CHARTERED SECRETARIES SOUTHERN AFRICA

OCTOBER 2014

CORPORATE FINANCIAL MANAGEMENT

Date: Time: Duration: Marks:

23 October 2014 08h45 – 12h00 15 minutes reading time + 3 hours 100

General Instructions 1. Check that you have the correct examination paper - and that it has all its

pages and sections. 2. Write clearly and only use BLACK BALL-POINT INK. Do NOT use felt-tip

pens. Cross out errors in ink - do NOT use correcting fluid. Please do NOT use highlighter pens.

3. Do not use your own name or that of your company in any of your answers. 4. Start each answer on a fresh page, clearly numbering it at the top. 5. Check that all answers are correctly numbered. 6. Submit your working papers wherever applicable - making sure that you

clearly identify them as WORKING PAPERS.

Specific Instructions for this Paper: 7. Answer any FOUR of the SIX questions. 8. Use ONLY the examination booklets – NO LOOSE PAGES WILL BE

MARKED. 9. This is a closed book examination – no notes, papers or texts may be used

or brought into the venue, except those provided by the invigilator. 10. You may use a calculator but all workings and calculations must be clearly

shown 11. Useful formulae and tables are appended at the end of the paper.

Answer any FOUR questions.

QUESTION 1

The CEO of a company has reached the age of 65 and wishes to purchase an annuity specially designed to make future annual cash flow payments to her. Her cash flow requirements for the next twelve years are as follows:

Annuity at the end of: Annual annuity cash flow

Years 1 - 4 R120 000

Years 5 - 8 R150 000

Years 9 - 12 R180 000

Required

1.1 You are the corporate financial manager of Best Life Insurance Company, the life insurance company underwriting this transaction. Assuming a discount rate of 8%, calculate the net present value (NPV) of the cash flows over the 12 year period. (15)

1.2 Write a note to the Investment Committee of Best Life Insurance addressing the risks involved in underwriting the annuity described in question 1.1 (5)

1.3 Given that all investments are subject to risks, discuss methods for incorporating risk into any capital investment appraisal. (5)

[25 marks]

Corporate Financial Management October 2014 Page 2 of 15

QUESTION 2

A removal company is considering purchasing a covered van for R2 000 000. It is expected that the van will be used for eight years after which time it will be worthless and have no scrap value. The net cash flow (after depreciation and taxation) over the working life of the van is estimated as follows:

Year Projected Income

1 R250 000

2 R500 000

3 R600 000

4 R300 000

5 R1 000 000

6 R500 000

7 R1 000 000

8 R250 000

Required

2.1 By using the discount rates 15% as the low rate and 20% as the high rate, calculate the net present values (NPV) for this investment. (10)

2.2 Given your answers in 2.1, determine the estimated Internal Rate of Return (IRR) for this capital investment. (5)

2.3 Discuss the merits and criticisms of using the IRR as a means of evaluating a capital investment project. (10)

[25 marks]

Corporate Financial Management October 2014 Page 3 of 15

QUESTION 3

A portfolio’s total value comprises a 50% investment in bonds and a 50% investment in shares.

The financial manager has postulated that over the next year there are three scenarios with the following probabilities and the likelihood of the return on the investments.

Probability Return on bonds

Return on shares

Repo rate decrease 10% 5% 18% Repo rate remain the same 30% 6% 10% Repo rate increase 60% 8% 7%

Required

3.1 Calculate the expected return and standard deviation of the return on the bonds. (4)

3.2 Calculate the expected return and the standard deviation of the return on the shares. (4)

3.3 Calculate the expected return and the standard deviation of the return on the combined portfolio. (6)

3.4 Comment on the standard deviation of the combined portfolio in comparison with those of the bonds and the shares. (4)

3.5 Comment on the correlation between the return on the bonds and the shares and what the effect would be if the correlation were to be positive or perfect. (7)

[25 marks]

Corporate Financial Management October 2014 Page 4 of 15

QUESTION 4

Capture Ltd (Capture) wishes to take over Target Ltd (Target). The following data is available concerning the two companies.

No. of shares

(million) Market price of shares EPS P/E ratio Capture 25 9.00 0.85 10.6 Target 8 12.50 0.65 19.2

Capture is offering its own shares for the shares in Target.

Required

4.1 Assuming that there is no synergistic benefits determine the total number of Capture shares that will be needed for this take-over deal. How many Capture shares will need to be offered for every 100 Target shares? (5)

4.2 It is anticipated that there will be a synergistic benefit to the deal worth of R15 million.

4,2.1 If these benefits are going to accrue totally to the shareholders of Target, determine the total number of Capture shares that will be needed for the deal. How many Capture shares will need to be offered for every 100 Target shares? (10)

4.2.2 If these benefits are going to accrue totally to the shareholders of Capture, determine the total number of Capture shares that will be needed for the deal. How many Capture shares will need to be offered for every 100 Target shares? (10)

[25 marks]

Corporate Financial Management October 2014 Page 5 of 15

QUESTION 5

The following portfolio of shares is held by your client:

Type of share Number of Shares β

Property shares 1 200 000 1.1

Industrial shares 900 000 1.8

Mining shares 750 000 2.2

Financial shares 150 000 1.4

Total shares 3 000 000

Your view is that over the next year there is a 75% chance that the market return on the shares will be 12%. However, should there be another series of strikes then the return will fall to 5%.

