題目專項(xiàng)真題推薦afm訓(xùn)練

2019/MJQ1

TalamCo,alistedcompany,aimstomanufactureinnovativeengineeringproductswhichareenvironmentallyfriendlyandsustainable.Theseproductshavebeenhighlymarketablebecauseoftheiraffordability.TalamCo’smissionstatementalsostatesitsdesiretooperatetothehighestethicalstandards.ThesecommitmentshavemeantthatTalamCohasaveryhighreputationandahighsharepricecomparedtoitscompetitors.

TalamCoisconsideringanewproject,theUwaProject,tomanufacturedronesforuseintheagriculturalindustry,whichareatleast50%biodegradable,atcompetitiveprices.Thedroneswillenablefarmerstoincreasecropyieldsandreducecropdamage.ManufactureofdronesisanewbusinessareaforTalamCo.Theprojectisexpectedtolastforfouryears.

TalamCowillalsoworkontheJiguProject(afollow-onprojecttotheUwaProject)tomake95%+biodegradabledrones.ItisexpectedthattheJiguProjectwilllastforafurtherfiveyearsaftertheUwaProjecthasfinished.IftheUwaProjectisdiscontinuedorsoldsoonerthanfouryears,theJiguProjectcouldstillbeundertakenafterfouryears.

UwaProject

Thefollowingnumberofdronesareexpectedtobeproducedandsold:

Year 1 2 3 4

Numberofdronesproducedandsold4,300 19,200 35,600 25,400

Inthefirstyear,foreachdrone,itisexpectedthatthesellingpricewillbe$1,200andthevariablecostswillbe$480.Thetotalannualdirectfixedcostswillbe$2,700,000.Afterthefirstyear,thesellingpriceisexpectedtoincreaseby8%annually,thevariablecostsby4%annuallyandthefixedcostsby10%annually,forthenextthreeyears.Trainingcostsareexpectedtobe200%ofthevariablecostsinyear1,60%inyear2,and10%ineachofyears3and4.Thereissubstantialuncertaintyaboutthedronesproducedandsold,andTalamCoestimatestheprojecttohaveastandarddeviationof30%.

Atthestartofeveryyear,theUwaProjectwillneedworkingcapital.Inthefirstyear,thiswillbe20%ofsalesrevenue.Insubsequentyears,theprojectwillrequireadditionalorareductioninworkingcapitalof10%forevery$1increaseordecreaseinsalesrevenuerespectively.TheworkingcapitalisexpectedtobefullyrecoveredwhentheUwaProjectceases.

TheUwaProjectwillneed$35,000,000ofmachinerytoproducethedronesatthestartoftheproject.Taxallowabledepreciationisavailableonthemachineryat15%peryearonastraight-linebasis.Themachineryisexpectedtobesoldfor$7,000,000(post-inflation)attheendoftheproject.TalamComakessufficientprofitsfromitsotheractivitiestotakeadvantageofanytaxlossrelief.Taxispaidintheyearitfallsdue.

JiguProjectasarealoption

TalamCoestimatesthatJiguProject’scashflowsarehighlyuncertainanditsstandarddeviationis50%.Itisestimatedthat$60,000,000willberequiredatthestartoftheprojectinfouryears’time.Usingconventionalnetpresentvalue,TalamCo’sbestestimateisthatnetpresentvalueoftheprojectwillbe$10,000,000atthestartoftheproject.

ThefollowingfigureswereestimatedfortheJiguProjectusingtherealoptionsmethod.Assetvalue(Pa)=$46,100,000(tonearest100,000)

Exerciseprice(Pe)=$60,000,000Exercisedate(t)=4years

Risk-freerate(r)=2·30%Volatility(s)=50%

d1=0·329 d2=–0·671N(d1)=0·6288 N(d2)=0·2510

Calloptionvalue:$15,258,399

Itcanbeassumedthatthecalloptionvalueisaccurate.

TalamCo’sfinancedirectorwantstoknowhowtheassetvalueof$46,100,000hasbeenestimated.

