Bright Spark plc is introducing a new product to the home lighting market. The cost of this new table lamp to Bright Spark plc is $40 including both fixed and variable costs. Fixed costs in total are $2.5m. Variable costs per lamp sold are $22.
a) Calculate the sale price and profit on each lamp if the following assumptions are made:
i. The mark-up on cost is 60%(3 marks)
ii.The sales margin is 45%(3 marks)
b) Calculate the break-even point volume of sales for this new product, assuming that the sale price is $70.(3 marks)
c) What is the total profit if Bright Spark plc sells 60,000 lamps? Assume that the sale price is $70.(3 marks)
d) Explain what the company would/could do if the volume of sales for the new lamp did not meet expectations and 5% fewer than the break-even point volume were being sold. (4 marks)
A Company has the opportunity to make one of the following investments.
A.$10,000 to be invested today and $4,000 to be received in one year, $4,000 in two years and $5,500 in 3 years;
B.$10,000 to be invested today and $14,000 to be received in two years; and
C.$10,000 to be invested today and $7,000 to be received in four years and $9,000 to be received in five years.
The company has determined that their required rate of return is 10% for all of the above investments.
a) Calculate the value of each investment in present value terms to enable the company to determine which investment represents the best opportunity. (9 marks)
b) THREE determinants of the investors’ required rate of return (discount rate). (6 marks)
A company has no debt and would like to calculate its cost of equity. The finance director has collated the following information:
• Beta is 1.4;
• Return on a 5-year Government bond is 2%;
• Market return is 9%.
a) Calculate the company’s cost of equity.(3 marks)
b) Critically discuss the Capital Asset Pricing Model (CAPM).(10 marks)
The company intends to use the cost of equity as part of an investment appraisal Net Present Value model to determine if a significant amount of capital should be invested in a new factory. Alternatively the company could raise debt and invest this in the new factory.
The pre-tax cost of this debt would be 7%. The bank would lend them $5m. The share price of the company is $4 and they have 2m shares in issue. The tax rate is 30%.
c) Calculate the weighted average cost of capital assuming that the cost of equity is 12%. You should also assume the company borrows from the bank at a pre-tax cost of debt of 7%. (6marks)
d) Explain what would be most likely to happen to the Weighted Average Cost of Capital of this company if it financed this project with debt. You may assume this company pays tax on its profits.(8 marks)
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