Ask Question, Ask an Expert

+61-413 786 465

info@mywordsolution.com

Ask Financial Accounting Expert

PART A: (10 marks)

You have been asked to examine Grand Plomp Ltd, a maker of rocket widgets employed by NASA. The owners are wondering whether the return received is adequate to justify the risks taken in each division. You are to consider both divisional risk and return in your analysis and the given information has been collected from the past 15 years to use in your analysis.

424_divisional rank and return.jpg             
• Average annual market return: 12 per cent
• Average annual risk-free rate: 8 per cent

By using standard deviation and beta measures of risk, you are to rank projects in terms of their risk-adjusted return. Such divisions providing the lowest risk per unit of return would be preferred. The analysis can be conducted by using a 'total' definition of risk, or standard deviation, and an ’undiversifiable’ definition or risk or beta.

Given the beta, it is possible to evaluate the required rate of return. Moreover, given the proportion of each division in Global Gears, it is possible to compute the firm beta, return and risk-adjusted return. With this information, it is possible to find out whether Global Gears, as a whole, provides an adequate return to justify the risks taken by its investors.

You are required to:

• Place the relevant information.
• Choose the proper tool or equation.
• Organize and manipulate the data.
• Elucidate the solution.

PART B: (12.5 marks)

Misty Ltd wishes to find out its weighted marginal cost of capital. In preparing for this task, it has compiled the following data:

611_weighted marginal cost.jpg

a) Determine the breaking points and ranges of total financing associated with each source of capital;

b) By using the data developed determine the levels of total financing at which the firm's weighted average cost of capital (WACC) will change;

c) Compute the weighted average cost of capital and the weighted marginal cost (WMCC) for each range of total financing

d) By using the results all along with the information on the available investment opportunities shown below, compile the firm's investment opportunities schedule (IOS), plot this schedule and plot the weighted marginal cost of the capital schedule:

305_imvestment opputunity schedules.jpg

Investment Opportunities Schedule
 
e) Which, if any of the available investments would you suggest that the firm accept? Describe your answer.

PART C: (7.5 marks)

Traditional project evaluation or capital budgeting analysis assumes a firm’s only choice is accept or refuse a program. In a real business situation, firms face many choices with respect to how to operate a project, both before it starts and after it is underway. Any time a firm has the capability to make choices, there is value added to the project in problem – Traditional NPV analysis ignores this value. The study of real options tries to put a dollar value on the capability to make choices.

a) What are real options and how they are valued.
b) Discuss the given:

Locate the given article: IRREVERSIBILITY, UNCERTAINTY, AND INVESTMENT (Robert S Pindyck – Massachusetts Institute of Technology March – 1990 – old but gold)

Most of the major investment expenditures have two significant characteristics which together can dramatically affect the decision to invest. First, the expenditures are largely irreversible; the firm can’t disinvest, thus the expenditures must be viewed as sunk costs. Second, the investments can be delayed, giving the firm an opportunity to wait for new information regarding prices, costs and other market conditions before it commits resources.

c) Compute the given:

Pindyck supplies a simple two-period ex to exemplify how irreversibility can affect an investment decision and how option pricing methods can be used to value a firm’s investment opportunity, and determine whether or not the firm should invest.

Using the given ex replicate Pyndick’s two-period ex.

Consider a firm's decision to irreversibly invest in a widget factory. The factory can be built instantly, at a cost of $7m, and will generate 1000 widgets per year forever, with zero operating cost. Currently the price of widgets is $700, but next year the price will change. With probability .6it will rise to $800, and with probability (l-q) it will fall to $600. The price will then remain at this new level forever. Assume that this risk is fully diversifiable, so that the firm can discount future cash flows using the risk-free rate, which we will take to be 10 percent.

Financial Accounting, Accounting

  • Category:- Financial Accounting
  • Reference No.:- M918

Have any Question? 


Related Questions in Financial Accounting

Comprehensive problem - lou barlow a divisional manager for

Comprehensive Problem - Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His annual pay raises are determined by his division's ...

Establish and maintain accounting info systems and provide

Establish and maintain accounting info systems and Provide management accounting information Assignment - Assignment 1 - Case Studies Case Study 1 - Review the case study information below and complete the steps mentione ...

At the start of 2013 shasta corporation has 15000

At the start of 2013, Shasta Corporation has 15,000 outstanding shares of preferred stock, each with a $60 par value and a cumulative 7% annual dividend. The company also has 28,000 shares of common stock outstanding wit ...

Need slides need a one page executive summarybelow is the

Need slides. Need a one page executive summary. Below is the scenario: "Hi again. I've got news about our client. "ExxonMobil is looking to increase revenue by 10 percent and possibly reduce costs. Need an executive summ ...

Assessment -part a -saturn petcare australia and new

Assessment - Part A - Saturn Petcare Australia and New Zealand is Australia's largest manufacturer of pet care products. Saturn have been part of the Australian and New Zealand pet care landscape since opening their firs ...

Lease classification considering firm guidance issues

Lease Classification, Considering Firm Guidance (Issues Memo) Facts: Tech Startup Inc. ("Lessee") is entering into a contract with Developer Inc. ("Landlord") to rent Landlord's newly constructed office building located ...

Corporate accounting assignment -assessment task -select

Corporate Accounting Assignment - Assessment task - Select two public limited companies listed on the Australian Securities Exchange (ASX) that are in the same industry. Go to the website of your selected companies. Then ...

Question 1 an organization owes pound300000 tax at 17x4 and

Question 1 . An organization owes £300,000 tax at 1.7.X4 and £450,000 at 30.6.X5. Its income statement for the year to 30.6.X5 includes a tax charge of £400,000. How much tax was actually paid in the year to 30.6.X5?

Advanced financial accounting assignment -assessment task

Advanced Financial Accounting Assignment - Assessment Task Part A - In an article entitled 'Unwieldy rules useless for investors' that appeared in the Australian Financial Review on 6 February 2012 (by Agnes King), the f ...

Consider the following account starting balances and

Consider the following account starting balances and transactions involving these accounts. Use T-accounts to record the starting balances and the offsetting entries for the transactions. The starting balance of Cash is ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Why might a bank avoid the use of interest rate swaps even

Why might a bank avoid the use of interest rate swaps, even when the institution is exposed to significant interest rate

Describe the difference between zero coupon bonds and

Describe the difference between zero coupon bonds and coupon bonds. Under what conditions will a coupon bond sell at a p

Compute the present value of an annuity of 880 per year

Compute the present value of an annuity of $ 880 per year for 16 years, given a discount rate of 6 percent per annum. As

Compute the present value of an 1150 payment made in ten

Compute the present value of an $1,150 payment made in ten years when the discount rate is 12 percent. (Do not round int

Compute the present value of an annuity of 699 per year

Compute the present value of an annuity of $ 699 per year for 19 years, given a discount rate of 6 percent per annum. As