CAP 2 SFMA ASSESSMENT 2010

martina16b · 11-01-2010 10:36am

Formula to use is

1-(1+r)(to the power of -n)
r

r=discount rate you are using

n=is the years

Work it out first to one in the tables

Archer26 · 11-01-2010 11:00am

Hey Guys,

Quick question, case study says they are trying to raise €300million for the growth strategies, but when you convert the 750 million CNY to euro its only about €75 million. If the go ahead with the France idea also this still doesn't make up the 300million??

Please help, getting more confused the more I try look at this!

MAX72 · 11-01-2010 11:43am

Hi Guys, in relation to scenario 2 & 3, has anyone increased the current dividend by the growth rate and got a new expected dividend and used that to calculate the cost of debt with the new market value of equity.

TMB · 11-01-2010 12:10pm

MAX72 wrote: »

Hi Guys, in relation to scenario 2 & 3, has anyone increased the current dividend by the growth rate and got a new expected dividend and used that to calculate the cost of debt with the new market value of equity.

Yea I did:

S2 & S3: 125 x 112% = 140

I then divided this by the number of shares in each situation to get the dividend per share.

S2 = 24.5 cent per share
S3 = 23.33 cent per share

I calculated my Ke from there

Can anyone agree with this?

MAX72 · 11-01-2010 12:34pm

TMB wrote: »

Yea I did:

S2 & S3: 125 x 112% = 140

I then divided this by the number of shares in each situation to get the dividend per share.

S2 = 24.5 cent per share
S3 = 23.33 cent per share

I calculated my Ke from there

Can anyone agree with this?

What new WACC rates did you get?

TMB · 11-01-2010 12:36pm

MAX72 wrote: »

What new WACC rates did you get?

S2 = 15.22%
S3 = 15.18%

Anything similar to yours?

martina16b · 11-01-2010 12:41pm

TMB wrote: »

S2 = 15.22%
S3 = 15.18%

Anything similar to yours?

Hi there

I got similar answers to yours I used the new dividends figure as well

MAX72 · 11-01-2010 1:28pm

TMB wrote: »

S2 = 15.22%
S3 = 15.18%

Anything similar to yours?

I got 15.55 and 15.69. Can you send on your workings?

TMB · 11-01-2010 1:45pm

MAX72 wrote: »

I got 15.55 and 15.69. Can you send on your workings?

Scenario 2
Dividend per Share = 140/570 = 24.5 cent

Ke = 24.5/420 + 12%

Ke = 17.8%

Scenario 3
Number of New Shares

500 / 5 = 100 new shares

Discounted Price

4.20 x 80% = 3.36 per share

Proceeds of Rights Issue

100 x 3.36 = 336 m

Dividends

140 / 600 = 23 cent p/s

Market Value of Shares

600 x 4.20 = 2520 m

Cost of Equity

Ke = 23.33/420 + 12%
Ke = 17.6%

I then just used these new Ke figures to calculate the new WACC.
Anyone agree??

Us against them · 11-01-2010 1:57pm

TMB wrote: »

Scenario 2
Dividend per Share = 140/570 = 24.5 cent

Ke = 24.5/420 + 12%

Ke = 17.8%

Scenario 3
Number of New Shares

500 / 5 = 100 new shares

Discounted Price

4.20 x 80% = 3.36 per share

Proceeds of Rights Issue

100 x 3.36 = 336 m

Dividends

140 / 600 = 23 cent p/s

Market Value of Shares

600 x 4.20 = 2520 m

Cost of Equity

Ke = 23.33/420 + 12%
Ke = 17.6%

I then just used these new Ke figures to calculate the new WACC.
Anyone agree??

Would the market value not be 2436

500*4.20=2100
100*4.20*.8=336
2436

post_it · 11-01-2010 2:05pm

Us against them wrote: »

Would the market value not be 2436

500*4.20=2100
100*4.20*.8=336
2436

See my workings for Scenario 1 2 & 3

Feel free to poing out where you think i have gone wrong.

TMB · 11-01-2010 2:06pm

Us against them wrote: »

Would the market value not be 2436

500*4.20=2100
100*4.20*.8=336
2436

Im not sure but my reasoning was that if the current investors were to sell their shares on the open market they would get 4.20 per share, cos I took it that the discounted price was only for the current investors availing of the rights issue?

