1、ACCACAT考試P4高級財務管理主觀題練習1、Mezza Co is a large food manufacturing and wholesale company. It imports fruit and vegetables from countries in South America, Africa and Asia, and packages them in steel cans, plastic tubs and as frozen foods, for sale to supermarkets around Europe. Its suppliers range from

2、individual farmers to Government run cooperatives, and farms run by its own subsidiary companies. In the past, Mezza Co has been very successful in its activities, and has an excellent corporate image with its customers, suppliers and employees. Indeed Mezza Co prides itself on how it has supported

3、local farming communities around the world and has consistently highlighted these activities in its annual reports.However, in spite of buoyant stock markets over the last couple of years, Mezza Cos share price has remained static. It is thought that this is because there is little scope for future

4、growth in its products. As a result the companys directors are considering diversifying into new areas. One possibility is to commercialise a product developed by a recently acquired subsidiary company. The subsidiary company is engaged in researching solutions to carbon emissions and global warming

5、, and has developed a high carbon absorbing variety of plant that can be grown in warm, shallow sea water. The plant would then be harvested into carbon-neutral bio-fuel. This fuel, if widely used, is expected to lower carbon production levels.Currently there is a lot of interest among the worlds go

6、vernments in finding solutions to climate change. Mezza Cos directors feel that this venture could enhance its reputation and result in a rise in its share price. They believe that the companys expertise would be ideally suited to commercialising the product. On a personal level, they feel that the

7、ventures success would enhance their generous remuneration package which includes share options. It is hoped that the resulting increase in the share price would enable the options to be exercised in the future.Mezza Co has identified the coast of Maienar, a small country in Asia, as an ideal locati

8、on, as it has a large area of warm, shallow waters. Mezza Co has been operating in Maienar for many years and as a result, has a well developed infrastructure to enable it to plant, monitor and harvest the crop. Mezza Cos directors have strong ties with senior government officials in Maienar and the

9、 countrys politicians are keen to develop new industries, especially ones with a long-term future.The area identified by Mezza Co is a rich fishing ground for local fishermen, who have been fishing there for many generations. However, the fishermen are poor and have little political influence. The g

10、eneral perception is that the fishermen contribute little to Maienars economic development. The coastal area, although naturally beautiful, has not been well developed for tourism. It is thought that the high carbon absorbing plant, if grown on a commercial scale, may have a negative impact on fish

11、stocks and other wildlife in the area. The resulting decline in fish stocks may make it impossible for the fishermen to continue with their traditional way of life.Required: Discuss the key issues that the directors of Mezza Co should consider when making the decision about whether or not to commerc

12、ialise the new product, and suggest how these issues may be mitigated or resolved.2、The chief executive officer (CEO) of Faoilean Co has just returned from a discussion at a leading university on the application of options to investment decisions and corporate value. She wants to understand how some

13、 of the ideas which were discussed can be applied to decisions made at Faoilean Co. She is still a little unclear about some of the discussion on options and their application, and wants further clarification on the following:(i) Faoilean Co is involved in the exploration and extraction of oil and g

14、as. Recently there have been indications that there could be significant deposits of oil and gas just off the shores of Ireland. The government of Ireland has invited companies to submit bids for the rights to commence the initial exploration of the area to assess the likelihood and amount of oil an

15、d gas deposits, with further extraction rights to follow. Faoilean Co is considering putting in a bid for the rights. The speaker leading the discussion suggested that using options as an investment assessment tool would be particularly useful to Faoilean Co in this respect.(ii) The speaker further

16、suggested that options were useful in determining the value of equity and default risk, and suggested that this was why companies facing severe financial distress could still have a positive equity value.(iii) Towards the end of the discussion, the speaker suggested that changes in the values of opt

17、ions can be measured in terms of a number of risk factors known as the greeks, such as the vega. The CEO is unclear why option values are affected by so many different risk factors.Required:(a) With regard to (i) above, discuss how Faoilean Co may use the idea of options to help with the investment

18、decision in bidding for the exploration rights, and explain the assumptions made when using the idea of options in making investment decisions. (11 marks)(b) With regard to (ii) above, discuss how options could be useful in determining the value of equity and default risk, and why companies facing s

19、evere financial distress still have positive equity values. (9 marks)(c) With regard to (iii) above, explain why changes in option values are determined by numerous different risk factors and what vega determines. (5 marks)3、4、Tisa Co is considering an opportunity to produce an innovative component

20、which, when fitted into motor vehicle engines, will enable them to utilise fuel more efficiently. The component can be manufactured using either process Omega or process Zeta. Although this is an entirely new line of business for Tisa Co, it is of the opinion that developing either process over a pe

21、riod of four years and then selling the productions rights at the end of four years to another company may prove lucrative.The annual after-tax cash flows for each process are as follows:Tisa Co has 10 million 50c shares trading at 180c each. Its loans have a current value of $36 million and an aver