HonuaCo’soffer

HonuaCo,whosemainbusinessisdroneproduction,hasapproachedTalamCowithanoffertobuytheUwaProjectinitsentiretyfromTalamCo,for$30,000,000atthestartofthethirdyearoftheproject’slife.

TalamCohascalculatedsomefigurestoassessthevalueofHonuaCo’sofferusingtherealoptionsmethod,asfollows:

d1=0·779d2=0·355N(d1)=0·7821N(d2)=0·6387

TalamCo’sfinancedirectorhasrequestedthatthevalueofHonuaCo’sofferisestimatedusingtherealoptionsmethod.

Shehasalsorequestedtoknowtheamountsoftheinitialvariableswhichwouldhavebeenusedtocalculatethed1,d2,N(d1)andN(d2)figures.

Itcanbeassumedthatthed1,d2,N(d1)andN(d2)figuresareaccurate.

Additionalinformation

BothHonuaCoandTalamCopaycorporationtaxatanannualrateof20%.TalamCohasestimatedUwaProject’sandJiguProject’srisk-adjustedcostofcapitalat11%,basedonHonuaCo’sassetbeta.TalamCobelievesthatLIBOR,whichiscurrently2·30%,providesagoodestimateoftherisk-freerateofinterest.

Required:

DiscusshowincorporatingrealoptionsintonetpresentvaluedecisionsmayhelpTalamCowithitsinvestmentappraisaldecisions. (5marks)

Prepareareportfortheboardofdirectors(BoD)ofTalamCowhich:

Estimates,showingallrelevantcalculations,thenetpresentvalueoftheUwaProjectbeforeconsideringtheofferfromHonuaCoandtheJiguProject;

(12marks)

AddressestherequestsmadebythefinancedirectorabouttheinitialvariablesandestimatedvalueoftheofferfromHonuaCousingtherealoptionsmethod;

(9marks)

AssesseswhethertheUwaProjectshouldbeundertaken,usingtheresultsfrom,anddiscussestheassumptionsmadein,thecalculationsin(b)(i)and(b)(ii)above.

(10marks)Professionalmarkswillbeawardedinpart(b)fortheformat,structureandpresentationofthereport. (4marks)

2016/06Q4

FurlionComanufacturesheavyagriculturalequipmentandmachinerywhichcanbeusedindifficultfarmingconditions.FurlionCo’schiefexecutivehasbeeninvestigatingasignificantopportunityinthecountryofNaswa,whereFurlionCohasnotpreviouslysoldanyproducts.ThegovernmentofNaswahasbeenundertakingamajorlandreclamationprogrammeandFurlionCo’sequipmentisparticularlysuitableforuseonthereclaimedland.Becauseof

thecostsandotherproblemsinvolvedintransportingitsproducts,FurlionCo’schiefexecutiveproposesthatFurlionCoshouldestablishaplantformanufacturingmachineryinNaswa.HeknowsthattheNaswangovernmentiskeentoencouragethedevelopmentofsustainablebusinesseswithinthecountry.

InitialcalculationssuggestthattheproposedinvestmentinNaswawouldhaveanegativenetpresentvalueof$1·01million.However,FurlionCo’schiefexecutivebelievesthattheremaybeopportunitiesforgreatercashflowsinfutureiftheNaswangovernmentexpandsitslandreclamationprogramme.Thegovernmentatpresentisstrugglingtofundexpansionoftheprogrammeoutofitsownresourcesandislookingforotherfunding.IftheNaswangovernmentobtainsthisfunding,thechiefexecutivehasforecastthattheincreaseddemandforFurlionCo’sproductswouldjustify$15millionadditionalexpenditureatthesiteofthefactoryinthreeyears’time.Theexpectednetpresentvalueforthisexpansioniscurrentlyestimatedtobe$0.

Itcanbeassumedthatallcostsandrevenuesincludeinflation.Therelevantcostofcapitalis12%andtheriskfreerateis4%.Thechiefexecutivehasestimatedthelikelyvolatilityofcashflowsatastandarddeviationof30%.

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