Required

5.1 Calculate the expected return on the mining share if the risk free rate is 8%. (5)

5.2 Your client is prepared to take higher risk and has asked you to sell the property shares and to invest the R1 200 000 value of property shares in small cap shares with a β = 3. Compare the risk and return of the original portfolio with the new portfolio. (15)

5.3 What would you advise a client if you were to anticipate a recession in the near future? (5)

[25 marks]

Corporate Financial Management October 2014 Page 6 of 15

QUESTION 6

6.1 The Companies Act No. 72 of 2008 (as amended) makes provision for Business Rescue. You have been told that you will be presented with a company’s annual financial statements and will have to offer advice to the directors as to whether there is a possibility of the company being in need of rescue. Altman devised a distress model to allow the forecasting of such an eventuality. Discuss the Altman model and how it can be used to anticipate the need for rescue. (7)

6.2 A government bond with face value R1 000 000 was purchased five years ago for R982 580. A coupon was paid at 7.5% annually. The interest was invested annually at the prevailing interest rate as shown below for the remaining period. Thus the interest received at the end of year 1 was invested at 7% for four years. The bond matures today. What is the compound interest yield on the investment?

Time Purchase date Prevailing

interest rate 0 8% 1 7% 2 7% 3 8% 4 5% 5 6%

(11)

6.3 What is meant by the term “working capital cycle”? Illustrate how debtors, creditors and inventory may be managed in order to optimise the working capital cycle. (7)

[25 marks]

(Total: 100 marks)

END OF QUESTION PAPER

Corporate Financial Management October 2014 Page 7 of 15

Present value tables of R1 Prd 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 12% 15% 16% 17% 18% 20% 1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929 0.8696 0.8620 0.8547 0.8475 0.8333 2 0.9803 0.9612 0.9426 0.9246 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264 0.7972 0.7561 0.7431 0.7305 0.7182 0.6944 3 0.9706 0.9423 0.9151 0.8890 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513 0.7118 0.6575 0.6407 0.6244 0.6086 0.5787 4 0.9610 0.9238 0.8885 0.8548 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.6355 0.5718 0.5523 0.5337 0.5158 0.4823 5 0.9515 0.9057 0.8626 0.8219 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5674 0.4972 0.4761 0.4561 0.4371 0.4019 6 0.9420 0.8880 0.8375 0.7903 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5066 0.4323 0.4104 0.3898 0.3704 0.3349 7 0.9327 0.8706 0.8131 0.7599 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4523 0.3759 0.3538 0.3332 0.3199 0.2791 8 0.9235 0.8535 0.7894 0.7307 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4039 0.3269 0.3050 0.2848 0.2660 0.2326 9 0.9143 0.8368 0.7664 0.7026 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3606 0.2843 0.2630 0.2434 0.2255 0.1938 10 0.9053 0.8203 0.7441 0.6756 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3220 002472 0.2267 0.2080 0.1911 0.1615 11 0.8963 0.8043 0.7224 0.6496 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505 0.2875 0.2149 0.1954 0.1778 0.1619 0.1346 12 0.8874 0.7885 0.7014 0.6246 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186 0.2567 0.1869 0.1685 0.1520 0.1372 0.1122 13 0.8787 0.7730 0.6810 0.6006 0.5303 0.4688 0.4150 0.3677 0.3262 0.2897 0.2292 0.1625 0.1452 0.1299 0.1163 0.0935 14 0.8700 0.7579 0.6611 0.5775 0.5051 0.4423 0.3878 0.3405 0.2992 0.2633 0.2046 0.1413 0.1252 0.1110 0.0985 0.0779 15 0.8613 0.7430 0.6419 0.5553 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394 0.1827 0.1229 0.1079 0.0949 0.0835 0.0649 16 0.8528 0.7284 0.6232 0.5339 0.4581 0.3937 0.3878 0.3404 0.2518 0.2176 0.1631 0.1069 0.0930 0.0811 0.0708 0.0541

Present value annuity tables of R1

Prd 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 12% 15% 16% 17% 18% 20% 1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929 0.8696 0.8620 0.8547 0.8475 0.8333 2 1.9704 1.9416 1.9135 1.8864 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355 1.6901 1.6257 1.6051 1.5852 1.5656 1.5278 3 2.9410 2.8839 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869 2.4018 2.2832 2.2458 2.2096 2.1743 2.1065 4 3.9020 3.8077 3.7171 3.6299 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699 3.0373 2.8550 2.7981 2.7432 2.6901 2.5887 5 4.8534 4.7135 4.5797 4.4518 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908 3.6048 3.3522 3.2742 3.1993 3.1272 2.9906 6 5.7955 5.6014 5.4172 5.2421 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553 4.1114 3.7845 3.6846 3.5892 3.4976 3.3255 7 6.7282 6.4720 6.2303 6.0020 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684 4.5638 4.1604 4.0384 3.9224 3.8115 3.6046 8 7.6517 7.3255 7.0197 6.7327 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349 4.9676 4.4873 4.3434 4.2072 4.0776 3.8372 9 8.5660 8.1622 7.7861 7.4353 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590 5.3282 4.7716 4.6064 4.4506 4.3030 4.0310 10 9.4713 8.9826 8.5302 8.1109 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446 5.6502 5.0188 4.8331 4.6586 4.4941 4.1925 11 10.3676 9.7868 9.2526 8.7605 8.3064 7.8869 7.4987 7.1390 6.8052 6.4951 5.9377 5.2377 5.0285 4.8364 4.6560 4.3271 12 11.2551 10.5753 9.9540 9.3851 8.8633 8.3838 7.9427 7.5361 7.1607 6.8137 6.1944 5.4206 5.1970 4.9884 4.7932 4.4392 13 12.1337 11.3484 10.6350 9.9857 9.3936 8.8527 8.3577 7.9038 7.4869 7.1034 6.4235 5.5831 5.3422 5.1183 4.9095 4.5327 14 13.0037 12.1062 11.2961 10.5632 9.8986 9.2950 8.7455 8.2442 7.7862 7.3667 6.6282 5.7245 5.4676 5.2293 5.0081 4.6106 15 13.8651 12.8493 11.9380 11.1185 10.3797 9.7122 9.1079 8.5595 8.0607 7.6061 6.8109 5.8474 5.5753 5.3242 5.0916 4.6755 16 14.7179 13.5777 12.5612 11.6524 10.8378 10.1059 9.4957 8.8999 8.3125 7.7692 7.7130 5.9543 5.6683 5.4053 5.1624 4.7296

