The Rhodium division has prepared its budget for 2020 and its working capital requirements are summarised below: MONTH Rand January 8 450 000February 9 150 000 March 6 250 000 April 3 750 000 May 2 850 000 June 10 500 000 July 2 925 000 August 10 625 000 September 5 200 000 October 4 600 000November 7 300 000 December 8 100 000 The division is deciding whether to adopt an aggressive funding strategy or a conservative funding strategy.Short-term funds can be borrowed at a rate of 16,25% per annum and long-term funds at a rate of 19% per annum. REQUIRED: Q.3.1 Determine thepermanent component of the division's monthly working capital funding requirements Q.3.2 Determine the seasonal component and average of thedivision's monthly working capital funding requirements. Round off your final answer to tne nearest Rand. Q.3.3 Calculate the total average monthlycost if the Rhodium division adopts an aggressive funding strategy. Round off all calculations to the nearest Rand

Working capital is the amount which is used to finance the difference between the disbursements and…

Answered: The Rhodium division has prepared its…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 15P

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The Rhodium division has prepared its budget for 2020 and its working capital requirements are summarised below: MONTH Rand January 8 450 000 February 9 150 000 March 6 250 000 April 3 750 000 May 2 850 000 June 10 500 000 July 2 925 000 August 10 625 000 September 5 200 000 October 4 600 000 November 7 300 000 December 8 100 000 The division is deciding whether to adopt an aggressive funding strategy or a conservative funding strategy. Short‐term funds can be borrowed at a rate of 16,25% per annum and long‐term funds at a rate of 19% per annum Determine the permanent component of the division’s monthly working capital funding requirements.
The Rhodium division has prepared its budget for 2020 and its working capital requirements are summarised below: MONTH Rand January 8 450 000 February 9 150 000 March 6 250 000 April 3 750 000 May 2 850 000 June 10 500 000 July 2 925 000 August 10 625 000 September 5 200 000 October 4 600 000 November 7 300 000 December 8 100 000 The division is deciding whether to adopt an aggressive funding strategy or a conservative funding strategy. Short‐term funds can be borrowed at a rate of 16,25% per annum and long‐term funds at a rate of 19% per annum. REQUIRED: Q.3.1 Determine the permanent component of the division’s monthly working capital funding requirements.(1) Q.3.2 Determine the seasonal component and average of the division’s monthly working capital funding requirements. Round off your final answer to the nearest Rand. Q.3.3 Calculate the total average monthly cost if the Rhodium division adopts an aggressive funding strategy. Round off all calculations to the nearest Rand.
Senior management asks you to recommend a decision on which project(s) to accept based on the cash flow forecasts provided. Relevant information: The firm uses a 3-year cutoff when using the payback method. The hurdle rate used to evaluate capital budgeting projects is 15%. The cash flows for projects A, B and C are provided below. Project A Project B Project C Year 0 -30,000 -20,000 -50,000 Year 1 0 4,000 20,000 Year 2 7,000 5,000 20,000 Year 3 20,000 6,000 20,000 Year 4 20,000 7,000 5,000 Year 5 10,000 8,000 5,000 Year 6 5,000 9,000 5,000 Calculate the net present value (NPV) for each project in excel. Which projects would you accept based on the NPV criterion?
Senior management asks you to recommend a decision on which project(s) to accept based on the cash flow forecasts provided. Relevant information: The firm uses a 3-year cutoff when using the payback method. The hurdle rate used to evaluate capital budgeting projects is 15%. The cash flows for projects A, B and C are provided below. Project A Project B Project C Year 0 -30,000 -20,000 -50,000 Year 1 0 4,000 20,000 Year 2 7,000 5,000 20,000 Year 3 20,000 6,000 20,000 Year 4 20,000 7,000 5,000 Year 5 10,000 8,000 5,000 Year 6 5,000 9,000 5,000 Calculate the internal rate of return (IRR) for each project in excel Which projects would you accept based on the IRR criterion?
Senior management asks you to recommend a decision on which project(s) to accept based on the cash flow forecasts provided. Relevant information: The firm uses a 3-year cutoff when using the payback method. The hurdle rate used to evaluate capital budgeting projects is 15%. The cash flows for projects A, B and C are provided below. Project A Project B Project C Year 0 -30,000 -20,000 -50,000 Year 1 0 4,000 20,000 Year 2 7,000 5,000 20,000 Year 3 20,000 6,000 20,000 Year 4 20,000 7,000 5,000 Year 5 10,000 8,000 5,000 Year 6 5,000 9,000 5,000 Calculate the payback period for each project. Which project(s) would you accept based on the payback criterion?
SUPERIOR Company Limited is considering the following projects for inclusion in its capital budget for year 2021.The projects have equal risks and the capital outlay required is as follows: Project Investment required Project Investment Requirement Return $000 $000 1 24,000 5520 2 9600 3072 3 7000 980 4 4800 864 5 3200 640 6 1400 392 As the Divisional Manager, you are to decide which of the projects to accept. The company has a cost of capital of 15% with $60million available to the division for investment purposes.Required: Compute the total investment, total return on capital invested and residual income on each of the following assumptions, indicating the preferred project: The Company has a rule that all projects promising at least 20% or more should be accepted. The divisional manager is evaluated on his ability to maximise his return on capital investment. The divisional manager is expected to maximise residual income as computed by using…
