APV’sLogic&ModiglianiandMiller’stheoryAPV’sLogic&ModiglianiandMiller’stheoryongearingtellsusthattheimpactofandaddedasanadjustmenttothepresentvalueofaproject.Ifaquestionshowsaninvestmenthasbeenfundedentirelybydebtorasksforprojectappraisalusing'theadjustedpresentvaluemethod’,youmustStepStepStepAddthePVofthetaxsavedasaresultofthedebtusedintheofissuingnewThevalueoftheprojectisinitiallyassessedconsideringonlythebusinessThevalueoftheprojectisinitiallyassessedconsideringonlythebusinessriskinvolvedinundertakingtheproject.Theimpactofdebtfinancing(andthesubsidybenefitifapplicable)arethenconsidered.Inthisway,XXcanassessthevaluecreatedfromandthentheadditionalvaluefrominwhichtheproject.Keypoint-discountBeKeypoint-discountBecarefulwhichdiscountfactorsyouuseinStepStepCalculatetheprojectNPVatungearedKecalculatedeitherbyusingtheAddthePVofthetaxsavedatKdbecausethisreflectsthelowriskofthetaxsavingsAlsoAlsonotethatifisofferedthenclearlyaddssomeextravaluetotheAPV,thisshouldbecalculatedasthepresentvalueofthesavingsduetothesubsidy,discountedatthenormalKd(againitislowChangingbusinessChangingbusinessForprojectswithdifferentbusinessriskitisinappropriatetousetheWACCtocalculateaprojectNPV;insteadamarginalcostofcapital(usingtheCAPM)shouldbeused.Thisinvolvesasimilarapproach.Ex3-Ex3-BahariBahariisasmallcountrywithagricultureasitsmaineconomicactivity.Arecentgeologicalsurveyconcludedthattheremaybearichdepositofcopperavailabletobeminedinthenorth-eastofthecountry.InameetingbetweentheBaharigovernmentandMlimaCo’sBoD,theBaharigovernmentofferedMlimaCoexclusiverightstominethecopper.Itisexpectedthatthereareenoughdepositstolastatleast15years.Initialestimatessuggestthattheprojectwillgeneratefreecashflowsof$4millioninthefirstyear,risingby100%peryearineachofthenexttwoyears,andthenby15%ineachofthetwoyearsafterthat.Thefreecashflowsarethenexpectedtostabiliseattheyear-fivelevelfortheremaining10years.ThecostofThecostoftheproject,payableatthestart,isexpectedto$150million,comprisingmachinery,workingcapitalandtheminingrightsfeepayabletotheBaharigovernment.Noneofthesecostsisexpectedtoberecoverableattheendoftheproject’s15-yearlife.TheinterestpayableisallowablefortaxationItcanbeassumedthatMlimaCo’sbusinessriskisnotexpectedtochangeasaresultofundertakingtheBahariproject.【MJ:TheinvestmentactivitycanbediscountedattheZiwacalculatedinA2Ex2Answer–Answer–Basecasepresentvalue(in$millions)-PV(in$--012345**Thefreecashflowsinyears6to15areanannuityfor10yearsat11%,thendiscountedbackforfiveyears:21·2×5·889×0·593=74·0PVofthePVofthetaxshieldandAnnuityfactor(7%,15years)=Annualtaxshieldbenefitinterest=3%×$150m×25%=Subsidybenefit=4%×$150m×(1–25%)=PVoftaxshieldandsubsidybenefit=5·6×9·108=Adjustedpresentvalue=$-29.5m+$51·0m=一定一定要自己獨(dú)立完成再聽YouhaverecentlycommencedworkingforBurungYouhaverecentlycommencedworkingforBurungCoandarereviewingafour-yearprojectwhichthecompanyisconsideringforinvestment.TheprojectisinabusinessactivitywhichisverydifferentfromBurungCo’scurrentlineofbusiness.ThefollowingnetpresentvalueestimatehasThefollowingnetpresentvalueestimatehasbeenmadefortheAllfiguresarein$SalesrevenueCashflows01 2 3 