Corporate Financial Management October 2014 Page 8 of 15

Future value tables of R1 Prd 1% 2% 5% 6% 7% 8% 9% 10% 12% 15% 17% 18% 20% 1 1.0100 1.0200 1.0500 1.0600 1.0700 1.0800 1.0900 1.1000 1.1200 1.1500 1.1700 1.1800 1.2000 2 1.0201 1.0404 1.1025 1.1236 1.1449 1.1664 1.1881 1.2100 1.2544 1.3225 1.3689 1.3924 1.4400 3 1.0303 1.0612 1.1576 1.1910 1.2250 1.2597 1.2950 1.3310 1.4049 1.5209 1.6016 1.6430 1.7280 4 1.0406 1.0824 1.2155 1.2625 1.3108 1.3605 1.4116 1.4641 1.5735 1.7490 1.8739 1.9388 2.0736 5 1.0510 1.1041 1.2763 1.3382 1.4026 1.4693 1.5386 1.6105 1.7623 2.0114 2.1924 2.2878 2.4883 6 1.0615 1.1262 1.3401 1.4185 1.5007 1.5869 1.6771 1.7716 1.9738 2.3131 2.5652 2.6996 2.9860 7 1.0721 1.1487 1.4071 1.5036 1.6058 1.7138 1.8280 1.9487 2.2107 2.6600 3.0012 3.1855 3.5832 8 1.0829 1.1717 1.4775 1.5938 1.7182 1.8509 1.9926 2.1436 2.4760 3.0590 3.5115 3.7589 4.2998 9 1.0937 1.1951 1.5513 1.6895 1.8385 1.9990 2.1719 2.3579 2.7731 3.5179 4.1084 4.4355 5.1598

10 1.1046 1.2190 1.6289 1.7908 1.9672 2.1589 2.3674 2.5937 3.1058 4.0456 4.8068 5.2338 6.1917 11 1.1157 1.2434 1.71030 1.8983 2.1049 2.3316 2.5804 2.8531 3.4785 4.6524 5.6240 6.1759 7.4301 12 1.1268 1.2682 1.7959 2.0122 2.2522 2.5182 2.8127 3.1384 3.8960 5.3503 6.5801 7.2876 8.9161 13 1.1381 1.2936 1.8856 2.1329 2.4098 2.7196 3.0658 3.4523 4.3635 6.1528 7.6987 8.5994 10.6993 14 1.1495 1.3195 1.9799 2.2609 2.5785 2.9372 3.3417 3.7975 4.8871 7.0757 9.0075 10.1472 12.8392 15 1.1610 1.3459 2.0789 2.3966 2.7590 3.1722 3.6425 4.1722 5.4736 8.1371 10.5387 11.9737 15.4070

Future value of an annuity of R1 per period Prd 1% 2% 5% 6% 7% 8% 9% 10% 12% 15% 17% 18% 20% 17% 18% 19% 20%

1 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 2 2.0100 2.0200 2.0500 2.0600 2.0700 2.0800 2.0900 2.1000 2.1200 2.1500 2.1700 2.1800 2.2000 2.1700 2.1800 2.1900 2.2000 3 3.0301 3.0604 3.1525 3.1836 3.2149 3.2464 3.2781 3.3100 3.3744 3.4725 3.5389 3.5724 3.6400 3.5389 3.5724 3.6061 3.6400 4 4.0604 4.1216 4.3101 4.3746 4.4399 4.5061 4.5731 4.6410 4.7793 4.9934 5.1405 5.2154 5.3680 5.1405 5.2154 5.2913 5.3680 5 5.1010 5.2040 5.5256 5.6371 5.7507 5.8666 5.9847 6.1051 6.3528 6.7424 7.0144 7.1542 7.4416 7.0144 7.1542 7.2966 7.4416 6 6.1520 6.3081 6.8019 6.9753 7.1533 7.3359 7.5233 7.7156 8.1152 8.7537 9.2068 9.4420 9.9299 9.2068 9.4420 9.6830 9.9299 7 7.2135 7.4343 8.1420 8.3938 8.6540 8.9228 9.2004 9.4872 10.0890 11.0668 11.7720 12.1415 12.9159 11.7720 12.1415 12.5227 12.9159 8 8.2857 8.5830 9.5491 9.8975 10.2598 10.6366 11.0285 11.4359 12.2997 13.7268 14.7733 15.3270 16.4991 14.7733 15.3270 15.9020 16.4991 9 9.3685 9.7546 11.0266 11.4913 11.9780 12.4876 13.0210 13.5795 14.7757 16.7858 18.2847 19.0859 20.7989 18.2847 19.0859 19.9234 20.7989

10 10.4622 10.9497 12.5779 13.1808 13.8164 14.4866 15.1929 15.9378 17.5487 20.3037 22.3931 23.5213 25.9587 22.3931 23.5213 24.7089 25.9587 11 11.5668 12.1687 14.2068 14.9716 15.7836 16.6455 17.5603 18.5312 20.6546 24.3493 27.1999 28.7551 32.1504 27.1999 28.7551 30.4035 32.1504 12 12.6825 13.4121 15.9171 16.8699 17.8885 18.9771 20.1407 21.3843 24.1331 29.0017 32.8239 34.9311 39.5805 32.8239 34.9311 37.1802 39.5805 13 13.8093 14.6803 17.7130 18.8821 20.1406 21.4953 22.9534 24.5227 28.0291 34.3519 39.4040 42.2187 48.4966 39.4040 42.2187 45.2445 48.4966 14 14.9474 15.9739 19.5986 21.0151 22.5505 24.2149 26.0192 27.9750 32.3926 40.5047 47.1027 50.8180 59.1959 47.1027 50.8180 54.8409 59.1959 15 16.0969 17.2934 21.5786 23.2760 25.1290 27.1521 29.3609 31.7725 37.2797 47.5804 56.1101 60.9653 72.0351 56.1101 60.9653 66.2607 72.0351 16 17.2579 18.6393 23.6575 25.6725 27.8881 30.3243 33.0034 35.9497 42.7533 55.7175 66.6488 72.9390 87.4421 66.6488 72.9390 79.8502 87.4421

