Question
4
Your company wants to
purchase shares of Wombat, Inc. as an investment. Wombat, Inc.
has just paid a dividend of $2.50. It’s next annual dividends will be
$3.00, $4.50, and $5.00 respectively. Following these dividends, the next five
(5) years dividends will rise 5.00% per annum. And after that, the dividends
will rise at a constant rate of 3.00% per annum indefinitely.
Wombat, Inc. has a
capitalisation rate of 12.00%.
What is the maximum price
should your company purchase Wombat, Inc.
shares for?
Question
5
Rong Long Trading is
considering two mutually exclusive projects, one with a four-year life and one
with a nine-year life. The net cash flows from the two projects are as follows:
Year Project A Project B
0 -$180,000 -$180,000
1
65,000 35,000
2
70,000 35,000
3
65,000 40,000
4
90,000 40,000
5 45,000
6 45,000
7 45,000
8 45,000
9 45,000
Assuming a 12% required
rate of return on both projects, calculate each project’s Equivalent Annual
Amount (EAA.) Which project should be
selected? Why should it be selected?
Question 6
You have been witnessing a
surge in health awareness in Viet Nam for some time and realise the time is
right to start and run a personal fitness centre. Your family owns a large
building which will meet your needs (This building is currently being rented
out at $48,000 per annum.) You estimate
you will need to spend $100,000 in total, made up of an initial cost of $50,000
to renovate the premises, $45,000 for new equipment, and $5,000 to install the
equipment. You must also provide $10,000 for Working Capital. This will be
returned to you at the end of ten (10) years. You have spent $3000 on a market
survey, which leads you to believe that you will get 500 members each paying
$1,000 per year. You have also found five instructors you can hire at $30,000
each per year. For tax reasons you will expense the renovation costs
immediately and depreciate the equipment (including the installation cost) over
ten years using the straight-line method. You expect the equipment to
be fully functional for 10 years, which is the life of the operation. Due to
the nature of fitness equipment it will be unlikely to have a salvage value at
the end of ten years. Assume theinitial
investment is made today and all cash-flows are received or paid at the end of
each year. Yourdiscount rate is 15%
and yourtax rate is 30%.
Should you invest in the personal fitness centre??
Use theTwo-Step method to measure
the cash flows and to determine theNet
Present Value (NPV,) the Internal Rate of Return (IRR) and the Payback Period.
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