This year, 2022 ABM Company selected your team to manage their allotted budget amounting to 10 million pesos for investment diversification portfolio. Your team was assigned to handle the said account. What would you choose? OTHER INVESTMENT ASSETS or ALTERNATIVES TO FIXED INCOME AND EQUITIES
Evaluate the following capital budgeting project. ABC is evaluating an investment in specialized equipment for a cost of $700 million (including installation and modification expenses). The equipment is defined as a three-year asset to be depreciated to a zero-salvage value. The firm can depreciate 33% of the investment in Year 1 and 45% in Year 2 when the equipment will be sold, net of expenses, to another organization for $200 million. The investment is projected to generate $300 million per year pre-tax, net operating income for the two years the equipment is retained. The firm pays income taxes and capital gains taxes at the 20% marginal rate. The firm is profitable and would offset taxes (or recapture prior taxes paid) in any year the project is unprofitable. The firm’s weighted, average after-tax cost of capital is 4.00% and the cost of equity is 5.00%. a) Develop the annual after-tax, pre-leverage operating, and non-operating cash flow for the investment for year zero, year one…
A company wants to decide which project to undertake out of two projects A and B. For this purpose, it wants to evaluate each project that have the same initial investment (cost) but different cash flows for the next three years. The following table gives information on these two projects. The discount rate to be used is 8 percent, which is the WACC for the company. Use two methods of capital budgeting: The Net Present Value (NPV) Method and the Internal Rate of Return (IRR) Method, to evaluate and compare the two projects. Based on the outcome of calculations, choose the best project A or B and explain your decision for each method. Show all your work for each method step by step. Initial Investment and Cash Flows of Projects A and B in AED Project A Project B Initial Investment - 150,000 - 150,000 Year 1 Cash flow 20,000 50,000 Year 2 Cash flow 90,000 90,000 Year 3 Cash flow 70,000 60,000
Dynabase Tool has forecast its total funds requirements for the coming year as shown in the following table. picture a. Divide the firm’s monthly funds requirement into (1) a permanent component and (2) a seasonal component, and find the monthly average for each of these components. b. Describe the amount of long-term and short-term financing used to meet the total funds requirement under (1) an aggressive funding strategy and (2) a conservative funding strategy. Assume that, under the aggressive strategy, long term funds finance permanent needs and short-term funds are used to finance seasonal needs. c. Assuming that short-term funds cost 5% annually and that the cost of longterm funds is 10% annually, use the averages found in part a to calculate the total cost of each of the strategies described in part b. Assume the firm can earn 3% on any excess cash balances. d. Discuss the profitability–risk trade-offs associated with the aggressive strategy and those associated with the…
Clearcast Communications Inc. is considering allocating a limited amount of capital investment funds among four proposals. The amount of proposed investment, estimated operating income, and net cash flow for each proposal are as follows: The companys capital rationing policy requires a maximum cash payback period of three years. In addition, a minimum average rate of return of 12% is required on all projects. If the preceding standards are met, the net present value method and present value indexes are used to rank the remaining proposals. Instructions 1. Compute the cash payback period for each of the four proposals. 2. Giving effect to straight-line depreciation on the investments and assuming no estimated residual value, compute the average rate of return for each of the four proposals. Round to one decimal place. 3. Using the following format, summarize the results of your computations in parts (1) and (2). By placing the computed amounts in the first two columns on the left and by placing a check mark in the appropriate column to the right, indicate which proposals should be accepted for further analysis and which should be rejected. 4. For the proposals accepted for further analysis in part (3), compute the net present value. Use a rate of 12% and the present value table appearing in Exhibit 2 of this chapter. 5. Compute the present value index for each of the proposals in part (4). Round to two decimal places. 6. Rank the proposals from most attractive to least attractive, based on the present values of net cash flows computed in part (4). 7. Rank the proposals from most attractive to least attractive, based on the present value indexes computed in part (5). 8. Based on the analyses, comment on the relative attractiveness of the proposals ranked in parts (6) and (7).
The net present value of a project with an initial outflow of $1,100,000 and annual cash income of $240,000 per year for 9 years is (assume an annuity factor of 5.7590) : a. $66,980 b. $126,980 c. $182,160 d. $282,160 Which of the following is an advantage of the budgeting process? 1. It forces management to focus on the past and not be distracted by the day-to-day operations of the business. 2. It can communicate to employees specific information about their past performance to determine their promotion prospects. 3. It can communicate to employees specific information about their past performance to determine their promotion prospects. 4. It can communicate to employees information about their performance expectations in the period ahead. Which one of the following statements regarding changing inventory costing methods is true? 1. A change in inventory methods can be justified if the change is made to better match profits with revenue 2. Changing inventory costing methods…

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