Acct1501 Exam

Instructions • Use blue or black ink or ball-point pen. • Fill in the boxes at the top of this page. • Answer all questions in the spaces provided. All working must be shown. • Do all rough work in this book. Cross through any work you do not want marked. Information • The maximum mark for this paper is 75. • Mark

Problems #65 - #94 from page 311. Please provide your answer after each problem and submit the file with your answers through Blackboard.

The process of transferring the cost of metal ores and other minerals removed from the earth to an

1. The paper fulfills the purpose of the assignment as described in the syllabus and in this document (up to 10 points)

Assume that next year management wants the company to earn a minimum profit of $162,000. How many units be sold to meet this target profit figure? [3 points]

a. What risk-free rate and risk premium did you use in calculating the cost of equity for each division? Why did you choose these numbers?

In this assignment you will demonstrate your understanding of capital investment techniques by evaluating the following three case studies.

Solutions to Valuation Questions 1. Assume you expect a company’s net income to remain stable at $1,100 for all future years, and you expect all earnings to be distributed to stockholders at the end of each year, so that common equity also remains stable for all future years (assumes clean surplus). Also, assume the company’s β = 1.5, the market risk premium is 4% and the 20-30 year yield on risk free treasury bonds is 5%. Finally, assume the company has 1,000 shares of common stock outstanding. a. Use the CAPM to estimate the company’s equity cost of capital. • re = RF + β * (RM – RF) = 0.05 + 1.5 * 0.04 = 11% b. Compute the expected net distributions to stockholders for each future year. • D = NI – ΔCE = $1,100 – 0 = $1,100 c. Use the

Cost of Equity is the return that stockholders require for a company. A company’s cost of equity represents the compensation that the market demands in exchange for owning the assets and bearing the risk of ownership. Based on capital markets the cost of equity varies in direct relation to the assumed risk in that specific market. The distinctive of the firm is the sensitivity to market risk (β) which depends on everything from management to its business and capital structure. Therefore past performances and present conditions have a direct effect on the overall value. Applying calculations at a divisional level allows specified markets to be analysis based on present market conditions for that service or product. The formula used to calculate Cost of Equity is:

This assignment has a maximum total of 100 marks and is worth 10% of your total grade for this course. You should complete it after completing your course work for Units 1 through 5. Answer each question clearly and concisely.

c. Is your estimate of Lex’s cost of equity appropriate as a discount rate for Lex’s total operating cash flows? Why or why not?

Each question is marked out of 25%. The technique and detail parameter was subtracted from the paper directly used as a instruction and reference.

Named best student in the 4-year course: BTech: Cost and Management Accounting by the Faculty of Business Informatics at the Cape Technikon at the end of the year 2004.

Named best student in the 4-year course: BTech: Cost and Management Accounting by the Faculty of Business Informatics at the Cape Technikon at the end of the year 2004.

Professor Hector Perera Department of Accounting and Finance Division of Economic and Financial Studies Macquarie University, Sydney Australia hperera@efs.mq.edu.au