What do people think? Im really not sure

salmagoo · 11-01-2010 2:22pm

lala1987 wrote: »

Which do people recommend they invest in CHina or France and with which fiance option?

The 300m is being used to finance both. There is no choice. There are both growth strategies that they will be pursuing....am i right?

im_ron_burgundy · 11-01-2010 2:24pm

Coldplayer wrote: »

Guys for the second point on Material FG

Is it not just the scrap value that we use. If you look at the wording it says "could have been used" not "could be used" as a replacement material for another contract.

The opportunity to plug it in at €5 per kg is gone surely?/

I definately agree, i think they're trying to catch us out, if you look at the wording relating to the scrap value its all present tense, whereas the project they're talking about is past tense. It's definately a grey area but i think its the scrap value.

MAX72 · 11-01-2010 2:27pm

TMB wrote: »

Scenario 2
Dividend per Share = 140/570 = 24.5 cent

Ke = 24.5/420 + 12%

Ke = 17.8%

Is the formula not D (1+g)/MV of shares and then add g

Therefore yours should read 24.5 (1+.12)/420 +.12

What do you think

post_it · 11-01-2010 2:31pm

MAX72 wrote: »

TMB wrote: »

Scenario 2
Dividend per Share = 140/570 = 24.5 cent

Ke = 24.5/420 + 12%

Ke = 17.8%

Is the formula not D (1+g)/MV of shares and then add g

Therefore yours should read 24.5 (1+.12)/420 +.12

What do you think

yeh i think the only difference is that you increased the dividend by the growth rate of 12% where as i kept it at 125m? I didnt think that the dividend would change but the dividend per share would due to increased no of shares?

What do other people think, in scenario should the divided increase to 140m?????

MAX72 · 11-01-2010 2:38pm

post_it wrote: »

MAX72 wrote: »

yeh i think the only difference is that you increased the dividend by the growth rate of 12% where as i kept it at 125m? I didnt think that the dividend would change but the dividend per share would due to increased no of shares?

What do other people think, in scenario should the divided increase to 140m?????

I had orginally kept the dividend at 125 and got 15.19 and 15.23. I was just wondering if the dividend was to be increased to 140 and if it was what then would the resluts be.

salmagoo · 11-01-2010 3:00pm

Archer26 wrote: »

Hey Guys,

Quick question, case study says they are trying to raise €300million for the growth strategies, but when you convert the 750 million CNY to euro its only about €75 million. If the go ahead with the France idea also this still doesn't make up the 300million??

Please help, getting more confused the more I try look at this!

Well what I gathered is that the 300m is to finance the growth and not just inital investment. Like when they takeover Rian Inc they also need more funds to compete as Rian Inc waas not able to compete due to lack of fund. ???

TMB · 11-01-2010 3:06pm

MAX72 wrote: »

TMB wrote: »

Scenario 2
Dividend per Share = 140/570 = 24.5 cent

Ke = 24.5/420 + 12%

Ke = 17.8%

Is the formula not D (1+g)/MV of shares and then add g

Therefore yours should read 24.5 (1+.12)/420 +.12

What do you think

Does it not work out the same using the formula

If divided is left at 125, we have to recalculate the dividend per share to take into account the new shares

125/570 = 21.93

21.93(1+.12)/420 +.12

Ke = 17.8

What you think?

Buddy the Elf · 11-01-2010 3:21pm

hi all,

for the 2nd and 3rd scenario should the cost of the ord. shares not stay the same? by working out a new dividend that implies the company will pay out a dividend immediately to the new shareholders but would they not wait until next year to do this?

also just thinking about a few questions we may get asked, im looking at different sources of finance, pros/cons, etc and theres a section in ann marie wards book relating debt/equity, gearing and effect changes in the WACC have on the capital structure? its chap. 15 in her book

any opinions would be appreciated

TMB · 11-01-2010 3:31pm

Buddy the Elf wrote: »

hi all,

for the 2nd and 3rd scenario should the cost of the ord. shares not stay the same? by working out a new dividend that implies the company will pay out a dividend immediately to the new shareholders but would they not wait until next year to do this?

I didn't think of that I just assumed that they would pay the new shareholders dividends.

Thats prob why i'm getting a different Ke, are people saying they wont pay dividends on the new shares and using a Ke of 18.67%??