4Discountfactors(7%)PresentNetpresentNetpresentvalueisnegative$1·65million,andthereforetherecommendationisthattheprojectshouldnotbeaccepted.Incalculatingthenetpresentvalueoftheproject,thefollowingnotesweremade:Sincetherealcostofcapitalisusedtodiscountcashflows,neitherthesalesrevenuenorthedirectprojectcostshavebeeninflated.Itisestimatedthattheinflationrateapplicabletosalesrevenueis8%peryearandtothedirectprojectcostsis4%peryear.Theprojectwillrequireaninitialinvestmentof$38million.Ofthis,$16millionrelatestoplantandmachinery,whichisexpectedtobesoldfor$4millionwhentheprojectceases,aftertakinganytaxationandinflationimpactintoaccount.TaxallowabledepreciationisavailableontheplantandmachineryatTaxallowabledepreciationisavailableontheplantandmachineryat50%inthefirstyear,followedby25%peryearthereafteronareducingbalancebasis.Abalancingadjustmentisavailableintheyeartheplantandmachineryissold.BurungCopays20%taxonitsannualtaxableprofits.Notaxallowabledepreciationisavailableontheremaininginvestmentassetsandtheywillhaveanilvalueattheendoftheproject.BurungCouseseitheranominalcostofcapitalof11%orarealcostofcapitalof7%todiscountallprojects,giventhattherateofinflationhasbeenstableat4%foranumberofInterestisInterestisbasedonBurungof150basispointsoverthe10-yeargovernmentyieldrate.Atthebeginningofeachyear,BurungCowillneedtoprovideworkingcapitalof20%oftheanticipatedsalesrevenuefortheyear.Anyremainingworkingcapitalwillbereleasedattheendoftheproject.Workingcapitalanddepreciationhavenotbeentakenintoaccountinthenetpresentvaluecalculationabove,sincedepreciationisnotacashflowandalltheworkingcapitalisreturnedattheendoftheproject.Itisanticipatedthattheprojectwillbefinancedentirelybydebt,60%ofwhichwillbeobtainedfromasubsidisedloanschemerunbyItisanticipatedthattheprojectwillbefinancedentirelybydebt,60%ofwhichwillbeobtainedfromasubsidisedloanschemerunbythegovernment,whichlendsmoneyatarateof100basispointsbelowthe10-yeargovernmentdebtyieldrateof2·5%.Issuecostsrelatedtoraisingthefinanceare2%offinancerequired.TheremainingwillbefundedfromBurungCo’snormalborrowingsources.ItcanbeassumedthatthedebtcapacityavailabletoBurungCoisequaltotheactualamountofdebtfinanceraisedfortheproject.BurungCohasidentifiedacompany,LintuCo,whichoperatesinthesamelineofbusinessasthatoftheprojectitBurungCohasidentifiedacompany,LintuCo,whichoperatesinthesamelineofbusinessasthatoftheprojectitisconsidering.LintuCoisfinancedby40millionsharestradingat$3·20eachand$34milliondebttradingat$94per$100.LintuCo’sequitybetaisestimatedat1·5estimatedthatthemarketriskpremiumis8%.LintuCopaystaxatanannualrateof20%.BothBurungCoandLintuCopaytaxinthesameyearaswhenprofitsareearned.Calculatetheadjustedpresentvalue(APV)Calculatetheadjustedpresentvalue(APV)fortheproject,correctinganyerrorsmadeinthenetpresentvalueestimateabove,andconcludewhethertheprojectshouldbeacceptedornot.Showallrelevantcalculations.(15CommentonthecorrectionsmadetotheoriginalnetpresentvalueestimateandexplaintheAPVapproachtakeninpart(a),includinganyassumptionsmade.(10(25Q2- AllfiguresareQ2- Allfiguresarein$millionSalesrevenue(inflated,8%p.a.)Costs(inflated,4%p.a.)IncrementalprofitWorkingcapital(W2)CashflowsDiscountfactors(12%,W3)Presentvalues01 2 3 4Basecasenetpresentvalueisapproximately$8·62 Allfiguresarein Allfiguresarein$IncrementalprofitCapital01234 Allfiguresarein$01234(20% Allfiguresarein$01234(20%ofsalesrevenue)WorkingcapitalLintuCoassetbeta=1·5×$128m/($128m+$31·96m×0·8)approx.