ABC PTY LTD BALANCE SHEETS AS A

2015 2016 2017 2018

ASSETS
Current Assets
Cash 515 422 480 458
Account Receivable 106 115 120 113
Inventory 212 220 186 179
Prepaid Expense 22 18 15 17
Total Current Assets 855 775 801 767

Non-current Assets
Land and Building 1,310 1,310 1,310 1,310
Motor Vehicles 160 160 160 160
less Depreciation (8) (24) (40) (56)
Plant and Equipment 480 571 599 683
less Depreciation (22) (69) (125) (185)
Furniture, Fixtures and Fittings 150 155 160 165
less Depreciation (15) (25) (35) (45)
Total Non-current Assets 2,055 2,078 2,029 2,032
TOTAL ASSETS 2,910 2,853 2,830 2,799

ABC PTY LTD PROFIT AND LOSS

STATEMENTS FOR THE YEARS ENDING 31
DECEMBER ($000)
2016 2017 2018
Sales 2,191 2,100 2,376
Cost of Good Sold (Cost of Sales) (1,306) (1,332) (1,371)
Gross Profit 885 768 1,005
Wages (308) (302) (399)
Rent (89) (89) (89)
Motovehicle running expenses (35) (37) (39)
Heating and Lighting (28) (25) (26)
Telephone, postage and Internet (46) (42) (41)
Depreciation (73) (82) (86)
Total Operating Expenses (579) (577) (680)
Operating Profit (EBIT) 306 191 325
Interest (73) (71) (70)
Profit Before Tax 233 120 255
Tax (30%) (70) (36) (77)
Net Profit 163 84 179

Ordinary Dividend Paid 85 84 90

Preference Dividend Paid 20 20 20
Dividend Paid 105 104 110

Purchases 1,029 1,173 1,036

All purchases and sales are on credit
ANCE SHEETS AS AT 31 DECEMBER ($000)

2015 2016 2017 2018

LIABILITIES
Current Liabilities
Bank Overdraft 23 24 25 24
Account Payable 104 105 106 107
Income Tax Payable 97 73 70 65
Dividend Payable 229 146 128 130
Total Current Liabilities 453 348 329 326

Non-current Liabilities
Bank Loans 658 658 658 658
Mortgage Loans 341 307 292 260
Corporate Loans 670 670 670 670
Total Non-current Liabilities 1,669 1,635 1,620 1,588

TOTAL LIABILITIES 2,122 1,983 1,949 1,914

SHAREHOLDERS' EQUITY
Ordinary Shares 502 502 502 502
Preference Shares 175 175 175 175
Retained Earnings 111 193 204 208
Total Shareholders' Equity 788 870 881 885
TOTAL LIABILITIES AND SHAREHOLDERS'EQUITY 2,910 2,853 2,830 2,799

ABC PTY LTD STATEMENTS OF CASHFLOWS FOR THE YEARS

ENDING 31 DECEMBER ($000)
2016 2017 2018
CASHFLOWS FROM OPERATING ACTIVITIES
Cash received from customers 2,166 2,293 2,054
Cash paid to suppliers (1,045) (1,000) (890)
Cash expenses (847) (747) (827)
Interest paid (108) (105) (103)
Tax paid (81) (70) (36)
Prepaid expenses (18) (15) (17)
Net cash provided by operating activities 67 356 181
CASHFLOWS FROM INVESTING ACTIVITIES
Plant and Equipment (44) 28 (24)
Furniture, Fixtures and Fittings 5 5 5
Net cash provided by investing activities (39) 33 (19)
CASHFLOWS FROM FINANCING ACTIVITIES
Bank Overdraft (1) (1) (2)
Mortgage Loan Repayments (37) (34) (30)
Buyback of Shares - - -
Dividend Paid (83) (85) (84)
Net cash provided by financing activities (121) (120) (116)
Net increase in cash (93) 269 46
+ Opening Cash 515 422 480
= Closing Cash 422 480 458

Ordinary Share price ($) 2.05 2.10 2.32

Number of Ordinary Share (thousand) 245 245 245
Preference Share price ($) 1.32 1.45 1.36
Number of Preference Share (thousand) 195 195 195
 CAPITAL BUDGETING PROJECT
Note: All dollar values (except share prices) are to be entered as $000s.

