FINANCE HOMEWORK ASSIGNMENT

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.