22、age after-tax cost of debt of 450%. Tisa Cos capital structure is unlikely to change significantly following the investment in either process.Elfu Co manufactures electronic parts for cars including the production of a component similar to the one being considered by Tisa Co. Elfu Cos equity beta is

23、 140, and it is estimated that the equivalent equity beta for its other activities, excluding the component production, is 125. Elfu Co has 400 million 25c shares in issue trading at 120c each. Its debt finance consists of variable rate loans redeemable in seven years. The loans paying interest at b

24、ase rate plus 120 basis points have a current value of $96 million. It can be assumed that 80% of Elfu Cos debt finance and 75% of Elfu Cos equity finance can be attributed to other activities excluding the component production.Both companies pay annual corporation tax at a rate of 25%. The current

25、base rate is 35% and the market risk premium is estimated at 58%.Required:(a) Provide a reasoned estimate of the cost of capital that Tisa Co should use to calculate the net present value of the two processes. Include all relevant calculations. (8 marks)(b) Calculate the internal rate of return (IRR

26、) and the modified internal rate of return (MIRR) for Process Omega. Given that the IRR and MIRR of Process Zeta are 266% and 233% respectively, recommend which process, if any, Tisa Co should proceed with and explain your recommendation. (8 marks)(c) Elfu Co has estimated an annual standard deviati

27、on of $800,000 on one of its other projects, based on a normal distribution of returns. The average annual return on this project is $2,200,000.Required:Estimate the projects Value at Risk (VAR) at a 99% confidence level for one year and over the projects life of five years. Explain what is meant by

28、 the answers obtained. (4 marks)5、6、Proteus Co, a large listed company, has a number of subsidiaries in different industries but its main line of business is developing surveillance systems and intruder alarms. It has decided to sell a number of companies that it considers are peripheral to its core

29、 activities. One of these subsidiary companies is Tyche Co, a company involved in managing the congestion monitoring and charging systems that have been developed by Proteus Co. Tyche Co is a profitable business and it is anticipated that its revenues and costs will continue to increase at their cur

30、rent rate of 8% per year for the foreseeable future.Tyche Cos managers and some employees want to buy the company through a leveraged management buy-out. An independent assessment estimates Tyche Cos market value at $81 million if Proteus Co agrees to cancel its current loan to Tyche Co. The manager

31、s and employees involved in the buy-out will invest $12 million for 75% of the equity in the company, with another $4 million coming from a venture capitalist for the remaining 25% equity.Palaemon Bank has agreed to lend the balance of the required funds in the form. of a 9% loan. The interest is pa

32、yable at the end of the year, on the loan amount outstanding at the start of each year. A covenant on the loan states that the following debt-equity ratios should not be exceeded at the end of each year for the next five years:As part of the management buy-out agreement, it is expected that Proteus

33、Co will provide management services costing $12 million for the first year of the management buy-out, increasing by 8% per year thereafter.The current tax rate is 25% on profits and it is expected that 25% of the after-tax profits will be payable as dividends every year. The remaining profits will b

34、e allocated to reserves. It is expected that Tyche Co will repay $3 million of the outstanding loan at the end of each of the next five years from the cash flows generated from its business activity.Required:(a) Briefly discuss the possible benefits to Proteus Co of disposing Tyche Co through a mana

35、gement buy-out. (4 marks)(b) Calculate whether the debt-equity covenant imposed by Palaemon Bank on Tyche Co will be breached over the five-year period. (9 marks)(c) Discuss briefly the implications of the results obtained in part (b) and outline two possible actions Tyche Co may take if the covenan

36、t is in danger of being breached. (5 marks)7、8、9、The MandM Company, a large listed company, has two divisions. The first, the MoneyMint division produces coins and notes for the national exchequer and generates 80% of the companys revenues. The second, the LunarMint division, manufactures a brand of

37、 sweets which are very popular with traders in the financial markets. The company is considering disposing of its LunarMint division. The LunarMint business is no longer viewed as part of the core business of the MandM Company. The Chief Executive Officer commented that he could never understand why

38、 the company entered into sweet-making in the first place. The LunarMint business is profitable and low risk, but has not been a high priority for investment.Required:Outline the issues that should be considered when disposing of the LunarMint division noting the risks that might be involved.10、(d)

39、Estimate by how much the bid might be increased without the shareholders of Paxis suffering a fall in their expected wealth, and discuss whether or not the directors of Paxis should proceed with the bid. (5 marks)11、(b) Discuss the limitations of the above estimates. (6 marks)12、13、14、15、16、Section

40、A BOTH questions are compulsory and MUST be attemptedTramont Co is a listed company based in the USA and manufactures electronic devices. One of its devices, the X-IT, is produced exclusively for the American market. Tramont Co is considering ceasing the production of the X-IT gradually over a perio

