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5 questions for a corporate finance course.




Question 1Victo ry Industries produces food products using automated production machine which processes rawfoods into processed and packaged frozen foods. It currently uses a production machine which wa sinstalled 3 years back at a cost of AED 70 million. When installed, it had a useful life of a totalof7 years. The expected salva ge value at end of 7 years of useful life is nil. Victory Industriesdepreciates the machine using a straight line method. If sold today, the machine would have a market value of AED 50 million.;Victory Indus.tries proposes to replace this machine with a modern and more efficient machine whichwould lead to significant cost savings. The new machine is expected to have a purchase price of AED150 million and set-up costs of AED 10 million. The new machine has a useful life of 10 years witha nil salvage value.;The tax rate of the company is 30%.;Calculate the initial outlay for the new machine which will replace the old machine.Question 2Global Plastics is considering setting up a new machine to produce plastic products. The details ofthe machine are as under:? Purchase Price? Transportation and Installation Costs? Useful life? Salvage value (for depreciation)? Scrap value at end of 5 years? Initial working capital investmentAED 50 millionAED 5 million5 yearsNilAED 2 millionAED 4 million;? Once the machine goes into production, the details of sales and operating costs are as under;Particulars Year l Year 2 Year 3 Year 4 Year 5Units Sold 1,000,000 1,000,000 1,250,000 1,250,000 1,500,00Selling Price (AED per unit) 90 90 100 100 100Variable Cost per unit (AED) 40 40 45 45 50Fixed Costs (excluding 20,000,000 20,000,000 25,000,000 25,000,000 30,000,000depreciation);? Working Capital at end of each year is expected to be 5% of sales of that year? Capital expenditure would be about AED 2 million per year? Corporate tax rate is 30%;Calculate the following1. Initial Outlay {Initial Investment)2. Annual free Cash Flows for year 1to 43. Terminal Year free Cash Flow4. Using NPV, evaluate whether the company should invest in this machine or notC 3.11-Appendix Ill: Assessment Instrument Cover Sheet;Question 3Al Arabia Tissues produces and sells disposable tissues at an average price of AED 3 per box.Variable cost of manufacturing is AED 1.2 per box. Total fixed costs per year are estimated at AED270,000.Calculate the following:1. The break-even point in units2. The break-even point in AED3. The EBIT of the company if it produced and sold 200,000 boxes4. The number of boxes to be produced and sold if the Company wants to achieve an EBIT of AED150,000Question 4Global Industries sells products at an average price of AED 250 per unit. Variable Cost ofmanufacturing is AED 140 per unit. Fixed Costs per year are AED 350,000. Interest Cost per year isAED 125,000.For the production and sallllllles of 0,000 units, calculate the following;1. The Degree of Operating Leverage 2. The Degree of Financial Leverage3. The Degree of Total Leverage4. The impact on EBIT and EBT if the sales increase by 25%Question 5Vision LLC proposes to set up a new project at a cost of AED 45 million. To finance the project, itis considering two options as explained below;Option I: A low debt option which will comprise of debt of AED 15 million and equity of AED 30million.;Option 2: A high debt option which will comprise of debt of AED 30 million and equity of AED 15million;Equity financing under both options would be through issuance of new shares at a price of AED 3 pershare. Debt financing under both options would be through the issuance of 10 year bonds having acoupon rate of 8%.Corporate Tax Rate is 40% Answer the following:1. Calculate the EBIT-EPS Indifference Point2. Prepare an income statement that verifies that the EPS will be the same for both the financingoptions at the indifference point3. If the actual EBIT is AED 4.5 million, which financing option will show a higher EPS?C 3.11-Appendix Ill: Assessment Instrument Cover Sheet


Paper#30851 | Written in 18-Jul-2015

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