UGB363: You are Considering Buying WALLIE Ltd 7.5% Preference Share ($1 par value) Your Required Rate of Return on this Preference Share is 10%: Strategic Corporate Finance Assignment, MDIS, Singapore

The assignment has been designed to cover the following learning outcomes associated with successful completion of the module:

Knowledge

K1. Critical understanding of the key strategic decisions that a business may have to make and appreciated how accounting and finance can assist in making and evaluating those decisions.

K2. Critical understanding of specific analytical skills in key decision areas within strategy and finance at local and international level.

K3. Critical understanding of the limitations of the current state of financial theory in making strategic business decisions.

Skills

S1. Competence in applying the key valuation concepts and methodologies of financial decision making in order to contribute to the wider decision making of the organization

Part A
(a)
(i)You are considering buying WALLIE Ltd 7.5% preference share ($1 par value). Your required rate of return on this preference share is 10%. If the current market price is $0.99, and the income tax rate is 22%, would you buy the preference share?

(ii) KURU Ltd’s ordinary shares current market price is $2.80 per share. The company recently paid $0.30 dividend per share. If the expected constant growth rate is 8%, and that you require a 18% return, should you purchase the shares?

(iii) Consider the following bond investment: HDB Corporation $1,000 bond at 10% coupon interest matures in 10 years. Find the fair value of the bond if the market interest rates are: (a) 8% (b) 12%

Explain the relationship between the fair value of the bond and the market interest rate based on the above calculation.

(b)

“A firm should consider carefully the advantages and disadvantages of different forms of long term financing; as such financing decisions have long term impact on the firm’s investing decisions.”

Critically evaluate the above quotation in the light of the overwhelming evidence of different forms of long-term financing methods available for consideration by the business entities.

In this section, students should demonstrate an understanding and knowledge of the theoretical aspects that underpin the long-term financing methods. The evaluation should be supported with relevant, contemporary, academic research that has been undertaken within this field and should be referenced accordingly.

Ensure the response does not become overly descriptive within its approach, rather attempts to incorporate a critical perspective integrating relevant academic literature, allowing logical conclusions to be proposed.

Part B
(a) AKIRA Singapore Limited provides investment advisory services to a wide range of national and international clients. High on the agenda of the company this season is investment enquiry from an international client focusing on airport ‘s ground handling and catering business industry in Singapore. As a newly recruited member of staff, you are assigned the responsibility to research and report on the SATS.

(1) Using the most recent financial reports of the company, SATS, calculate relevant financial ratios over the 2017 – 2020 period covering:

• Profitability
• Liquidity
• Asset management
• Solvency
• Stock market investment

Show your workings clearly.

(2)
(i)Write a report to comment on the SATS’s business performance based on the financial ratios calculated in (1) and other relevant corporate information provided by the company.

(ii) Do you recommend the client to invest in this company? State your reasons.

(b) Critically evaluate the dividend policy adopted by the SATS. Your evaluation may wish to consider the following points:

•  what is meant by “optimal dividend policy” and analyse challenges in determining the optimal dividend policy for a firm.
• What factors should be included when proposing a suitable dividend policy for a firm
• Integration of empirical evidence that offers critics and proponents of the dividend policyIn this section students should demonstrate both understanding and knowledge of the dividend policy theoretical viewpoints. The discussion / evaluation should be supported with relevant empirical research that has been performed within this area and should be referenced accordingly.

Part C

The Board of Directors of GMT Limited is planning to purchase a modern Equipment costing $60,000 and the project duration is expected to be six years. The estimated cash flow before taxes and depreciation is $23,000 per year. The Company adopts straight line method of depreciation and the useful life of the equipment is estimated to be four years. The Company’s cost of capital is 20%. Assume that the corporate tax rate is 25%. There is no
salvage value of the equipment at the end of its useful life.

(1)
Calculate the following:
(i) Net Present Value (5 marks)
(ii) Payback period (2 marks)
(iii) Internal rate of return (5 marks)
State the assumptions and show the workings clearly.

(2)
Should the company invest in this project? Provide your justifications with reasons clearly.

(b)
“Capital budgeting, or investment appraisal, is the planning process used to determine whether an organization’s long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth the funding of cash through the firm’s capitalization structure (debt, equity or retained earnings).

It is the process of allocating resources for major capital, or investment, expenditures.” Critically evaluate the above quotation in the light of the overwhelming research evidence of capital budgeting in the last 10 years (2010 to 2020) Your evaluation may wish to consider the following points:

• Recent research works (2010 to 2020) on capital budgeting practices
• Evaluate the criteria that are most frequently recommended in the financial literature for the evaluation of investments
• Critics on whether profitability is an appropriate criterion for evaluating investment proposals.

In this section students should demonstrate both understanding and knowledge of the capital budgeting theoretical viewpoints. The discussion and evaluation should be supported with relevant empirical research that has been performed within this area and should be referenced accordingly.

The inclusion and ability to integrate real-life practical business examples, addressing whether differing companies adopt different capital budgeting strategies would assist in developing the response in greater depth and detail.