41、d of four years because it needs the manufacturing facilities used to make the X-IT for other products.The government of Gamala, a country based in south-east Asia, is keen to develop its manufacturing industry and has offered Tramont Co first rights to produce the X-IT in Gamala and sell it to the

42、USA market for a period of four years. At the end of the four-year period, the full production rights will be sold to a government-backed company for Gamalan Rupiahs (GR) 450 million after tax (this amount is not subject to inflationary increases). Tramont Co has to decide whether to continue produc

43、tion of the X-IT in the USA for the next four years or to move the production to Gamala immediately.Currently each X-IT unit sold makes a unit contribution of $20. This unit contribution is not expected to be subject to any inflationary increase in the next four years. Next years production and sale

44、s estimated at 40,000 units will fall by 20% each year for the following three years. It is anticipated that after four years the production of the X-IT will stop. It is expected that the financial impact of the gradual closure over the four years will be cost neutral (the revenue from sale of asset

45、s will equal the closure costs). If production is stopped immediately, the excess assets would be sold for $23 million and the costs of closure, including redundancy costs of excess labour, would be $17 million.The following information relates to the production of the X-IT moving to Gamala. The Gam

46、alan project will require an initial investment of GR 230 million, to pay for the cost of land and buildings (GR 150 million) and machinery (GR 80 million). The cost of machinery is tax allowable and will be depreciated on a straight-line basis over the next four years, at the end of which it will h

47、ave a negligible value.Tramont Co will also need GR 40 million for working capital immediately. It is expected that the working capital requirement will increase in line with the annual inflation rate in Gamala. When the project is sold, the working capital will not form. part of the sale price and

48、will be released back to Tramont Co.Production and sales of the device are expected to be 12,000 units in the first year, rising to 22,000 units, 47,000 units and 60,000 units in the next three years respectively.The following revenues and costs apply to the first year of operation: Each unit will b

49、e sold for $70; The variable cost per unit comprising of locally sourced materials and labour will be GR 1,350, and; In addition to the variable cost above, each unit will require a component bought from Tramont Co for $7, on which Tramont Co makes $4 contribution per unit; Total fixed costs for the

50、 first year will be GR 30 million.The costs are expected to increase by their countries respective rates of inflation, but the selling price will remain fixed at $70 per unit for the four-year period.The annual corporation tax rate in Gamala is 20% and Tramont Co currently pays corporation tax at a

51、rate of 30% per year. Both countries corporation taxes are payable in the year that the tax liability arises. A bi-lateral tax treaty exists between the USA and Gamala, which permits offset of overseas tax against any USA tax liability on overseas earnings. The USA and Gamalan tax authorities allow

52、losses to be carried forward and written off against future profits for taxation purposes.Tramont Co has decided to finance the project by borrowing the funds required in Gamala. The commercial borrowing rate is 13% but the Gamalan government has offered Tramont Co a 6% subsidised loan for the entir

53、e amount of the initial funds required. The Gamalan government has agreed that it will not ask for the loan to be repaid as long as Tramont Co fulfils its contract to undertake the project for the four years. Tramont Co can borrow dollar funds at an interest rate of 5%.Tramont Cos financing consists

54、 of 25 million shares currently trading at $240 each and $40 million 7% bonds trading at $1,428 per $1,000. Tramont Cos quoted beta is 117. The current risk free rate of return is estimated at 3% and the market risk premium is 6%. Due to the nature of the project, it is estimated that the beta appli

55、cable to the project if it is all-equity financed will be 04 more than the current all-equity financed beta of Tramont Co. If the Gamalan project is undertaken, the cost of capital applicable to the cash flows in the USA is expected to be 7%.The spot exchange rate between the dollar and the Gamalan

56、Rupiah is GR 55 per $1. The annual inflation rates are currently 3% in the USA and 9% in Gamala. It can be assumed that these inflation rates will not change for the foreseeable future. All net cash flows arising from the project will be remitted back to Tramont Co at the end of each year.There are

57、two main political parties in Gamala: the Gamala Liberal (GL) Party and the Gamala Republican (GR) Party. Gamala is currently governed by the GL Party but general elections are due to be held soon. If the GR Party wins the election, it promises to increase taxes of international companies operating

58、in Gamala and review any commercial benefits given to these businesses by the previous government.Required:Prepare a report for the Board of Directors of Tramont Co that(i) Evaluates whether or not Tramont Co should undertake the project to produce the X-IT in Gamala and cease its production in the

59、USA immediately. In the evaluation, include all relevant calculations in the form. of a financial assessment and explain any assumptions made;Note: it is suggested that the financial assessment should be based on present value of the operating cash flows from the Gamalan project, discounted by an ap

60、propriate all-equity rate, and adjusted by the present value of all other relevant cash flows. (27 marks)(ii) Discusses the potential change in government and other business factors that Tramont Co should consider before making a final decision. (8 marks)Professional marks will be awarded in questio