=All-equityfinanceddiscountrate+1·25×8%=(P/A,4%,4)=(P/A,4%,4)=FinancingsideIssuecosts2/98×$42,970,000TaxshieldAnnualtax=($42,970,000×60%×0·015×+($42,970,000×40%×0·04×=77·35+137·50=Thepresentvalueofthetaxreliefannuity=214·85×Annualsubsidy$42,970,000×60%×0·025×80%=Thepresentvalueofthesubsidybenefitannuity=515·64×3·63TotalbenefitoffinancingsideeffectsFinancingtheprojectentirelybydebtwouldFinancingtheprojectentirelybydebtwouldaddjustunder$1·78milliontothevalueoftheproject,orapproximately,anadditional20%totheall-equityfinancedproject.Theadjustedpresentvalue(APV)oftheprojectisjust$10·4millionandthereforeitshouldbeIncalculatingthepresentvaluesofthetaxshieldandsubsidybenefits,theannuityfactorusedisbasedon4%toreflectthenormalborrowing/defaultriskofthecompany.Alternatively,2%or2·5%couldbeuseddependingontheassumptionsmade.Creditwillbegivenwheretheseareusedtoestimatetheannuityfactor,wheretheassumptionisQ2-CorrectionsmadetotheoriginalnetpresentTheapproachtakentoexcludedepreciationfromthenetpresentvaluecomputationiscorrect,Q2-CorrectionsmadetotheoriginalnetpresentTheapproachtakentoexcludedepreciationfromthenetpresentvaluecomputationiscorrect,butcapitalallowancesneedtobetakenawayfromprofitestimatesbeforetaxiscalculated,reducingtheprofitsonwhichtaxispayable.Interestisnotnormallyincludedinthenetpresentvaluecalculations.Instead,itisnormallyimputedwithinthecostofcapitalordiscountrate.Inthiscase,itisincludedinthefinancingsideeffects.CashflowsareinflatedandthenominalratebasedonLintuCo’sall-equityfinancedrateisused(seebelow).Wheredifferentcashflowsaresubjecttodifferentratesofinflation,applyingarealratetonon-inflatedamountswouldnotgiveanaccurateanswer.TheimpactoftheworkingcapitalrequirementisCashflowsareinflatedandthenominalratebasedonLintuCo’sall-equityfinancedrateisused(seebelow).Wheredifferentcashflowsaresubjecttodifferentratesofinflation,applyingarealratetonon-inflatedamountswouldnotgiveanaccurateanswer.Theimpactoftheworkingcapitalrequirementisincludedintheestimateas,althoughalltheworkingcapitalisrecoveredattheendoftheproject,theflowsofworkingcapitalaresubjecttodifferentdiscountrateswhentheirpresentvaluesarecalculated.Thevalueoftheprojectisinitiallyassessedconsideringonlythebusinessriskinvolvedinundertakingtheproject.ThediscountrateusedisbasedonLintuCo’sassetbetawhichmeasuresonlythebusinessriskofthatcompany.SinceLintuCoisinthesamelineofThevalueoftheprojectisinitiallyassessedconsideringonlythebusinessriskinvolvedinundertakingtheproject.ThediscountrateusedisbasedonLintuCo’sassetbetawhichmeasuresonlythebusinessriskofthatcompany.SinceLintuCoisinthesamelineofbusinessastheproject.TheimpactofdebtfinancingandthesubsidybenefitthenInthisway,BurungCocanassessthevaluecreatedfromitsinvestmentactivityandthentheadditionalvaluecreatedfromthemannerinwhichtheprojectisfinanced.Itisassumedthatallfiguresusedareaccurateandanyestimatesmadearereasonable.BurungComaywanttoconsiderundertakingasensitivityanalysistoassessthis.【MJ：P4必備】ItisassumedthatItisassumedthatallfiguresusedareaccurateandanyestimatesmadearereasonable.BurungComaywanttoconsiderundertakingasensitivityanalysistoassessthis.【MJ：P4必備】ItisassumedthatLintuCo’sassetbetaandall-equityfinanceddiscountraterepresentthebusinessriskoftheproject.Thevalidityofthisassumptionalsoneedstobeassessed.Forcase,theassetbetawouldneedtobeadjustedsothatjusttheproject’sbusinessriskisconsidered.的重要考點(diǎn)/假設(shè)之一。應(yīng)試用了什么寫什么ItisassumedthattheinitialworkingcapitalrequiredwillformpartofthefundsItisassumedthattheinitialworkingcapitalrequiredwillformpartofthefundsborrowedbutthatthesubsequentworkingcapitalrequirementswillbeavailablefromthefundsgeneratedbytheproject.Thevalidityofthisassumptionneedstobeassessedsincetheworkingcapitalrequirementsatthestartofyears2and3aresubstantial.