Assignment
Learning Outcomes Covered
1. To enable students to explore and develop an understanding of the theoretical techniques, concepts and methods employed in finance.
2. To develop the ability to apply the theoretical to the practical, through the analysis of data and application of relevant techniques in the context of a variety of organizations.
3. To evaluate and develop a critical and reflective awareness of the importance of the application of finance to decision making within organisations.
Questions
1. In about 500 words:
a. Critically evaluate the Free Cash Flow to Firm (FCFF) and the Free Cash Flow to Equity (FCFE) methods in the valuation of a financial institution.
b. Critically assess if the cost of equity and the weight average cost of capital are the most appropriate discount rates to use.
2. You are in charge of analysing a project with plans to invest $20 million into a new theme park. The park will take two years to build and the expenditure will also be spread out across the two years.
Today: $10 million
One year from now: $5 million
Two years from now: $5 million
Once the park is built, you expect to attract teenagers in record numbers, and have revenues of $10 million a year for the next ten years (your assumed project life). The park will cost $3 million a year to operate, and the depreciation will be $1 million a year. You plan to build it on land that you already own, that you bought three years ago for $1 million. If you do not take this project, you plan to lease the land out and make $200,000 a year before taxes. At the end of the ten years, it is assumed that the park can be salvaged for book value. The tax rate is 40%, and the discount rate is 15%.
a. Critically justify if the project is feasibility by computing the NPV of this project on a before tax (10 marks) and after tax basis (10 marks). Critically evaluate which project appraisal tool provides greater accuracy in determining project feasibility and why.
b. Assume that due to the appearance of a friendly investor, who is keen to invest another $10 million into the theme park, the project is now being planned to last another 10 years longer after Year 10 but this investor would like to have an (after tax) exit value of $25 million at the end of the 20th year. Recalculate the NPV of this project on an after tax basis (10 marks). Critically assess if it is worthwhile to extend the project for another 10 years to Year 20.
Word count: 1000 words.
Additional Information - Potential Assessment Content
1. Financial accounting - financial reporting/ statements/corporate financing/financial control/ financial techniques/cash flow management.
2. Management and cost accounting - operational/implementation/strategic financial decision making/performance measurement.
Resources to support students -
Arnold G "Corporate Financial Management", 3rd edition (2007) FT/Prentice Hall
Brearley & Myers "Principles of Corporate Finance" 7th ed. (2001) McGraw Hill
Drury C. "Management & Cost Accounting" (2007) 7th Edition Business Press Thomson Learning
Proctor, R. "Managerial Accounting for Business Decisions" (2006) F/T Prentice Hall