Essay AFE-7-CFM – Corporate Financial Management – Finance Management Assignment Help

Assignment Task

Question 1
The income statement of David B2L plc for the year ended 30th April 2020 is summarised below:
Following a detailed strategic analysis, the following estimates have been made:
-A programme of modernisation and replacement of equipment is expected to result in a strategical drift from the firm’s strategic position which would generate unfavourable cost consequences that would negatively impact the ratio of operating cost to sales by two percentage point from the previous year’s level. This adverse cost impact would be felt in the first year (i.e. 2019-20), and the operating cost ratio would remain at that level thereafter.
-David B2L plc’s management would be able to increase the turnover at the rate of 5% in real terms for the next three years, after which the turnover is expected to remain stable in real terms.
-Inflation is currently 2.5% per annum, and the average inflation rate is expected to continue at this level for the foreseeable future.
-The corporation tax rate is 19% – The company has no debt.
-The company’s beta is 1.5, the rate of return on Treasury Bills is 1.6% and the expected rate of market risk premium is approximately 7.2%.

Required:
a) Perform a DCF valuation of David B2L plc’s, using shareholder value analysis and the information provided above.
b) Distinguish between entity valuation and equity valuation, and comment upon the relevance of the distinction in the case of David B2L plc’s.

Question 2
Exhibit -1
Colombo City Computers LTD, a computer manufacturing company based in Sri Lanka, has received an order for export of 1000 computers from Prajakta UK Ltd, invoiced at GBP 1,500 each. These computers are to be shipped from Sri Lanka immediately, but receipts in GBP is only expected in 3 months’ time. Colombo City Computers LTD operates a bank overdraft account that is fully drawn, and the company has no spare cash to finance the credit period. Colombo City Computers LTD does not have an established risk management policy. The Finance Manager is undecided about whether the currency risk of the transaction should be covered through the forward market, or by using futures or options.

Required:
a) Advise Colombo City Computers LTD whether the forward market or the money market would offer the cheaper hedge; your recommendations should be supported by
appropriate calculations. Ignore transaction costs. (Exhibit -1). 
b) Explain the main advantage and main disadvantage of using an option contract rather than a forward or futures contract as a hedge against currency risk. 
c) Suppose the beta of the risk is zero and the risk-free- rate is 5%. (Exhibit -2) Which insurance policy would the firm choose if its risk of loss is 5%?

Question 3
The value of Rambha & Urvashi plc is currently £100 million. The company proposes to invest in a project which will increase the value of the business to £125 million. The new project has an expected internal rate of return of 10%, and a standard deviation of return of 6%. Rambha & Urvashi plc’s existing activities have an internal rate of return of 16% and a standard deviation of return of 9.5%. The coefficient of correlation between the return on Rambha & Urvashi plc ’s existing activity and the expected return on the new project is 0.43

Required:
Note: For answering parts (b) and (c) of this question use the formula for portfolio standard deviation: σP=√Wx2σx2+Wy2σy2+(2WxWyσxσy×CORxy)
(a) Calculate the weighted average return and the weighted average risk of Rambha & Urvashi plc ’s activities after implementation of the new project.
(b) Calculate the risk of the company’s existing activities and the new project using the formula for portfolio standard deviation, and explain why this is not the same as the weighted average risk calculated in part (a). Also state in what circumstance the new overall risk would be equal to the weighted average risk.
(c) Calculate the coefficient of variation for Rambha & Urvashi plc’s each investment sector and based on the coefficient of variation, state which investment sector is the riskiest. 
(d) Which manager performed best based on Sharpe ratio?