SOURCES OF CAPITAL COST

Bank Loans
Before-tax cost of bank loans 8.00%
Market value of bank loans ($000)

Mortgage Loans
Before-tax cost of mortgage loans 11.00%
Market value of mortgage loans ($000)

Corporate Bonds
Before-tax cost of corporate bonds 5.15%
Face value of all bonds ($000) 670
Coupon rate 6%
Market Value of corporate bonds ($000)

Ordinary Shares
Beta 1.4
Risk free rate 5.40%
Market risk premium 4% Rf+beta(Rm-Rf)
Cost of ordinary shares 11.00%
Market value of ordinary shares

Preference shares
Preference dividend per share 0.1
Preference share price 1.36
Cost of preference shares 7.35%
Market value of preference shares

Total

Tax rate 30%

Weighted Average Cost of Capital

OJECT
VALUE WEIGHT INDIVIDUAL WEIGHTAGE
1 - tax

658 1.49% 26.69% 2.1352717360000000%

260 0.81% 10.55% 1.1601210420000000%

0
0

713.6567
713.66 1.04% 28.95% 1.4908565430000000%

4.7862493210000000%
0.03350374524

568.40 2.54% 23.06% 2.5362030780000000%

265.2 0.79% 10.76% 0.790991619500000%

2465.26 6.68% 100.00% 3.3271946980000000%

6.68%
 1 2 3 4 5 6 7 8 9 10
40.2 40.2 40.2 40.2 40.2 40.2 40.2 40.2 40.2 710.2
38.2311 36.35863 34.57787 32.88433 31.27373 29.74202 28.28532 26.89997 25.58248 429.8213

PV= Div/r
r = PV / Div
 CAPITAL BUDGETING PROJECT
It is now Feb 2019. ABC Pty Ltd has identified few potential projects that the firm could undertake, but is not sure how to determine the best projects to go
is to figure out the firm's Weighted Average Cost of Capital (WACC), as it is the minimum return required on new projects in order to meet the cost of capita
financial data in 2018 which has been provided in Assignment 2, you will help the firm to calculate its WACC based on the sources of capital shown in the 20

You need to complete the following tasks in Cost of Capital tab.

1. Determine the cost of all sources of capital (i.e. all non-current liabilities, ordinary shares, preference shares) - Note that Retained Earnings are not includ
owners of ordinary shares, and market value of ordinary shares has included the value of these reserves).
2. Determine the market value of all sources of capital (excluding Retained Earnings).
3. Calculate the firm's WACC.

The interest rate on Bank Loan is 8.0%, and interest rate on the Mortgage Loan is 11.0%.
Market value of Bank Loan and Mortgage Loan can be presumed to be the values in the 2018 Balance Sheet.

The corporate bond issued by the firm is rated A+ and require 165bsp above the 5-year Government Securities rate of 3.5%. This bond is paying 6% coupon

The ordinary shares have a beta of 1.4, the risk-free rate applies for the CAPM to identify cost of equity is the 10-year Government Securities rate of 5.4%. M

The preference shares pay a fixed annual dividend of 10 cents per share.

After identifying the WACC, the firm is considering about two projects. You will be in the position to recommend the acceptance or rejection of the project

The project in question involves the acquisition of a new machine which will help the firm to increase its productivity of children toys. The firm has analysed

You need to complete the following tasks in Capital Budgeting tab.

1. Determine the incremental free cashflows if they would be accepted.

2. Calculate the NPV of the incremental free cashflows.
3. Provide the firm with your recommendation to accept or reject the project.

Following is the project's information (all values are in thousands of dollars).

A feasibility study has been performed at the cost of $25, which has generated the following data.

The machine will have a useful life of 5 years, will cost $400 to purchase and install.

This cost will be depreciated over the life of the project to a book value of zero using diminishing value depreciation.

The machine is expected to have a salvage value of $50, which will be received at the end of Year 5.
The project will require an increase in Net working capital of $10, which will be also recouped at the end of Year 5.