Corporate Financial Management October 2014 Page 9 of 15

Standard Normal Distribution Table 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.0 0.0000 0.0040 0.0080 0.0120 0.0160 0.0199 0.0239 0.0279 0.0319 0.0359 0.1 0.0398 0.0438 0.0478 0.0517 0.0557 0.0596 0.0636 0.0675 0.0714 0.0753 0.2 0.0793 0.0832 0.0871 0.0910 0.0948 0.0987 0.1026 0.1064 0.1103 0.1141 0.3 0.1179 0.1217 0.1255 0.1293 0.1331 0.1368 0.1406 0.1443 0.1480 0.1517 0.4 0.1554 0.1591 0.1628 0.1664 0.1700 0.1736 0.1772 0.1808 0.1844 0.1879 0.5 0.1915 0.1950 0.1985 0.2019 0.2054 0.2088 0.2123 0.2157 0.2190 0.2224 0.6 0.2257 0.2291 0.2324 0.2357 0.2389 0.2422 0.2454 0.2486 0.2517 0.2549 0.7 0.2580 0.2611 0.2642 0.2673 0.2704 0.2734 0.2764 0.2794 0.2823 0.2852 0.8 0.2881 0.2910 0.2939 0.2967 0.2995 0.3023 0.3051 0.3078 0.3106 0.3133 0.9 0.3159 0.3186 0.3212 0.3238 0.3264 0.3289 0.3315 0.3340 0.3365 0.3389 1.0 0.3413 0.3438 0.3461 0.3485 0.3508 0.3531 0.3554 0.3577 0.3599 0.3621 1.1 0.3643 0.3665 0.3686 0.3708 0.3729 0.3749 0.3770 0.3790 0.3810 0.3830 1.2 0.3849 0.3869 0.3888 0.3907 0.3925 0.3944 0.3962 0.3980 0.3997 0.4015 1.3 0.4032 0.4049 0.4066 0.4082 0.4099 0.4115 0.4131 0.4147 0.4162 0.4177 1.4 0.4192 0.4207 0.4222 0.4236 0.4251 0.4265 0.4279 0.4292 0.4306 0.4319 1.5 0.4332 0.4345 0.4357 0.4370 0.4382 0.4394 0.4406 0.4418 0.4429 0.4441 1.6 0.4452 0.4463 0.4474 0.4484 0.4495 0.4505 0.4515 0.4525 0.4535 0.4545 1.7 0.4554 0.4564 0.4573 0.4582 0.4591 0.4599 0.4608 0.4616 0.4625 0.4633 1.8 0.4641 0.4649 0.4656 0.4664 0.4671 0.4678 0.4686 0.4693 0.4699 0.4706 1.9 0.4713 0.4719 0.4726 0.4732 0.4738 0.4744 0.4750 0.4756 0.4761 0.4767 2.0 0.4772 0.4778 0.4783 0.4788 0.4793 0.4798 0.4803 0.4808 0.4812 0.4817 2.1 0.4821 0.4826 0.4830 0.4834 0.4838 0.4842 0.4846 0.4850 0.4854 0.4857 2.2 0.4861 0.4864 0.4868 0.4871 0.4875 0.4878 0.4881 0.4884 0.4887 0.4890 2.3 0.48928 0.48956 0.48983 0.49010 0.49036 0.49061 0.49086 0.49111 0.49134 0.49158 2.4 0.49180 0.49202 0.49224 0.49245 0.49266 0.49286 0.49305 0.49324 0.49343 0.49361 2.5 0.49379 0.49395 0.49413 0.49430 0.49446 0.49461 0.49477 0.49492 0.49506 0.49520 2.6 0.49534 0.49547 0.49560 0.49573 0.49585 0.49698 0.49609 0.49621 0.49632 0.49643 2.7 0.49653 0.49664 0.49674 0.49683 0.49693 0.49702 0.49711 0.49720 0.49728 0.49736 2.8 0.49744 0.49752 0.49760 0.49767 0.49774 0.49781 0.49788 0.49795 0.49801 0.49807 2.9 0.49813 0.49819 0.49825 0.49831 0.49836 0.49841 0.49846 0.49851 0.49856 0.49861 3.0 0.49865 0.49869 0.49874 0.49878 0.49882 0.49886 0.49889 0.49893 0.49997 0.49900 3.1 0.49903 0.49906 0.49910 0.49913 0.49916 0.49918 0.49921 0.49924 0.49926 0.49929 3.2 0.49931 0.49934 0.49936 0.49938 0.49940 0.49942 0.49944 0.49946 0.49948 0.49950 3.3 0.49952 0.49953 0.49955 0.49957 0.49958 0.49960 0.49961 0.49962 0.49964 0.49965 3.4 0.49966 0.49968 0.49969 0.49970 0.49971 0.49972 0.49973 0.49974 0.49975 0.49976 3.5 0.49977 0.49978 0.49978 0.49979 0.49980 0.49981 0.49981 0.49982 0.49983 0.49983 3.6 0.49984 0.49985 0.49985 0.49986 0.49986 0.49987 0.49987 0.49988 0.49988 0.49989 3.7 0.49989 0.49990 0.49990 0.49990 0.49991 0.49991 0.49991 0.49992 0.49992 0.49992 3.8 0.49993 0.49993 0.49993 0.49994 0.49994 0.49994 0.49994 0.49995 0.49995 0.49995 3.9 0.49995 0.49995 0.49996 0.49996 0.49996 0.49996 0.49996 0.49996 0.49997 0.49997 4.0 0.49997 0.49997 0.49997 0.49997 0.49997 0.49997 0.49998 0.49998 0.49998 0.49998