【MJ：高分靈活（實(shí)務(wù)）思路，因題而異，不用強(qiáng)求(Note:Creditwillbegivenforalternative,relevantQ2Q2-MarkingWorkingcapitalEstimateofdiscountrateNetpresentvalueIssueSubsidybenefitAdjustedpresentvalueand222211212Q2-MarkingQ2-MarkingApproachtakenMax一定要一定要自己獨(dú)立完再聽AmberleCoisalistedcompanywithdivisionswhichmanufacturecars,motorbikesandcycles.Overthelastfewyears,AmberleCohasusedamixtureofequityanddebtfinanceforitsinvestments.However,itisabouttomakeanewinvestmentof$150millionAmberleCoisalistedcompanywithdivisionswhichmanufacturecars,motorbikesandcycles.Overthelastfewyears,AmberleCohasusedamixtureofequityanddebtfinanceforitsinvestments.However,itisabouttomakeanewinvestmentof$150millioninfacilitiestoproduceelectriccars,whichitproposestofinancesolelybydebtfinance.ProjectinformationAmberleCo’sfinancedirectorhaspreparedestimatesofthepost-taxcashflowsfortheproject,usingafour-yeartimehorizon,togetherwiththerealisablevalueattheendoffouryears:Workingcapitalof$6million,notincludedintheestimatesaboveandfundedfromretainedearnings,willalsoberequiredimmediatelyfortheproject,risingbythepredictedrateofinflationforeachyear.AnyremainingworkingcapitalwillbereleasedinfullattheendofthePredictedratesofinflationWorkingcapitalof$6million,notincludedintheestimatesaboveandfundedfromretainedearnings,willalsoberequiredimmediatelyfortheproject,risingbythepredictedrateofinflationforeachyear.AnyremainingworkingcapitalwillbereleasedinfullattheendofthePredictedratesofinflationareas12341234Post-taxoperatingcashIssuecostsof3%ofgrossproceedswillbepayableonIssuecostsof3%ofgrossproceedswillbepayableonthesubsidisedloan.Noissuecostswillbepayableonthebankloan.Issuecostsarenotallowablefortax.Thefinancedirectorhasproposedthefollowingfinancepackageforthenewinvestment:Bankloan,repayablein annualinstalmentsovertheproject’slife,interestpayableat8%peryearSubsidisedloanfromagovernmentloanschemeovertheproject’slifeonwhichinterestispayableat3·1%peryearFinancialinformationAmberleCoFinancialinformationAmberleCopaystaxatanannualrateof30%onprofitsinthesameyearinwhichprofitsarise.AmberleCo’sassetbetaiscurrentlyestimatedat1·14.Thecurrentreturnonthemarketisestimatedat11%.Thecurrentrisk-freerateis4%peryear.AmberleCo’schairmanhasnotedthatallofthecompany’sdebt,includingthenewdebt,willberepayablewithinthreetofiveyears.HeiswonderingwhetherAmberleConeedstodevelopapolicyinbroadtermsthisshouldtheadjustedtheadjustedpresentvalue(APV)fortheprojectandwhethertheprojectshouldbeacceptedornot.(15AnswerAnswer2DiscountUsingassetAll-equityfinanceddiscountrate=4%2DiscountUsingassetAll-equityfinanceddiscountrate=4%+(11%–4%)*1·14=1Workingcapital(in012343Issue$80million/0·97=Issuecosts=3%x$82,474,227=$2,474,227Therewillbenoissuecosts3Issue$80million/0·97=Issuecosts=3%x$82,474,227=$2,474,227Therewillbenoissuecostsforthebankloan.4TaxshieldonsubsidisedloanUsePVofanannuity(PVA)years1to4at8%(normalborrowing$80mx0·031x30%x3·312=5SubsidyBenefit=$80mx(0·08–0·031)x70%x3·312=NotetoFullcreditshouldbegiveniftaxshieldisdiscountedatthegovernmentinterestrateof3·1%ratherthanthenormalborrowingrateof8%.Annualrepayment=($70m/PVA8%Yr1–=($70m/3·312)=Annualrepayment=($70m/PVA8%Yr1–=($70m/3·312)=OpeningInterestatClosingInterestTaxreliefatDiscountfactorInterestTaxreliefatDiscountfactorPresentNetpresentIssuecostsIssuecostsTaxshieldonsubsidisedloan(W4)Subsidybenefit(W5)TaxshieldonbankloanTotalbenefitoffinancingsideFinancingtheprojectinthiswaywouldaddaround$12·82millionFinancingtheprojectinthiswaywouldaddaround$12·82milliontothevalueoftheproject.Theadjustedpresentvalueoftheprojectisaround$7·73millionandsotheprojectshouldbeSensitivityanalysisshouldbeundertakenonallthesignificantvariables.Furtheranalysismaybeneeded,particularlyoftheassumptionswhichliebehindthepost-taxcashflows,suchassalesandthetaxrate.Therealisablevalueof$45millionmaybeOntheotherhand,thetimehorizonoffouryearsseemslowandanalysisshouldbedoneofpotentialcashflowsbeyondthattime.QuestionQuestionDiscussthefactorswhichmaydeterminethelong-termfinancepolicywhichAmberleCo’sboardmayadoptandthefactorswhichmaycausethepolicytochange.(10marks)AnswerAnswerAmberleCo’sboardcanusevariousprinciplestodetermineitslong-termfinancemix.Thedirectorsmayaimtofollowconsistentlong-termpolicies,ortheymayhavepreferenceswhichchangeascircumstanceschange.Long-termLong-termpolicyAtpresentAmberleCoisusingamixoffinance,raisingthequestionofwhetherthedirectorsareaimingforanoptimallevelofgearing,orthereisalevelwhichtheydonotwishgearingtoexceed.Iftheboardwishestomaintaingearingatanoptimallevel,thisislikelytobedeterminedbyabalanceofrisksandadvantages.Themainrisksarenotbeingabletomaintaintherequiredlevelofpaymenttofinanceproviders,interesttodebtprovidersorrequiredlevelofdividendtoshareholders.Advantagesmayincludelowercostsofdebt,taxreliefonfinancecostsasshownintheAPVcalculationor,ontheotherhand,notbeinglegallyrequiredtopaydividendsinaparticularyear.AnotherAnotherissueiswhetherAmberleCo’sboardhaspreferencesaboutwhatsourceoffinanceshouldbeusedandinwhatorder.Oneexampleofthisisfollowingthepeckingorderofretainedearnings,thendebt,thenequity.Theboardmaypreferthispeckingorderonthegroundsthatavoidinganewequityissuemeansthatthecompositionofshareholdingsisunchanged,orbecauseretainedearningsandlongertermdebtarejudgedlowrisk,orbecausethemarketwillassumethatanequityissueisbeingmadebecausedirectorswanttotakeadvantageofAmberleCo’ssharesbeingover-priced.Otherspecificsourcesoffinancemayhavebenefitswhichattractthedirectorsordrawbackswhichdeterthem.Thisinvestmenthighlightstheaspectofwhethertheboardpreferstomatchsourcesoffinancewithspecificinvestments.MatchingarguablygivesgreaterflexibilityandavoidscommittingThisinvestmenthighlightstheaspectofwhethertheboardpreferstomatchsourcesoffinancewithspecificinvestments.MatchingarguablygivesgreaterflexibilityandavoidscommittingAmberleCotoalong-terminterestburden.However,toadoptthisapproach,theboardwillneedassuranceeitherthattheinvestmentwillbeabletomeetfinancecostsandultimatelyrepaymentburdens,orthesecanbemetfromsurplusesfromotheroperations.ChangingChanginglong-termfinancingAswellasdecidingwhatfinancingmixorsourcesoffinancetheydesiretouse,thedirectorswillalsoneedtoconsiderwhatfactorswouldcausethisdecisiontochange.Amajorchangeinthescopeoftheoperations,withinvestmentrequirementsbeingparamount,maycauseachangeinfinancingpolicy.Herethe$150millioninvestmenthasbeenfinancedentirelybymedium-termdebt.AmberleComayhavechosensolelytousedebtifithasmadearecentequityissueanddoesnotfeelitcanmakeanotheronesosoonafterwards.Inaddition,ifAmberleCoexpandsitsmanufactureofelectriccars,itmaydecidetoselloffitsmotorbikeorcyclesdivisionsiftheyareperforminglesswell.Ifpartofthebusinessissold,thesaleproceedscouldhelpfinancenewinvestmentinthecarsTheboardmayalsobeflexibleattimesandtakeadvantageofwhateversourceoffinanceseemstobeofferingthebesttermsforAmberleTheboardmayalsobeflexibleattimesandtakeadvantageofwhateversourceoffinanceseemstobeofferingthebesttermsforAmberleCo.Heretheboardistakingadvantageofloanfinancebeingavailableatalowcost,thankstothegovernmentloanscheme.Achangeinthebusinessoreconomicenvironmentmayalsoleadtotheboardrethinkinghowthecompanyisfinanced.Aneconomicrecession,leadingtofallingshareprices,maymeanthattheresultsofashareissueareuncertain.Ontheotherhand,anincreaseineconomicorbusinessriskmaymeanthatlendersarelesslikelytolendatacceptableratesorwillimposegreaterrestrictions.Ifthedirectorsarerisk-averse,theymaynotseeknewfinanceduringarecessionbutinsteadrelyonretainedearningstofinanceanyexpansion.2021/062021/06一定要自己獨(dú)立完再聽RobsonCoisafoodmanufacturerwithaportfolioofwell-knownbrands.ThefoundingdirectorsRobsonCoisafoodmanufacturerwithaportfolioofwell-knownbrands.Thefoundingdirectorsretainasignificantminorityshareholdinginthecompanyandcontinuetoserveontheboardfollowingasuccessfullistingtenyearsago.AfterobtainingtheListing,RobsonCo'sgearingratioincreasedsignificantlyabovethesectoraverageastheresultofapoorlytimedstrategy,mainlyfinancedbydebt.Earningsbecameincreasinglyvolatileandthedebtburdentriggeredadeclineinthecompany'sfinancialperformance.Theboardrespondedtotheseproblemsfiveyearsagobypursuingadebt-reductionturnaroundstrategy,whichhasbeenfinancedbyaseriesofrightsissuesandassetdisposals.Eventhoughthisstrategysuccessfullyreducedthegearingratio,whichisnowequaltotheindustryaverage,thesharepriceremainsdepressedduetocompetitivepressureswithintheindustryThecompanyscreditratinghasrecentlybeendowngradedonceagain.RobsonCo'schiefexecutiveofficer(CEO)hasidentifiedanopportunitytorelocatethemanufacturingplantanddevelopastate-of-the-artautomatedproductionline,whichwilllreducetheunderlyingcostbaseandbeasourceofcompetitiveadvantage.RobsonCo'sfinancedirectorhaspreparedestimatesofRobsonCo'sfinancedirectorhaspreparedestimatesofthefreecashfiowsgeneratedbytheproject,basedonafour-yeartimehorizon:Theinvestmentcostis$120m,whichRobsonCosCEOproposestofinanceasDisposalofexistingmanufacturingplantRightsissueSubsidisedloan,3.5%annualinterestrateBankloan,9%annualinterestrate01234Freecash0Issuecostsof2%arepayableongrossexternalfinancingIssuecostsof2%arepayableongrossexternalfinancingandarenotallowableforcorporationtax.Issuecostsarepayableoutofavailablecashreserves.Thefinancedirectorhasaskedyoutoignoreunderwritingcostsrelatingtotherightsissue.RobsonCo'scurrentequitybetais1.418andthedebtequityratiois1:5basedonmarketvaluesTheriskfreerateis3%andthemarketriskpremiumis9%.TheCEOexpectsthebusinessriskofthecompanytoremainunchangedasaresultoftheinvestmentCorporationtaxispayableatanannualrateofExhibitExhibit2:FurtherinformationonprojectTheboarddiscussedthefinancingoftheprojectatarecentmeeting.RobsonCo'scorporatebankershavealreadyapprovedthefundingdecisionfortheS50mbankloanbutthefinancedirectorisconcernedaboutthefollowingcapitalproviders:ExternalThelastrightsissuetookplace18monthsagoandthereweretwoothersinthepreviousfiveyears.Agroupofshareholdershaveformedanactiongrouptoexertpressureontheboardformoredrasticchange.ThisincludedacampaigntoreplacetheCEO,whichwasonlynarrowlyavoidedwhentheshareholdersvotedatthemostrecentannualgeneralmeeting.TheCEOisoptimisticabouttheprospectsofanightsissuebutsuggestedunderwritingtheissuetoreducetheriskoffailureTheproductionandmarketingdirectorsindicatedtheywouldnotbeabletotakeuptheirrightsduetopersonalfinancialcommitmentsbutwouldotherwiseprovidefullsupportforthenewstrategy.SubsidisedloanThegovernmentfundsthesubsidisedloanprogrammetoboostjobcreationintheeconomicallydeprivednorthernregionofthecountry,whichiswherethenewautomatedmanufacturingplantistobelocated.Althoughtheloanhasyettobeapproved,thechiefexecutiveisoptimisticabouttheoutcomeoftheirapplication.Onefeatureoftheloanprogrammeisthatitisopentoapplicantswithoutassetsavailabletoprovidesecurityalthoughotherrestrictionsmaybeimposed.ThisisrelevanttoRobsonCosincesurplusassetsweredisposedofduringtheturnaroundstrategyandthosewhichremainwillbeusedtosecurethenewbankloan.a)Calculatea)Calculatetheadjustedpresentvalueoftheinvestmentandwhethertheprojectshouldbeacceptedornot(14(b)Discussthefactorsthecapitalproviders,excludingthebank,willconsiderbeforedecidingwhetherornottoapprovethefundingdecisionforRobsonCo'sinvestmentinanewmanufacturingplant.(11marks)(a)Projectcashflows:AllfiguresareinBasecasenetpresent(a)Projectcashflows:AllfiguresareinBasecasenetpresentvalue=Basecasenetpresentvalueisnegativeandonthisbasisshouldthereforebe01234Cash-Discountfactors-14%1Present-Financingsideeffects:Financingsideeffects:AllfiguresareinIssuecostsTaxshieldonsubsidisedloan(w3)Taxshieldonbankloan(w4)Subsidybenefit(w5)Totalbenefitoffinancingside2Theadjustedpresentvalueoftheprojectis$2·0mandsotheprojectshouldbeUngearedcostofequityβa=βex[MVe/(MVe+MVd(1–βa=1·418x[5/(5+1(0·8))]=Keu=rf+ba(rm–rf)=0·03+(1·222x0·09)=Issuex0·02=(Note:Issuecostsarepayableoutofcashreserves,sothefinancedoesnotneedtobegrossedWorkingWorking3(w3):TaxshieldonsubsidisedloanAnnuityfactor(9%,4years)=3.240$40mx0·035x0·20x3.240=(Note:TheriskfreeratewouldalsobeacceptableasadiscountTaxshieldonbankloanAnnualrepayment=$50m/3·240=Totalpresentvalue=Working5(w5):SubsidybenefitTaxshieldonbankloanAnnualrepayment=$50m/3·240=Totalpresentvalue=Working5(w5):SubsidybenefitSubsidy=$40mx(0.09–0·035)x0.80x3.240=Year$1234Opening39InterestatClosing7TaxreliefoninterestDiscountfactorPresent(b)(b)FactorseachcapitalprovidermayconsiderExternalshareholdersThechiefexecutive’soptimismregardingtherightsissuemaybemisplaced.RobsonCo’sshareholdersmayquestiontheneedforanotherrightsissuesosoonafterthelastone.Normaytheyhavethefundsavailabletotakeuptheirrights,particularlywhentherehasbeenaseriesoffundraisingexercisesinthelastsixyears.Whilstintheorytheshareholdersareabletoselltheirrights,thiswouldmeanacceptingadilutionintheirvotingpower,whichmaynotbeacceptable.Thereforeitispossiblearightsissuecouldfail.EvenifRobsonCohastheissueunderwritten,failureoftherightsissuewouldhaveanadverseimpactonRobsonCo’ssharepriceandthemarket’sconfidenceintheShareholdersShareholdersmayquestionthelogicbehindthenewprojectandwhethertheforecastresultscanbedelivered.Theymayneedreassurancethatlessonsfromthepasthavebeenlearnt.Theunderwritingcostshavebeenignoredinthefinancialappraisaleventhoughthesearelikelytobesignificantandmayprovefataltothefinaloutcome,particularlywhentheproject’sAPVisquitemarginalat$2m.TheloanwillmeanthatRobsonCo’sgearingonceagainexceedstheaverageandshareholderswillrequirehigherreturnstocompensatefortheincreaseinfinancialrisk.TheshareholdersmayquestionwhetherthecommitmenttoserviceandrepaythenewloansmaymeanthatRobsonCowillhavedifficultypayinganacceptablelevelofdividend.Thedirectorsmayalsolackthefundsrequiredtotakeuptheirrightsbuttheirparticipationislikelytobecriticaltothesuccessoftherightsissue.Anyreluctancetoparticipatecouldsendasignaltoexternalinvestorsthattherisksinvolvedinthenewprojectaretoohigh,particularlywhenthereareinformationasymmetriesabouttheproject.Tension