QUESTION 1
Bluestone Ltd has provided the following figures for two investment projects, only one of which may be chosen.
Project A Project B
£ £
Initial outlay 190,000 170,000
Profit for year 1 55,000 15,000
2 40,000 25,000
3 25,000 45,000
4 10,000 65,000
Estimated resale value at end of year 4 50,000 20,000
Profit is calculated after deducting straight line depreciation. The business has a cost of capital of 10%.
Required
a) Calculate the payback period, net present value and accounting rate of return for each project, and provide brief recommendations as to what project needs to be chosen based on the following:
i. The Payback Period.
ii. The Accounting Rate of Return/Return on Capital Employed.
iii. The Net Present Value. (20 marks)
b) Critically evaluate the benefits and limitations of each of the different investment appraisal techniques. (30 marks)
In this section students should demonstrate understanding, knowledge, and an ability to critically evaluate the differing theoretical viewpoints associated with differing capital appraisal methods. The response should attempt to incorporate a critical perspective through relevant academic referencing, rather than overly describing the differing models.
QUESTION 2
Company P has 4 million shares in issue and Company Q 12 million. On day 1 the market value per share for Company P is £3.50, and for Company Q is £5.00. On day 2, the management of Company Q decides at a private meeting, to make a cash takeover bid for Company P at a price of £5.00 per share. The takeover will produce large operating savings with a value of £12 million.
On day 4, Company Q publicly announces an unconditional offer to purchase all the shares of Company P at a price of £5.00 per share with settlement on day 20. Details of the large savings are not announced and are not public knowledge. On day 12,
Company Q announces details of the savings, which will be derived from the takeover.
Required:
Ignoring tax and the time-value of money between days 1 and 20, and assuming the details given are the only factors having an impact on the share prices of Company Y and Z, determine the day 2, day 4, and day 12 share prices of Company P and Company Q if the market is:
1. Semi-Strong Efficient.
2. Strong Form Efficient.
In each of the following circumstances:
(i)The purchase consideration is cash as specified above, and
(ii)The purchase consideration, decided upon on day 2, and publicly announced on day 4, is one newly issued share of Company Q for each share of Company P. (20 marks)
b. Academics have argued that market efficiency can be defined using three differing strengths; weak form, semi-strong form, and strong form. Critically evaluate the three differing strengths of market efficiency ensuring the response is supported with relevant academic evidence
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