Ask Question, Ask an Expert

+61-413 786 465

info@mywordsolution.com

Ask Basic Finance Expert

The questions in this assignment require some quantitative work and some interpretation. When answeringthe discursive questions you are expected to make full use of the relevant theoretical propositions andconcepts.

Question 1: Berick Ltd: A Capital Expenditure Decision
Berick Ltd is a relatively small engineering company that manages to compete effectively with larger companies by adapting to changing market requirements and specialising in innovative products with limited markets. The products are sold to a wide range of companies, but most of its sales are to companies in the oil industry. On this basis it has maintained a high rate of return on capital employed in relation to the engineering sector as a whole. The latest product to be developed, a high pressure valve, has completed its testing stage and the company now has to decide on whether or not to invest in a production facility and a marketing programme.

The work already undertaken on the product has cost £1.3 million and it is anticipated that some further development work will cost a further £0.2 million. It is estimated that an investment of £9.00 million will be necessary in plant and machinery. This expenditure can be written off (capital allowances) for tax purposes on a straight-line basis over the product's expected six year life. It is anticipated that the re-sale value of the equipment will be about £2.00 million at the end of the six years. The outlay would have been larger, but the company already owns some finishing equipment that will be required. This was previously used in the manufacture of another product that is no longer being produced. It is fully depreciated for tax purposes and could be sold today for £180,000. If used for the next six years it will have no resale value.

The production facility would be located in one of the company's factories with spare capacity available. It will occupy 15 per cent of the factory's space. The company has no alternative uses available for this space for the foreseeable future and has further spare capacity available in other factories. The product will be charged
£50,000 per annum for this space by the company's management accounting system, though only 20 per cent of this figure will stem from incremental costs resulting from heating and lighting. The fixed costs directly attributable to the production are expected to be £ 90,000 per annum. Each product sold by the company is also allocated a general overhead charge equivalent to 10 per cent of the revenues it generates. This allocation is made by the company's accountant to cover head office expenses.

The selling price is expected to be set at £38.00 per unit and it is anticipated that sales in the first year will be about 150,000 units, rising to 200,000 in year two, and staying at this level for the following four years. The introduction of the product would require a marketing campaign that will cost £150,000. As a result of the rapid technological development in the area a six year product life is all that can be expected.

The direct manufacturing costs are expected to be £12.00 per unit. The company will need to hold stocks of the product at the start of each year equivalent to 25 per cent of the sales expected in the year to come. The increase in debtors as a result of introducing the product will be just about offset by the increase in creditors. The company requires a rate of return of 14 per cent on investments of this nature, and the tax rate is 40 percent.

a) Determine the investment's net present value and the internal rate of return. All key assumptions should be specified and explained. (20 marks)
b) Undertake a sensitivity analysis for the assumed price and volume of expected sales and interpret your results carefully. 
c) Provide a brief general discussion of the potential risks associated with this investment 

Question 2)

Prices of Calls and Puts Options the shares of Marks & Spencer

a) Explain carefully why the November calls are trading at higher prices than the September calls. (4marks)
b) Draw a diagram illustrating a straddle, using calls and puts expiring in November and an exercise price of 210. Explain the circumstances in which an investor might consider it worthwhile to invest in a straddle. (4marks)
c) Develop a covered call using the data provided and comment on the nature of the payoffs produced and the potential uses of the strategy

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M91593809
  • Price:- $30

Priced at Now at $30, Verified Solution

Have any Question?


Related Questions in Basic Finance

Suppose a stock has just paid a 44 per share dividend d0

Suppose a stock has just paid a $4.4 per share dividend (D0). The dividend is projected to grow at 15% for the next three years, then 6% thereafter indefinitely. What should be the amount of dividend in four years (D4)

Corporate fund started the year with a net asset value of

Corporate Fund started the year with a net asset value of $15.90. By year-end, its NAV equaled $13.80. The fund paid year-end distributions of income and capital gains of $3.30. What was the rate of return to an investor ...

Social networking is a popular method of communication for

Social networking is a popular method of communication for individuals, businesses, and organizations of all kinds. Conduct some research online and identify how companies are utilizing some of the most popular social ne ...

Your cousin is currentlynbsp10nbspyears old she will be

Your cousin is currently 10 years old. She will be going to college in 8 years. Your aunt and uncle would like to have $90,000 in a savings account to fund her education at that time. If the account promises to pay a fix ...

Tom decides to open a small italian wine store in an

Tom decides to open a small Italian wine store in an affluent South Florida neighborhood. He will be an absentee owner and has hired Vinnie as the store manager. He has agreed to pay Vinnie a fixed salary of $75,000 per ...

General mills has a 1000 par value 15-year to maturity bond

General Mills has a $1,000 par value, 15-year to maturity bond outstanding with an annual coupon rate of 8.01 percent per year, paid semiannually. Market interest rates on similar bonds are 8.15 percent. Calculate the bo ...

Question - booker inc has identified an investment project

Question - Booker, Inc., has identified an investment project with the following cash flows. Year Cash Flow 1 $1,000 2 1,230 3 1,450 4 2,190 If the discount rate is 9 percent, what is the future value of these cash flows ...

A perpetual bond sells for 885 and pays a semiannual coupon

A perpetual bond sells for $885 and pays a semiannual coupon in the amount of $34. What is the annualized yield for the bond?

Abc company has projected sales of 19810 in january the

ABC Company has projected Sales of $19810 in January. The sales are expected to grow by 10% each month. ABC's collection schedule is as follows: ABC collects 88 percent of its sales in the month of sale and the remainder ...

Is an institutional client different from an institutional

Is an institutional client different from an institutional investor? If so could you please please give an example of each just so I understand?

  • 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