Corporate Financial Management October 2014 Page 10 of 15

FORMULAE SHEET

Ke =

o

oPd

Po =

e

oKd

Kp = Spdp

Gordon’s Growth Model

Po = gr

g)( ldo−+ or Po =

gKg)( ld

e

o−+

Ke = gP

g)( ldo

o ++

Ke = gPdl

o+

Ke = gfPg)( ld

o

o +−+ or Ke = g

lPg)( ld

o

o +−+

Kd = I (l – t) and Kd = dS

t)-l( l

Po = K (l – t ) + Vn × CR (l + r)n (l + r) n Re = D1 + (P1– Po) Po

WACC = Keg

+D)( E

( E) + Kd (l – t)

+D)( E

( D)

r = Σ p x r σ² = Σ p(r – r )²

σ = 2θ y = mx + c

m = m

fm

θ

RR −

Corporate Financial Management October 2014 Page 11 of 15

Rp = Rf + �Rm − Rf

θm�θp

ß = m

p

θθ

or m

sms

θ

Pθ

Rp = Rf + ß (Rm – Rf) or Rs = Rf + ß (Rm – Rf) Rs – Rf = β (Rm – Rf) r = F(rj) + β1 F1 + ß2F2 + ß3F3 + .... e E(rj) = rf + ß1 (r1 – rf) + ß2 (r2 – rf) + ß3 (r3 – rf) DOG = MC or MI PBIT PBIT Vd + Veg = Veng

gβ =

−+

eg

dug V

t)( lvIβ

Spread = 33rateinterest

costntransactiovariance0.75 ×××

Q = h

2cd

Inventory costs =

+

Qdxchx

2Q or hdc2 ×××

ΔP = ΔG ± ΔI ± ΔB ± ΔD

Effective discount rate annualised = t

365d100

d×

−

(l + n) = (l + r) x (l + i) l + r = l + n l + i

r = ilin

+− or r =

++

ilnl – l

l + i = rlnl

++ or i =

++

rlnl – l

Corporate Financial Management October 2014 Page 12 of 15

𝐼𝐼𝐼𝐼𝐼𝐼 = 𝑙𝑙𝑙𝑙𝑙𝑙 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 + �𝑁𝑁𝑁𝑁𝑁𝑁 𝑙𝑙𝑙𝑙𝑙𝑙 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟

(𝑁𝑁𝑁𝑁𝑁𝑁 𝑙𝑙𝑙𝑙𝑙𝑙 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 + 𝑁𝑁𝑁𝑁𝑁𝑁 ℎ𝑖𝑖𝑖𝑖ℎ 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟) × (ℎ𝑖𝑖𝑖𝑖ℎ 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 − 𝑙𝑙𝑙𝑙𝑙𝑙 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟)�

Profitability Index = I

PV

Altman’s Z score

𝑍𝑍 = 1.2𝑥𝑥1 + 1.4𝑥𝑥2 + 3.3𝑥𝑥3 + 0.6𝑥𝑥4 + 1.0𝑥𝑥5 Where 𝑥𝑥1 = (𝑊𝑊𝑙𝑙𝑟𝑟𝑊𝑊𝑖𝑖𝑊𝑊𝑖𝑖 𝐶𝐶𝑟𝑟𝐶𝐶𝑖𝑖𝑟𝑟𝑟𝑟𝑙𝑙)

(𝑟𝑟𝑙𝑙𝑟𝑟𝑟𝑟𝑙𝑙 𝑟𝑟𝑎𝑎𝑎𝑎𝑟𝑟𝑟𝑟𝑎𝑎)� 𝑥𝑥2 = (𝐸𝐸𝑟𝑟𝑟𝑟𝑊𝑊𝑖𝑖𝑊𝑊𝑖𝑖𝑎𝑎)

(𝑇𝑇𝑙𝑙𝑟𝑟𝑟𝑟𝑙𝑙 𝑟𝑟𝑎𝑎𝑎𝑎𝑟𝑟𝑟𝑟𝑎𝑎)� 𝑥𝑥3 = (𝐸𝐸𝑟𝑟𝑟𝑟𝑊𝑊𝑖𝑖𝑊𝑊𝑖𝑖𝑎𝑎 𝑏𝑏𝑟𝑟𝑏𝑏𝑙𝑙𝑟𝑟𝑟𝑟 𝑟𝑟𝑟𝑟𝑥𝑥 𝑟𝑟𝑊𝑊𝑎𝑎 𝑖𝑖𝑊𝑊𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑎𝑎𝑟𝑟)

(𝑇𝑇𝑙𝑙𝑟𝑟𝑟𝑟𝑙𝑙 𝑟𝑟𝑎𝑎𝑎𝑎𝑟𝑟𝑟𝑟𝑎𝑎)�

𝑥𝑥4 = (𝑀𝑀𝑟𝑟𝑟𝑟𝑊𝑊𝑟𝑟𝑟𝑟 𝑣𝑣𝑟𝑟𝑙𝑙𝑣𝑣𝑟𝑟 𝑙𝑙𝑏𝑏 𝑟𝑟𝑒𝑒𝑣𝑣𝑖𝑖𝑟𝑟𝑒𝑒)(𝐵𝐵𝑙𝑙𝑙𝑙𝑊𝑊 𝑣𝑣𝑟𝑟𝑙𝑙𝑣𝑣𝑟𝑟 𝑙𝑙𝑏𝑏 𝑟𝑟𝑙𝑙𝑟𝑟𝑟𝑟𝑙𝑙 𝑎𝑎𝑟𝑟𝑏𝑏𝑟𝑟)�

𝑥𝑥5 = 𝑆𝑆𝑟𝑟𝑙𝑙𝑟𝑟𝑎𝑎

(𝑟𝑟𝑙𝑙𝑟𝑟𝑟𝑟𝑙𝑙 𝑟𝑟𝑎𝑎𝑎𝑎𝑟𝑟𝑟𝑟𝑎𝑎)� St = l + if So l + id l + rf = l + if l + rd l + id l + rf = St

l + rd So

AT

AMT MPN

MVMVER×−

=

)( TT

ATMVN

NMVER−×

=MMV

aAA

amax NEPS

SEEPSEPSER +=

AA

aamin NEPSSE

NEPSER+

=

1−×=

MPaERMPMP A

pRi) p( REDSGR +−=

Corporate Financial Management October 2014 Page 13 of 15

𝐶𝐶𝑣𝑣𝑟𝑟𝑟𝑟𝑟𝑟𝑊𝑊𝑟𝑟 𝑟𝑟𝑟𝑟𝑟𝑟𝑖𝑖𝑙𝑙 = 𝐶𝐶𝑣𝑣𝑟𝑟𝑟𝑟𝑟𝑟𝑊𝑊𝑟𝑟 𝑟𝑟𝑎𝑎𝑎𝑎𝑟𝑟𝑟𝑟𝑎𝑎

𝑐𝑐𝑣𝑣𝑟𝑟𝑟𝑟𝑟𝑟𝑊𝑊𝑟𝑟 𝑙𝑙𝑖𝑖𝑟𝑟𝑏𝑏𝑖𝑖𝑙𝑙𝑖𝑖𝑟𝑟𝑖𝑖𝑟𝑟𝑎𝑎

𝑄𝑄𝑣𝑣𝑖𝑖𝑐𝑐𝑊𝑊 𝑟𝑟𝑟𝑟𝑟𝑟𝑖𝑖𝑙𝑙 =𝑐𝑐𝑣𝑣𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑊𝑊𝑟𝑟 𝑟𝑟𝑎𝑎𝑎𝑎𝑟𝑟𝑟𝑟𝑎𝑎 − 𝑖𝑖𝑊𝑊𝑣𝑣𝑟𝑟𝑊𝑊𝑟𝑟𝑙𝑙𝑟𝑟𝑒𝑒

