OPEN UNIVERSITY MALAYSIA

ASSIGNMENT MANAGERIAL FINANCE BMMF5103

PREPARED BY: SHARIFAH SUBAIHAH BINTI SYED MALIK CGS00312700 DUE DATE: 16 APRIL 2010

1. Recently you invested RM2,566.70 in a project that promises a return 12 of percent per year. The cash flows are expected to be as follows: End of Cash Year Flow(RM) 1 325 2 400 3 550 4? 5 750 6 800 What is the cash flow at the end of the 4th year?

X= CF1 + CF2 + CF3 + CF4 + ---------- -------------------(1+i)^1 (1+i)^2 (1+i)^3 (1+i)^4

CF5 + CF6 -------------(1+i)^5 (1+i)^6

2566.7 = 325 + 400 + ---------------(1+0.12)^1 (1+0.12)^2

550 + CF4 + 750 + 800 ----------------------------------(1+0.12)^3 (1+0.12)^4 (1+0.12)^5 (1+0.12)^6

2566.7 = 290.178 -------(1+0.12)^4

+ 318.877

391.48

+ CF4

+ 425.57 + 405.304

2566.7 = 1831.409 + CF4 -------1.5735 2566.7 = 1831.409 + 0.6355 CF4 735.291 = 0.6355 CF4 CF4 = 1157

2. If you buy a factory for RM250,000 and the terms are 20 percent down, the balance to be paid off over 30 years at a 12 percent rate of interest on the unpaid balance, what are the 30 equal annual payments? Given Initial cost of factory = RM 250,000 PV = Less 20% downpayment = RM 200,000 n = 30 i = 0.12

PV = A { 1 - [ 1/(1+i)n ]/i } , 200,000 = A { 1- [ 1/(1+0.12 )30 ] /0.12 } 200,000 = A { 1 [ 1/29.95 ] / ( 0.12 ) } 200,000 = A { 0.97 / 0,12 } A = 200,000/ 8.1 = 24,691.4 So, A (Annual Payment ) are RM24,691.4

3. You are willing to pay RM15,625 to purchase a perpetuity which will pay you and your heirs RM1,250 each year, forever. If your required rate of return does not change, how much would you be willing to pay if this were a 20-year, annual payment, ordinary annuity instead of a perpetuity?

ForPerpetuity , Given PV = RM15, 625 , A = RM1250 PV = A/ i 15,625 = 1250 / i i = 1250 / 15,625 = 0.08 = 8% For an Ordinary Annuity, Given n = 20 with A = RM1250 PV = A { [1 1/ ( 1+I )n ] /i } = 1250 { [1 1/ (1+0.08)20] / 0.08 } = 1250 { [ 1 0.21 ] / 0.08 } = 1250 { 0.79 / 0.08 } = 12, 343. 75 , Amount willing to be paid is RM12,343,75

4.SuriaMentariSdn. Bhd. has the following information for the previous year: Net income = RM400; Net operating profit after taxes (NOPAT) = RM600; Total assets = RM2,000; and Total net operating capital = RM1800. The information for the current year is: Net income = RM900; Net operating profit after taxes (NOPAT) = RM800; Total assets = RM2,300; and Total net operating capital = RM2200. What is the free cash flow for the current year?

Given Previous year Net Income NOPAT Total Assets Current Year 400 600 2000 2200 900 800 2300

Total Net Operating Capital 1800 Find free cash flow for current year

Net investment in operating capital

= =

2,200 - 1,800 400

Free cash flow

= NOPAT - Net Investment in Operating Capital = 800 - 400

= 400

5. LembahBeringin Corporation Bhd. has forecasted the following numbers for this upcoming year: Sales RM1,000,000 Cost of Goods Sold 600,000 Interest Expense 100,000 Net Income 180,000 The company is in the 40 percent tax bracket. Its cost of goods sold always represents 60 percent of its sales. The companys CEO is unhappy with the forecast and wants the firm to achieve a net income equal to RM240,000. Assume that the companys interest expense remains constant. In order to achieve this level of net income, what level of sales will the company have to achieve?

Given Forecast Sales Cost of Goods Sold Interest Expense RM1,000,000 (RM600,000) (RM100,000) ---------------------RM300,000 40 percent tax ------------------Net income ------------------Since required net income is RM240,000, the different with current net income (RM180,000) is Rm60,000. Percentage increase = 60,000 / 240,000 x 100 = 25 % Increase 25 % in sales = (1,000,000 x 25% ) + 1,000,000 = RM 1,250,000 RM180,000 (RM120,000)

6. Juara Rasa Bhd. has the following data: Net income: RM240 Sales: RM10,000 Total assets: RM6,000 Debt ratio: 75% TIE ratio: 2.0 Current ratio: 1.2 BEP ratio: 13.33% If the company could streamline operations, cut operating costs, and raise net income to RM300, without affecting sales or the balance sheet (the additional profits will be paid out as dividends), by how much would its ROE increase?

