Assignment: Financial Management
Question 1
Touchtone Pty Ltd is considering investing in either of two competing projects that will allow the company to eliminate a production bottleneck and meet the growing demand for its products. The company's engineering department narrowed the alternatives down to two - Status Quo (SQ) and High Tech (HT). Working with the accounting and finance personnel, the company's CFO (S Zaman) developed the following estimates of the cash flows for SQ and HT over the relevant 6-year time horizon. The firm has a 9 per cent required return and views these projects as equally risky.
|
Year
|
Project SQ cash flows
|
Project HT cash flows
|
|
0
|
-$660,000
|
-$950,000
|
|
1
|
$250,000
|
$190,000
|
|
2
|
190,000
|
170,000
|
|
3
|
180,000
|
180,000
|
|
4
|
160,000
|
260,000
|
|
5
|
120,000
|
570,000
|
|
6
|
140,000
|
320,000
|
a. Calculate the Net Present Value (NPV) of each project, assess its acceptability, and indicate which project is best using NPV.
b. Calculate the Pay Back Period (PBP) of each project, assess its acceptability, and indicate which project is best using PBP.
c. Calculate the Internal Rate of Return (IRR) of each project, assess its acceptability, and indicate which project is best using IRR.
d. Calculate the Profitability Index (PI) of each project, assess its acceptability, and indicate which project is best using PI.
e. Which of the two mutually exclusive projects would you recommend Touchtone Pty Ltd undertake? Why.
Question 2
"Sharif IT Solution Ltd" announced an increase of their quarterly dividend from $0.55 to $0.61 per share in September 2010. This continued a long string of dividend increases. "Sharif IT Solution Ltd" was one of a few companies that had managed to increase its annual dividend at a double-digit clip for many years, including through the financial crisis and recession from 2007-2009. Suppose you want to use the dividend growth model to value "Sharif IT Solution Ltd" s equity. You believe that dividends will grow at 7 % per year indefinitely, and you think the market's required return on this share is 11 %. Let's simplify by assuming that "Sharif IT Solution Ltd" s pays dividends annually and that the next annual dividend is expected to be $2.44 per share. The dividend will arrive in exactly one year. What would you pay for "Sharif IT Solution Ltd" s equity right now? Suppose you buy the equity today, hold it just long enough to receive the next dividend, and then sell it. What rate of return will you earn on that investment?