𝑐𝑐𝑣𝑣𝑟𝑟𝑟𝑟𝑟𝑟𝑊𝑊𝑟𝑟 𝑙𝑙𝑖𝑖𝑟𝑟𝑏𝑏𝑖𝑖𝑙𝑙𝑖𝑖𝑟𝑟𝑖𝑖𝑟𝑟𝑎𝑎

𝐼𝐼𝑊𝑊𝑣𝑣𝑟𝑟𝑊𝑊𝑟𝑟𝑙𝑙𝑟𝑟𝑒𝑒 𝑟𝑟𝑣𝑣𝑟𝑟𝑊𝑊𝑙𝑙𝑣𝑣𝑟𝑟𝑟𝑟 =𝑐𝑐𝑙𝑙𝑎𝑎𝑟𝑟 𝑙𝑙𝑏𝑏 𝑎𝑎𝑟𝑟𝑙𝑙𝑟𝑟𝑎𝑎𝑖𝑖𝑊𝑊𝑣𝑣𝑟𝑟𝑊𝑊𝑟𝑟𝑙𝑙𝑟𝑟𝑒𝑒

𝐴𝐴𝑣𝑣𝑟𝑟𝑟𝑟𝑟𝑟𝑖𝑖𝑟𝑟 𝑐𝑐𝑙𝑙𝑙𝑙𝑙𝑙𝑟𝑟𝑐𝑐𝑟𝑟𝑙𝑙𝑊𝑊 =𝑟𝑟𝑐𝑐𝑐𝑐𝑙𝑙𝑣𝑣𝑊𝑊𝑟𝑟𝑎𝑎 𝑟𝑟𝑟𝑟𝑐𝑐𝑟𝑟𝑖𝑖𝑣𝑣𝑟𝑟𝑏𝑏𝑙𝑙𝑟𝑟

𝑎𝑎𝑟𝑟𝑙𝑙𝑟𝑟𝑎𝑎365�

𝐹𝐹𝑖𝑖𝑥𝑥𝑟𝑟𝑎𝑎 𝑟𝑟𝑎𝑎𝑎𝑎𝑟𝑟𝑟𝑟 𝑟𝑟𝑣𝑣𝑟𝑟𝑊𝑊𝑙𝑙𝑣𝑣𝑟𝑟𝑟𝑟 =𝑎𝑎𝑟𝑟𝑙𝑙𝑟𝑟𝑎𝑎

𝑏𝑏𝑖𝑖𝑥𝑥𝑟𝑟𝑎𝑎 𝑟𝑟𝑎𝑎𝑎𝑎𝑟𝑟𝑟𝑟𝑎𝑎

𝐴𝐴𝑎𝑎𝑎𝑎𝑟𝑟𝑟𝑟 𝑟𝑟𝑣𝑣𝑟𝑟𝑊𝑊𝑙𝑙𝑣𝑣𝑟𝑟𝑟𝑟 =𝑎𝑎𝑟𝑟𝑙𝑙𝑟𝑟𝑎𝑎

𝑙𝑙𝐶𝐶𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑖𝑖𝑊𝑊𝑖𝑖 𝑟𝑟𝑎𝑎𝑎𝑎𝑟𝑟𝑟𝑟𝑎𝑎

𝐷𝐷𝑟𝑟𝑏𝑏𝑟𝑟 𝑟𝑟𝑟𝑟𝑟𝑟𝑖𝑖𝑙𝑙 =𝑎𝑎𝑟𝑟𝑏𝑏𝑟𝑟

𝑟𝑟𝑙𝑙𝑟𝑟𝑟𝑟𝑙𝑙 𝑟𝑟𝑎𝑎𝑎𝑎𝑟𝑟𝑟𝑟𝑎𝑎

𝐷𝐷𝑟𝑟𝑏𝑏𝑟𝑟 𝑟𝑟𝑙𝑙 𝑟𝑟𝑒𝑒𝑣𝑣𝑖𝑖𝑟𝑟𝑒𝑒 =𝑟𝑟𝑙𝑙𝑟𝑟𝑟𝑟𝑙𝑙 𝑎𝑎𝑟𝑟𝑏𝑏𝑟𝑟𝑟𝑟𝑙𝑙𝑟𝑟𝑟𝑟𝑙𝑙 𝑟𝑟𝑒𝑒𝑣𝑣𝑖𝑖𝑟𝑟𝑒𝑒

𝑇𝑇𝑖𝑖𝑇𝑇𝑟𝑟𝑎𝑎 𝑖𝑖𝑊𝑊𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑎𝑎𝑟𝑟 𝑟𝑟𝑟𝑟𝑟𝑟𝑊𝑊𝑟𝑟𝑎𝑎 =𝐸𝐸𝐵𝐵𝐼𝐼𝑇𝑇

𝑖𝑖𝑊𝑊𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑎𝑎𝑟𝑟

𝐸𝐸𝐵𝐵𝐼𝐼𝑇𝑇𝐷𝐷𝐴𝐴 𝑐𝑐𝑙𝑙𝑣𝑣𝑟𝑟𝑟𝑟𝑟𝑟𝑖𝑖𝑟𝑟 =𝐸𝐸𝐵𝐵𝐼𝐼𝑇𝑇 + 𝑎𝑎𝑟𝑟𝐶𝐶𝑟𝑟𝑟𝑟𝑐𝑐𝑖𝑖𝑟𝑟𝑟𝑟𝑖𝑖𝑙𝑙𝑊𝑊 + 𝑟𝑟𝑇𝑇𝑙𝑙𝑟𝑟𝑟𝑟𝑖𝑖𝑎𝑎𝑟𝑟𝑟𝑟𝑖𝑖𝑙𝑙𝑊𝑊

𝑖𝑖𝑊𝑊𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑎𝑎𝑟𝑟

𝐹𝐹𝑖𝑖𝑥𝑥𝑟𝑟𝑎𝑎 𝑐𝑐ℎ𝑟𝑟𝑟𝑟𝑖𝑖𝑟𝑟 𝑐𝑐𝑙𝑙𝑣𝑣𝑟𝑟𝑟𝑟𝑟𝑟𝑖𝑖𝑟𝑟 =𝐸𝐸𝐵𝐵𝐼𝐼𝑇𝑇 + 𝑎𝑎𝑟𝑟𝐶𝐶𝑟𝑟𝑟𝑟𝑐𝑐𝑖𝑖𝑟𝑟𝑟𝑟𝑖𝑖𝑙𝑙𝑊𝑊 + 𝑟𝑟𝑇𝑇𝑙𝑙𝑟𝑟𝑟𝑟𝑖𝑖𝑎𝑎𝑟𝑟𝑟𝑟𝑖𝑖𝑙𝑙𝑊𝑊

𝑖𝑖𝑊𝑊𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑎𝑎𝑟𝑟

𝐺𝐺𝑟𝑟𝑙𝑙𝑎𝑎𝑎𝑎 𝐶𝐶𝑟𝑟𝑙𝑙𝑏𝑏𝑖𝑖𝑟𝑟 𝑇𝑇𝑟𝑟𝑟𝑟𝑖𝑖𝑖𝑖𝑊𝑊 =𝑖𝑖𝑟𝑟𝑙𝑙𝑎𝑎𝑎𝑎 𝐶𝐶𝑟𝑟𝑙𝑙𝑏𝑏𝑖𝑖𝑟𝑟

𝑎𝑎𝑟𝑟𝑙𝑙𝑟𝑟𝑎𝑎

𝑁𝑁𝑟𝑟𝑟𝑟 𝐶𝐶𝑟𝑟𝑙𝑙𝑏𝑏𝑖𝑖𝑟𝑟 𝑙𝑙𝐶𝐶𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑖𝑖𝑊𝑊𝑖𝑖 𝑇𝑇𝑟𝑟𝑟𝑟𝑖𝑖𝑖𝑖𝑊𝑊 =𝐸𝐸𝐵𝐵𝐼𝐼𝑇𝑇𝑆𝑆𝐴𝐴𝑆𝑆𝐸𝐸𝑆𝑆

𝑁𝑁𝑟𝑟𝑟𝑟 𝐶𝐶𝑟𝑟𝑙𝑙𝑏𝑏𝑖𝑖𝑟𝑟 𝑇𝑇𝑟𝑟𝑖𝑖𝑖𝑖𝑊𝑊 =𝑁𝑁𝑟𝑟𝑟𝑟 𝐶𝐶𝑟𝑟𝑙𝑙𝑏𝑏𝑖𝑖𝑟𝑟𝑎𝑎𝑟𝑟𝑙𝑙𝑟𝑟𝑎𝑎

𝐼𝐼𝑟𝑟𝑟𝑟𝑣𝑣𝑟𝑟𝑊𝑊 𝑙𝑙𝑊𝑊 𝑟𝑟𝑙𝑙𝑟𝑟𝑟𝑟𝑙𝑙 𝑟𝑟𝑎𝑎𝑎𝑎𝑟𝑟𝑟𝑟𝑎𝑎 =𝑊𝑊𝑟𝑟𝑟𝑟 𝐶𝐶𝑟𝑟𝑙𝑙𝑏𝑏𝑖𝑖𝑟𝑟𝑟𝑟𝑙𝑙𝑟𝑟𝑟𝑟𝑙𝑙 𝑟𝑟𝑎𝑎𝑎𝑎𝑟𝑟𝑟𝑟𝑎𝑎