Debt ratio = Total liabilities / total assets 75 = total liabilities /6000 Total liabilities = 4500

Shareholder equity = total asset total liabilities = 6000 4500 = 1500

ROE = net income/shareholder equity ROE1 = 240 /1500 x 100% = 16% ROE2 = 300/1500 x100% =20% Increase in ROE = 20% - 16% = 4%

7. Your portfolio consists of RM100,000 invested in a stock which has a beta = 0.8, RM150,000 invested in a stock which has a beta = 1.2, and RM50,000 invested in a stock which has a beta = 1.8. The risk-free rate is 7 percent. Last year this portfolio had a required rate of return of 13 percent. This year, nothing has changed except for the fact that the market risk premium has increased by 2 percent (two percentage points). What is the portfolio's current required rate of return?

Given RM 100,000 -RM 150,000 -RM 50,000 -Previous year :

= 0.8 = 1.2 = 1.8

RFR (Risk Free rate) = 7% K (Required rate return) = 13% Current year ; Market risk premium = increased by 2%

Portfolio Beta = Weighted average of the beta = (0.8 x 100,000)+(1.2 x 150,000)+(1.8 x 50,000) (100,000+150,000+50,000) = 350,000 300,000 = 1.1667

Required rate of return = Risk free rate + beta(market risk premium ) For last year, market risk premium = x 13% x = 7% + x (1.167 ) = 5.14%

market premium up by 2% this year r= 7%+7.14%(1.167) = 15.33

8. An investor has RM5,000 invested in a stock which has an estimated beta of 1.2, and another RM15,000 invested in the stock of the company for which she works. The riskfree rate is 6 percent and the market risk premium is also 6 percent. The investor calculates that the required rate of return on her total (RM20,000) portfolio is 15 percent. What is the beta of the company for which she works? Given RM 50,000 -RM 15,000 -= 1.2 -- 25% =?

K= RFR +

(RM-RFR)

15% = 6% + (6%) = 1.5

port = wi i 1.5 = (0.25 x 1.2) + ( 0.75x 2) 1.5 = 0.3 + 0.75 2 2 = 1.6

9. A companys balance sheets show a total of RM30 million long-term debt with a coupon rate of 9 percent. The yield to maturity on this debt is 11.11 percent, and the debt has a total current market value of RM25 million. The balance sheets also show that the company has 10 million shares of stock; the total of common stock and retained earnings is RM30 million. The current stock price is RM7.50 per share. The current return required by stockholders, rS, is 12 percent. The company has a target capital structure of 40 percent debt and 60 percent equity. The tax rate is 40%. What weighted average cost of capital should you use to evaluate potential projects?

Cost of debt = rd (1-T) = 11.11% (1-40%) = 6.6% rs=12% WACC = 40% [rd (1-T)] + 60% (rs) =0.4(6.6%) + 0.6(12%) = 0.0264 + 0.072 = 0.0984 or 9.84%

10. GaliEmas Bhd. is considering a project which involves opening a new mine at a cost of RM10,000,000 at t = 0. The project is expected to have operating cash flows of RM5,000,000 at the end of each of the next 4 years. However, the facility will have to be repaired at a cost of RM6,000,000 at the end of the second year. Thus, at the end of Year 2 there will be a $5,000,000 operating cash inflow and an outflow of -$6,000,000 for repairs. The company's cost of capital is 15 percent. What is the difference between the project's MIRR and its regular IRR? NPV = CF0 + CF1 ----------(1+IRR)^1 = 10 mil + 5mil ----------(1+IRR)^1 + + CF2 + CF3 -----------(1+IRR)^3 + 5mil -----------(1+IRR)^3 + CF4 -------------(1+IRR)^4 +5mil -------------(1+IRR)^4

------------(1+IRR)^2 1mil ------------(1+IRR)^2

By trial and error method,if IRR =10% 0 = 10 mil + 5mil ----------(1.1)^1 = 10 mil + 0 890,650 1mil ------------(1.1)^2 + 5mil -----------(1.1)^3 + 3,756,574 +5mil -------------(1.1)^4 +3,415,067

4,545,455-826,446

By trial and error method,if IRR =14% 0 = 10 mil + 5mil ----------(1.14)^1 = 10 mil + 0 -48,2 4,385,964 1mil ------------(1.14)^2 769,468 + 5mil -----------(1.14)^3 +5mil -------------(1.14)^4 +2,960,401

+ 3,374,858

Interpolation 890,650 - 0 890,650 - (-48,245) 890,650 938,895 10 - i 10 + 3.7945 i = 10 - i 10 14 10 - i -4 -3.7945 i 13.7945 @ 13.79%

= = =

MIRR COF = (10 mill) + (1 mill) (1+0.15)^2 = -10,756,143

CIF = 5M (1 + 0.15) + 5M (1 + 0.15)^3 + 5M = = 5,750,000 + 7,604,375 + 5M 18,354,375 CIF (1 + r)n-t (1 + MIRR)n = 18,354,375 (1 + MIRR)^4 18,354,375 -10,756,143 -1.7064 1

COF (1 + r)t -10,756,143

(1 + MIRR)^4

= MIRR =

0.1429 @ 14.29%

Difference between regular IRR and MIRR is 0.51% r time cash flow IRR MIRR 15% 0 -10,000,000.00 13.78% 14.29% 1 5,000,000.00 2 -1,000,000.00 3 4 5,000,000.00 5,000,000.00