Buddy the Elf · 11-01-2010 3:56pm

meant to mention this aswell guys, the 3rd scenario 1 for 5 issue seems to be based on a major assumption that the minimum share holding of each share holder is 5 shares or could even go further to say number of shares each shareholder has is divisible by 5 to bring in the finance projected.
doubt this will be a realistic option to the company

wdarling · 11-01-2010 4:13pm

post_it wrote: »

MAX72 wrote: »

yeh i think the only difference is that you increased the dividend by the growth rate of 12% where as i kept it at 125m? I didnt think that the dividend would change but the dividend per share would due to increased no of shares?

What do other people think, in scenario should the divided increase to 140m?????

I don't think you should increase the dividend figure used to calculate Ke.... the dividend policy it self stays the same therefore the dividends are diluted not increased!.... anyone agree with this?

wdarling · 11-01-2010 4:16pm

Buddy the Elf wrote: »

meant to mention this aswell guys, the 3rd scenario 1 for 5 issue seems to be based on a major assumption that the minimum share holding of each share holder is 5 shares or could even go further to say number of shares each shareholder has is divisible by 5 to bring in the finance projected.
doubt this will be a realistic option to the company

It's a 1 for 5 based on shares held not individuals.... and it's assumed they will all be taken up i.e. the 1m extra shares because the discount rate of 20% would have been calculated and reviewed in order to ensure shareholders would take up the new shares.

Buddy the Elf · 11-01-2010 5:07pm

It says its a 1 for 5 rights issue and in the textbook a rights issue is defined as inviting existing shareholders to subscribe for new shares in the same proportions as their existing equity holdings i.e. if company has 2,000,000 issued shares and decides to issue a further 1,000,000 every equity holder who holds 2 shares will be entitled to purchase one additional share.

would this not apply with the case study example also or can it be offered where current shareholding isnt taken into account?

wiles9 · 11-01-2010 6:18pm

See the Sources of Funds part.. Replacing the £300m redeemable debentures, how is the WACC calculated??

Do the shares not need redeemed first? I mean what happens with the 300m already in issue? How exactly are they replaced?

Sorry if that seems a little simple, I haven't seen these yet -_-

EDIT : Another question:

If you work out the Ke to be 0.2193, do you then round this to 0.22 and carry on calculating or is it left as 0.2193 and rounded at a later date?

hawai09 · 11-01-2010 9:51pm

post_it wrote: »

Surely the cost of equity and debt changes in scenaro 1,2 & 3. As MV of equity increases the cost of that equity must increase??? My reviesd WACC figures are:

For scenario 1 14.20% (cost of debt 6.47%)
scenario 2 15.24% (cost of equity 17.87%)
scenario 3 15.04% (cost of equity 17.55%)

Anyone agree with this?

i got the same ans as you for the first two but I got 16.03% (cost of equity 18.89%) for senario 3 could you post your workings I wasnt sure how to go about this option

post_it · 11-01-2010 9:57pm

hawai09 wrote: »

i got the same ans as you for the first two but I got 16.03% (cost of equity 18.89%) for senario 3 could you post your workings I wasnt sure how to go about this option

Workings are attached above!

There seems to have been a lot of talk about the WACC, we are forgetting that there will be a lot of theory in this exam. Anyone thought about the acquisition of Rian Inc?

Im struggling at the minute with this. Does anyone have any thoughts??
Its obviosuly going to ask us to evaluate the 2 growth strategys? Any ideas

thanks

barrystealover · 11-01-2010 10:01pm

post_it wrote: »

Workings are attached above!

There seems to have been a lot of talk about the WACC, we are forgetting that there will be a lot of theory in this exam. Anyone thought about the acquisition of Rian Inc?

Im struggling at the minute with this. Does anyone have any thoughts??
Its obviosuly going to ask us to evaluate the 2 growth strategys? Any ideas

thanks

do you mean evaluate

1.investing in Rian

2.producing tooth whitenings machine for Lesbleu.

how would you go about evaluating investing in Rian incorporated???

post_it · 11-01-2010 10:10pm

barrystealover wrote: »

do you mean evaluate

1.investing in Rian

2.producing tooth whitenings machine for Lesbleu.

how would you go about evaluating investing in Rian incorporated???

The acquisition is for cash consideration - evaluate this strategy
Translation risk associated with currency exchange rates
Intereset only loan as a source of finance - alternatives.
It may give some b/sheet figures in the requirement.

You would expect to make a decision on whch is the best strategy?

Whats your views??

CAP 2 SFMA ASSESSMENT 2010

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