Corporate financial management module.

Question 1 [15 marks]

Plutonia Inc. in the United States is considering the manufacture of nuclear cells for industrial use. This project involves a capital investment of $220,000. The machine to make the cells has a three-year life and has a residual value of $40,000. The company uses the straight line method of depreciation.

Sales volumes of 6,000 units are forecast for the first year and expected to grow by 10 percent per annum over the life of the project. In the first year, the product has a selling price of $60 per unit and a variable cost of $36 per unit. Every year, these figures are expected to grow by 5 percent and 3 percent respectively.

A one-time fixed overhead cost of $60,000 will be incurred at project commencement. A safety

inspection will be due at the end of year 2. The relevant authority has quoted an inspection fee of $3,000. The project requires an initial working capital of $30,000, of which 80 percent is recoverable at the end of the project life. The cost of capital is 12 percent and the tax rate is 15 percent.

Required:

(a) Compute the net present value of this project. [10 marks]

(b) Briefly assess the use of multivariate models [Arbitrage Pricing Model] to overcome the Capital Asset Pricing Model (CAPM) as a single factor model. [Word count requirement for part b is 100. Academic references: minimum 2)[5 marks]

Question 2

In September 2015, H.J. Heinz (‘Heinz’) and Kraft Foods Group (‘Kraft’) completed the merger.

This merger created the fifth largest food company in the world. Warren Buffett’s Berkshire Hathaway and 3G Capital, the owners of Heinz, ended up with a 51% stake in the new Kraft Heinz company (NASDAQ stock code: KHC). Kraft shareholders received the other 49% stake and a special cash dividend of $16.50 per share as a deal sweetener. Each share of Kraft entitled the shareholder to one share of the new entity.

(a) Discuss the synergies faced by Heinz and Kraft arising from the merger. For data before the merger, use data from 2012 to 2014. To evaluate the effects of the merger, use data from 2016 to the first half of 2017. [10 marks]

(b) Test if the merger theory, presented in equation form [ PV (Acquirer) + PV (Target) <PV (Combined Firm)] was supported by this merger. Use the data periods specified in part a. Note: PV (Firm) refers to market capitalization. [15 marks]

Question 2’s word count requirement is 1200 to 1,800. Students are to provide the word count on the first page of the report. Minimum references: 5.