Grand Goals Bhd., is in the business of manufacturing steel utensils: Financial Management, Case Study, UTM, Malaysia
University | Universiti Teknologi Malaysia (UTM) |
Subject | Financial Management |
Question 1
Grand Goals Bhd., is in the business of manufacturing steel utensils. The firm is planning to diversify and add a new product line. The company requires machinery and can either purchase or get it on lease basis .
The machine can be purchased for $15,000,000. It is expected to have a useful life of 5 years with salvage value of $1,000,000 after 5 years. The purchase can be financed by a 20 percent loan repayable in 5 equal annual instalments (inclusive of interest) becoming due at the end of each year. Alternatively, the machine can be taken on year-end lease rentals of $4,500,000 for 5 years. You may assume the following:
(a) The company follows a written down value method of depreciation, the rate of depreciation being 25 percent.
(b) Tax rate is at 24 % and cost of capital is 18 percent
(c) Lease rents are to be paid at the end of the year.
(d) Maintenance expenses is estimated at $ 300,000 per year to be borne by the lessee.
Required
Advice the company on which option it should choose.
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Question 2
Zaman Silam Bhd have 500 employees with an average salary of $3,000 per month. Their average age are 30. The company is planning to start an Endowment scheme as the company pension scheme for all the company’s employees. The period of investment is expected to be for 30 years before the first batch of employees will go for retirement.
The company is going to set aside a salary deduction system to deduct 50% of the required installment for the endowment scheme. The installment payment will be invested in the endowment scheme with a target to achieve a capital endowment sufficient to generate income to take care of the pension payment at 50% of the last drawn salaries expected to average at RM10,000 in 40 years time. A fund management with a good reputation had assured that the endowment fund will generate an average return at 6% per annum.
- Estimate the monthly installment required by the company to the endowment fund.
- How much will each employee will have to contribute monthly to the pension fund.
- If each employee has an option to join the fund or to create their own investment fund, what would be your choice and why?
Question 3
Fast Mawar Bhd is a company that manufactures box mowers. It had net income of $ 15 million on revenues of $ 50 million last year, after depreciation charges of $ 10 million. Capital expenditures last year amounted to $ 16 million and total non-cash working capital was $ 10 million. The firm had a cash balance of $ 15 million and paid 50% of its earnings as dividends last year. There is no debt outstanding.
- Assuming that revenues, capital expenditures and depreciation grow 10% a year and that net income grows 12% a year for the next four years, and that the non-cash working capital as a percent of revenues does not change over this period, estimate the cash balance at the end of year 4, if the company maintains its current payout ratio and borrows no money.
- What proportion of earnings will Fast Mawar have to be pay out as dividends if the firm wants to to preserve its existing cash balance of $ 15 million at the end of 4 years?
- Assuming that Fast Mawar does not want to issue new shares and wants to maintain its existing payout ratio of 50% what debt ratio will the firm have to utilize over the next four years, to have a cash balance of $ 30 million at the end of the fourth year.
Question 4
Zanzibar Bhd has the following capital structure.
Source of Financing After-Tax Cost Cost of fund
RM’000 RM ‘000
Bond 8% 40,000
Term loan 9% 20,000
Overdraft 13%. 4,000
Preferred Stock 10% 10,000
Common Equity 14% 50,000
Accounts payable 15,000
Required :
What will be the costs of fund of the company ?
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Question 5
The following are financial summary of Gemar Bhd.
RM’000 2019 2020 2021 2022 2023 Average
Profits After Tax (NCF) RM’000 2,500.00 2,760.00 2,635.00 2,900.00 3,100.00
Retained Profit (NCF.K) RM’000 1,550.00 1,775.00 1,600.00 1,800.00 1,900.00
Dividend (NCF(1-K)) RM’000 950.00 985.00 1,035.00 1,100.00 1,200.00
Share Capital + retentions
B/F 30,000.00 31,550.00 33,325.00 34,925.00 36,725.00
C/F (= BF + Retained Profit) 31,550.00 33,325.00 34,925.00 36,725.00 38,625.00
Retention Rate K 0.62 0.64 0.61 0.62 0.61 0.62
r on opening capital 0.083 0.087 0.079 0.083 0.084 0.083
g = Kr = 0.05.
Required :
Using the Gordon Growth model, calculate the value of the company.
Question 6
The following are the summary of financial for Daya Subur Bhd.
2019 | 2020 | 2021 | 2022 | 2023 | |
Net Income RM‘000 | $1,857 | $2,136 | $2,456 | $2,825 | $3,248 |
– (Cap Ex – Depreciation) (1 – DR) | $1,484 | $1,632 | $1,795 | $1,975 | $2,172 |
– Change in Working Capital (1 – DR) | $193 | $213 | $234 | $257 | $283 |
Free Cash Flow after expenditures | $180 | $291 | $427 | $592 | $793 |
Expected Dividends | $193 | $222 | $256 | $294 | $338 |
Cash available for stock buybacks | ($13) | $69 | $171 | $299 | $455 |
Required :
- Compare the company’s dividend with the FCFE at the last 5 years of information.
- Would you choose to pay more cash dividend to the shareholders ?
- What form should the dividend take ( cash dividend or share buyback ?
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