BBMF2814 FINANCIAL MANAGEMENT 2 RAC
Week 8 Tutorial Questions
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Question 1
Card Co has in issue 8 million shares with an ex dividend market value of $7.16 per share. A dividend
of 62 cents per share for 2022 has just been paid. The pattern of recent dividends is as follows:
Year 2019 2020 2021 2022
Dividends per share (cents) 55.1 57.9 59.1 62.0
Card Co also has in issue 8.5% bonds redeemable in five years’ time with a total nominal value of $5
million. The market value of each $100 bond is $103.42. Redemption will be at nominal value.
Card Co is planning to invest a significant amount of money into a joint venture in a new business
area. It has identified a proxy company with a similar business risk to the joint venture. The proxy
company has an equity beta of 1.038 and is financed 75% by equity and 25% by debt, on a market
value basis.
The current risk-free rate of return is 4% and the average equity risk premium is 5%. Card Co pays
profit tax at a rate of 30% per year and has an equity beta of 1.6.
Required:
(a) Calculate the cost of equity of Card Co using the dividend growth model.
Ke = (D1 / P0) + g
(b) Calculate the weighted average after-tax cost of capital of Card Co using a cost of equity of 12%.
11.4
(c) Calculate a project-specific cost of equity for Card Co for the planned joint venture.
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BBMF2814 FINANCIAL MANAGEMENT 2 RAC
Week 8 Tutorial Questions
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Question 2
The following financial information relates to Wobnig Co.
Average ratios for the last two years for companies with similar business operations to Wobnig Co are
as follows:
Current ratio 1.7 times
Quick ratio 1.1 times
Inventory days 55 days
Trade receivables days 60 days
Trade payables days 85 days
Sales revenue/net working capital 10 times
Required:
(a) Using relevant working capital ratios evaluate whether Wobnig Co can be described as
overtrading. (12 marks)
(b) Discuss both the working capital investment policy and working capital financing policy.
(8 marks)
[Total: 20 marks]
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BBMF2814 FINANCIAL MANAGEMENT 2 RAC
Week 8 Tutorial Questions
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Question 3
The current assets and liabilities of CSZ Co at the end of March 20X4 are as follows:
For the year ended March 20X4, CSZ Co had sales of $40 million, all on credit, while cost of sales
was $26 million.
For the year ended March 20X5, CSZ Co has forecast that credit sales will remain at $40 million
while cost of sales will fall to 60% of sales. The company expects current assets to consist of
inventory and trade receivables, and current liabilities to consist of trade payables and the company's
overdraft.
CSZ Co also plans to achieve the following target working capital ratio values for the year ending
March 20X5:
Required:
(a) Calculate the working capital cycle of CSZ Co at the end of March 20X4 and discuss whether a
working capital cycle should be positive or negative. (6 marks)
Inventory = Inventory / Cost of sale x 365
= (5,700 / 26,000) x 365
= 80 days
Trade receivables = (Trade receivables / Sales) x 365
= (6,575 / 40,000) x 365
= 60 days
Trade payables = (Trade payables / COGS) x 365
= (2,137 / 26,000) x 365
= 30 days
CCC = Inventory + Receivables - Payables
= 80 + 60 - 30
= 110 days
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BBMF2814 FINANCIAL MANAGEMENT 2 RAC
Week 8 Tutorial Questions
__________________________________________________________________________________
(b) Calculate the target quick ratio and the target ratio of sales to net working capital of CSZ Co
(based on all the target working capital ratio values given) at the end of March 20X5. (5 marks)
(c) Analyse and compare the current asset and current liability positions for March 20X4 and March
20X5, and discuss how the working capital financing policy of CSZ Co would have changed.
(9
marks)
[Total: 20 marks]
