Assignment on Share Valuation and Investment Appraisal

This assignment is designed to test students on Topic  (Share Valuation) and on Topic (Investment Appraisal).

For Question 1, Assessed on the concepts of share valuation. expected to perform computations and to critically evaluate the approaches.  

For Question 2, expected to appraise the attractiveness of a capital asset

proposal. The emphasis is on deriving the relevant cash flows so as to make a reasoned recommendation.

Assume today is 31 December 2020. Firm P, a gold mining company, just paid dividends to its common shareholders. It is expected to pay dividends of $ 9 million, $12 million, $5 million and nil dividends, for the next 4 years.

Four years from now, the estimated net profit after tax is $50 million. The company adopts the policy of not issuing preference shares. The expected price multiple for the year 2024 is 15 times of earnings. The cost of equity for Firm P is 10 percent.

Required

1. Compute the intrinsic value of Firm P’s common shares.
2. Critically evaluate the use of the Dividend Discount Model in valuing the shares of Firm P, and explain which alternative methods may be more appropriate.

Note: To show all workings with accompanying explanations.

Word count requirement: 500 (actual word count to be stated on the cover page of the assignment). Minimum number of references: 2

Perfidia Pte Ltd (‘PPL’) is considering replacing one of its outdated machines that produces medical gloves. This machinery was purchased for $70,000 seven years ago. The net book value is currently $25,000. The replacement machine costs $139,350 and will be sold for $20,000 in five years’ time.

The new machine is expected to increase unit sales by 6,000 gloves per annum. The estimated unit selling price is $35 for the first year. The following table provides the unit costs for the first year:

PPL envisages there will be a shortage of supervisory staff due to the COVID-19 pandemic in Singapore. It has decided to divert some staff from another division to the new project. These staff earn a contribution of $2 per direct labour hour in their own division. The fixed overhead cost would be $2.20 per hour and this is expected to remain unchanged.

The sales agreement for the gloves specifies the sale price to rise at the rate of 10 percent per year after the first year. The unit costs, except for fixed costs, is expected to increase at the same rate as the selling price.

Working capital requirements are expected to be $15,000 in the first and second years, increasing to $18,000 in the third year and is expected to remain at this level till the end of the project. All the amounts of working capital will be recovered at the time of project termination.

Due to the nature of PPL’s products, the company falls under the ‘tax-free’ category. The risk-adjusted return for PPL’s projects is 27 percent per annum.

Required:

Identify the relevant cash flows for the decision as to whether or not PPL should proceed to purchase the new machine.       

Note: To show all workings with accompanying explanations.

Word count requirement: 800 (actual word count to be stated on the cover page of the assignment). Minimum number of references: NIL.