FACULTY OF BUSINESS AND MANAGEMENT

SEMESTER OCTOBER 2020 – FEBRUARY 2021

FIN544 : ADVANCED CORPORATE FINANCE

Individual Assignment 1

Prepared by :

Student’s Name : Puteri Nina Farhana Binti Mior Zoraini

Matrix Number : 2020983179

Group : BA2423D

Prepared For :

Lecturer Name : Pn Zarinah Binti Abu Yazid

Part A

1. Forecasting risk is the possibility that we will make a bad decision because of errors in the
projected cash flows. Forecasting risk could be greater for a new product because the new
product has greater demands for competition attention.

2. My respond will be like yes. It is true that the company would have a loss if average
revenue is below average expense. Decisions that only take into account average sales and
costs, however, are not entirely specific since they cover irrelevant and important data.
Hence, in the case of relevant data, the statement is right. Therefore, marginal and
incremental cash flows can be used since a project is only approved when the marginal
income is greater than the marginal cost, resulting in a rise in net profit.

3. Since the airlines are relatively capital intensive, fixed costs are relatively high because
the airplanes are expensive. Professional workers, such as pilots and mechanics, they have
high salaries, which are relatively set due to union agreements. Maintenance costs are also
important and often relatively fixed.

4. It is a must for every company to have enough cash to pay the bills. One would likely
emerge as a capital drain that puts pressure on the other, whether it is your business or your
life. To avoid this problem, owners of small businesses must either be highly capitalised or,
when appropriate, be able to raise extra income to shore up cash reserves. This is why
many small companies start with the founders working a job and simultaneously building a
company. Although this split emphasis will make it difficult to grow a company, running out of
money growing a business difficult.
PART B

a) Accounting break-even point

Depreciation = Initial outlay / Year

= 896 000 / 8
= Rm 112 000

OCF : [ (P-V)Q-FC ] (1-tax) + Depreciation (tax) = Depreciation

[ (40 – 25) Q – 900 000 ] (1-0.35 ) + 112 000 (0.35) = 112 000
(15Q – 900 000) (0.65) + 39 200 = 112 000
9.75Q – 58 500 = 112 000 – 39 200
9.75Q =72 800 + 58 500
Q = 657 800 / 9.75
Q = 67 466.67 units
DOL = 1 + ( fc / ocf )
= 1 + ( 900 000 / 112 000 )
= 9.04

b)
Lower Bound Base Upper Bound
Price / Unit Rm 36 Rm 40 Rm 44
Quantity Rm 90 000 Rm 100 000 Rm 110 000
Variable Cost Rm 22.50 Rm 25 Rm 27.50
Fixed Cost Rm 810 000 Rm 900 000 Rm 990 000

Best case NPV

OCF = [ (P-V)Q-FC ] (1-tax) + Depreciation (tax)
= [ ( 44 – 22.50 ) 110 000 – 810 000 ] (1-0.35) + 112 000 (0.35)
= ( 2 365 000 -810 000 ) (0.65) + 39 200
= Rm 1 049 950

2nd +/- ENTER

 CF 896 000 +/- ENTER
↓ 1 049 950 ENTER ↓
↓ 1 049 950 ENTER ↓
↓ 1 049 950 ENTER ↓
↓ 1 049 950 ENTER ↓
↓ 1 049 950 ENTER ↓
↓ 1 049 950 ENTER ↓
↓ 1 049 950 ENTER ↓
NPV 15 ENTER ↓
CPT 3 815 463.22

c) OCF base = [ (P-V)Q-FC ] (1-tax) + Depreciation (tax)

= [ (40 - 25) 100 000 – 900 000 ] (1-0.35) + 112 000 (0.35)
= ( 1 500 000 – 900 000) (0.65) + 39 200
= Rm 429 200

OCF best = [ (P-V)Q-FC ] (1-tax) + Depreciation (tax)

= [ ( 40 – 22.50 ) 100 000 – 900 000 ] (1-0.35) + 112 000 (0.35)
= ( 1 750 000 – 900 000 ] (0.65) + 39 200
= Rm 591 700

Sensitivity = OCF1 – OCF0 / V1 – V0

= 591 700 – 429 200 / 22,50 – 25
= - Rm 65 000

Therefore, if the variable cost decrease by Rm1, the OCF will decrease by Rm 65
000
d) DOL = % OCF
% Q

2.5 = % OCF
( 47 000 – 40 000 ) x 100%
40 000

% OCF = 43.75%

DOL = 1 + FC / OCF0
2.5 = 1 + 900 000 / OCF0
OCF0 = Rm 600 000

OCF1 = OCF0 x ( 100% + 43.75% )

= 600 000 x 1.4375
= Rm 862 500

DOL = 1 + FC / OCF1
= 1 + 900 000 / 862 500
DOL = 2.04

The new level of operating leverage is lower because the more quantity of output produces,
the lower DOL could be.