𝐼𝐼𝑟𝑟𝑟𝑟𝑣𝑣𝑟𝑟𝑊𝑊 𝑙𝑙𝑊𝑊 𝑟𝑟𝑒𝑒𝑣𝑣𝑖𝑖𝑟𝑟𝑒𝑒 =𝑊𝑊𝑟𝑟𝑟𝑟 𝑖𝑖𝑊𝑊𝑐𝑐𝑙𝑙𝑇𝑇𝑟𝑟

𝑟𝑟𝑙𝑙𝑟𝑟𝑟𝑟𝑙𝑙 𝑎𝑎ℎ𝑟𝑟𝑟𝑟𝑟𝑟ℎ𝑙𝑙𝑙𝑙𝑎𝑎𝑟𝑟𝑟𝑟𝑎𝑎 𝑏𝑏𝑣𝑣𝑊𝑊𝑎𝑎𝑎𝑎

𝐶𝐶𝑟𝑟𝑎𝑎ℎ 𝑙𝑙𝑙𝑙𝑙𝑙 𝑟𝑟𝑙𝑙 𝑟𝑟𝑙𝑙𝑟𝑟𝑟𝑟𝑙𝑙 𝑎𝑎𝑟𝑟𝑏𝑏𝑟𝑟 =𝑐𝑐𝑟𝑟𝑎𝑎ℎ 𝑏𝑏𝑙𝑙𝑙𝑙𝑙𝑙 𝑏𝑏𝑟𝑟𝑙𝑙𝑇𝑇 𝑙𝑙𝐶𝐶𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑖𝑖𝑙𝑙𝑊𝑊𝑎𝑎

𝑟𝑟𝑙𝑙𝑟𝑟𝑟𝑟𝑙𝑙 𝑎𝑎𝑟𝑟𝑏𝑏𝑟𝑟

Corporate Financial Management October 2014 Page 14 of 15

𝐷𝐷𝑖𝑖𝑣𝑣𝑖𝑖𝑎𝑎𝑟𝑟𝑊𝑊𝑎𝑎 𝑒𝑒𝑖𝑖𝑟𝑟𝑙𝑙𝑎𝑎 =𝑎𝑎𝑖𝑖𝑣𝑣𝑖𝑖𝑎𝑎𝑟𝑟𝑊𝑊𝑎𝑎 𝐶𝐶𝑟𝑟𝑟𝑟 𝑎𝑎ℎ𝑟𝑟𝑟𝑟𝑟𝑟𝐶𝐶𝑟𝑟𝑖𝑖𝑐𝑐𝑟𝑟 𝐶𝐶𝑟𝑟𝑟𝑟 𝑎𝑎ℎ𝑟𝑟𝑟𝑟𝑟𝑟

𝐸𝐸𝑟𝑟𝑟𝑟𝑊𝑊𝑖𝑖𝑊𝑊𝑖𝑖𝑎𝑎 𝑒𝑒𝑖𝑖𝑟𝑟𝑙𝑙𝑎𝑎 =𝑟𝑟𝑟𝑟𝑟𝑟𝑊𝑊𝑖𝑖𝑊𝑊𝑖𝑖𝑎𝑎 𝐶𝐶𝑟𝑟𝑟𝑟 𝑎𝑎ℎ𝑟𝑟𝑟𝑟𝑟𝑟𝐶𝐶𝑟𝑟𝑖𝑖𝑐𝑐𝑟𝑟 𝐶𝐶𝑟𝑟𝑟𝑟 𝑎𝑎ℎ𝑟𝑟𝑟𝑟𝑟𝑟

𝑁𝑁𝑟𝑟𝑖𝑖𝑐𝑐𝑟𝑟 𝑟𝑟𝑟𝑟𝑟𝑟𝑊𝑊𝑖𝑖𝑊𝑊𝑖𝑖𝑎𝑎 𝑟𝑟𝑟𝑟𝑟𝑟𝑖𝑖𝑙𝑙 =𝐶𝐶𝑟𝑟𝑖𝑖𝑐𝑐𝑟𝑟 𝐶𝐶𝑟𝑟𝑟𝑟 𝑎𝑎ℎ𝑟𝑟𝑟𝑟𝑟𝑟

𝑟𝑟𝑟𝑟𝑟𝑟𝑊𝑊𝑖𝑖𝑊𝑊𝑖𝑖𝑎𝑎 𝐶𝐶𝑟𝑟𝑟𝑟 𝑎𝑎ℎ𝑟𝑟𝑟𝑟𝑟𝑟

𝐷𝐷𝑖𝑖𝑣𝑣𝑖𝑖𝑎𝑎𝑟𝑟𝑊𝑊𝑎𝑎 𝑐𝑐𝑙𝑙𝑣𝑣𝑟𝑟𝑟𝑟 =𝑟𝑟𝑟𝑟𝑟𝑟𝑊𝑊𝑖𝑖𝑊𝑊𝑖𝑖𝑎𝑎 𝐶𝐶𝑟𝑟𝑟𝑟 𝑎𝑎ℎ𝑟𝑟𝑟𝑟𝑟𝑟𝑎𝑎𝑖𝑖𝑣𝑣𝑖𝑖𝑎𝑎𝑟𝑟𝑊𝑊𝑎𝑎 𝐶𝐶𝑟𝑟𝑟𝑟 𝑎𝑎ℎ𝑟𝑟𝑟𝑟𝑟𝑟

Corporate Financial Management October 2014 Page 15 of 15