The new machine will generate an increased revenue of $150 in the first year of operation, $180 in the second and third year, and $140 in Year 4 and Year 5
Use of the new machine will require an extra wage payment of $35 per year, extra maintenance costs of $9 per year.
PROJECT
ine the best projects to go ahead with. You have explained to your client that the first task to do
r to meet the cost of capital and increase the value of the firm. Based on the most recent
s of capital shown in the 2018 Balance Sheet.

ned Earnings are not included, since all reserves, including retained earnings, belong to the

bond is paying 6% coupon on annual basis and have 10 years to maturity.

nt Securities rate of 5.4%. Market Risk Premium is 4%.

or rejection of the project to your client.

toys. The firm has analysed the project and provided the following information, as shown below.

d $140 in Year 4 and Year 5.

 CAPITAL BUDGETING PROJEC
Note All values are in thousand dollars
All expenses and cash outflows are to be entered as negative numbers

Depreciation Calculation
Weighted Avergage 6.68% Year
Cost of Capital Opening Book Value
less Depreciation
Tax Rate 30% Closing Book Value

Initial Cashflow 0
Initial Outlay -400
Net Working Capital -10
Total Initial Cashflow -410
Operating Cashlow 0
Revenue
less Wages
less Maintenance
less Opportunity Cost (Rent)
less Depreciation
Incremental EBIT
less Tax
Incremental Earnings
plus Depreciation
Total Operating Cashflow
Terminal Cashlow
Salvage Value
less Tax on Profit on Sale of Asset
Net Working Capital
Total Terminal Cashflow
Incremental Free Cashflows -410.00
PV of Incremental Free Cashflows -410.00
NPV 15.10
GETING PROJECT
ve numbers

1 2 3 4 5
400 240 144 86.4 51.84
160 96 57.6 34.56 51.84
240 144 86.4 51.84 0

1 2 3 4 5

1 2 3 4 5
150 180 180 140 140
-35 -35 -35 -35 -35
-9 -9 -9 -9 -9
-15 -15 -15 -15 -15
-160 -96 -57.6 -34.56 -51.84
-69 25 63.4 46.44 29.16
20.70 -7.50 -19.02 -13.93 -8.75
-48.3 17.5 44.38 32.51 20.41
160 96 57.6 34.56 51.84
111.70 113.50 101.98 67.07 72.25

50
-15
10
45
111.70 113.50 101.98 67.07 117.25
104.71 99.74 84.00 51.79 84.87
104.7080 204.4435 288.4467 340.2339 425.1040
The description fields on this tab should
be entered similarly to the descriptions
in the following list. All expenses
should be entered using negative
values. You need to fill in all the blank
cells with their corresponding values.

less Wages
less Feasibility Study
Salvage Value
less Depreciation
plus Depreciation
less Maintenance
Revenue
less Tax
Net Working Capital
less Opportunity Cost (Rent)
Initial Outlay
less Tax on Profit on Sale of Asset

ROI Calculation IRR 8.07%

Profit 101.50
Average Profit 20.30
ROI 4.95%

Discounted ROI Calculation

Profit 15.10
Average Profit 3.02
ROI 0.74%

Payback calculation -410.00 111.70 113.50 101.98 67.07 117.25

117.7 231.20 333.18 400.25 517.50
4.08

Discounted payback calculation -410.00 104.71 99.74 84.00 51.79 84.87

104.71 204.45 288.45 340.24 425.11
4.82
Year CF PV
0 -10000 -10000
1 3000 2678.57142857143
2 3000 2391.58163265306
3 3000 2135.34074344023
4 3000 1906.55423521449
-887.9519601 Rejected

161.63

-410 111.7 113.5 101.98 67.068 117.252

Year Cashflow
0 -410 6.68%
1 111.7
2 113.5
3 101.98 15.08
4 67.068
5 117.252 8.075%

0.00 If IRR> Discount rate then accept the project

If discount rate = IRR then NPV is zero

$425.08 PV of cash inflows

$410 PV of Cash outflows
PI 1.04
Year CF Year Cashflow Cumulative Cashflow
0 -10000 0 -410 -410
1 3000 1 111.7 -298.3
2 3000 2 113.5 -184.8
3 3000 3 101.98 -82.82
4 3000 4 67.068 -15.752
5 117.252 101.5
Payback pe 3.333333
Between 4th and 5th year

4 years + (Deficit at the end of 4th year/earning of 5th year)

PBP 4.134343124