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Student Guidance on Taking Remote Examinations

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Examination Rubric: Instructions to and information for candidates

There are three (3) sections in this assessment.

You must answer all questions in Section A, and ONE (1) question in Sections B and C. (ie ONE (1) from Section B and ONE (1) from Section C.)

Section A (Question 1) is worth 10 marks and Sections B (Questions 2 & 3) and C (Questions 4 & 5) are worth 45 marks each.

Formulae sheet and tables are provided at the end of this paper

SECTION A – SHORT FORM. QUESTION

Answer all questions in this section 

QUESTION 1: DIVIDEND POLICY

A company's dividend policy is a crucial decision that affects its relationship with shareholders and its financial performance. In this question, you are required to critically explain three different dividend policies that a company can adopt and provide a detailed explanation of each, including their advantages and disadvantages.

 (10 marks) 

SECTION A TOTAL 10 MARKS 

Section B

Choose ONE (1) question only from this section. (ie Question 2 OR Question 3)

QUESTION 2: NPV (Net Present Value)

BMW, a renowned global automobile manufacturer, is contemplating a substantial multi-million-pound investment in the expansion of the Oxford Mini plant in the United Kingdom. This expansion aims to secure the production of a new line of electric cars and promises to create a substantial number of highly skilled jobs within the UK. The initial market research conducted by BMW, which cost £500,000, suggested that this investment holds significant promise, particularly in light of the UK government's commitment to net-zero policies.

To proceed with the project a £800,000 investment in new machinery would be needed. The machinery would have an expected life of 5 years, and a residual value of £50,000.

The revenue is forecast to be £350,000 p.a. in real terms, and costs are forecast to be £60,000 p.a. in real terms.

Inflation is forecast to be 6% p.a. over the next few years and the firm’s real cost of capital is 11% p.a.

Tax depreciation allowances will be claimed at 25% on a reducing balance basis, up until the year of disposal, when a balancing allowance will arise.

The tax rate is 33%, and tax is payable the year after that profit is earned.

Required:

a) Use the Net Present Value method to assess whether the new product should be undertaken and give a recommendation 

(25 marks)

b) Calculate the Modified Internal Rate of Return for the product launch and give a recommendation

(9 marks) 

c) Identify and analyse potential risks and uncertainties associated with using the NPV, IRR and MIRR investment decision making metrics. Discuss the differences between those three methods as well as their advantages and disadvantages.

(11 marks) 

TOTAL: 45 MARKS

Choose ONE (1) question from this section (ie Question 2 OR Question 3) 

QUESTION 3: VALUATION

Amazon, a prominent American technology company specialising in online sales, is embarking on a strategic journey aimed at the hostile takeover of Aliexpress, an e-commerce marketplace owned by Alibaba.

This aggressive move is driven by a compelling vision: the fusion of business development strategies and direct distribution channels originating from China. Amazon has received advice from its investment banker, asserting that such an integration has the potential to fuel annual growth and accelerate the expansion of their clothing and accessories brand. This case study delves into the complex dynamics surrounding Amazon's proposed hostile takeover of Aliexpress, scrutinizing the rationale, implications, and strategic considerations underlying this monumental endeavour.

Below is the financial data from Aliexpress for the evaluation of Amazon's hostile takeover bid. Please use this data to answer the questions presented under the respective requirements.

Aliexpress Statement of Financial Position:

Note 1: The freehold property has not been revalued for several years and after an extensive revaluation process the current price has increased the value by $800,000, this is not reflected in the extract above.

Note 2: Receivables contain an amount of $300,000 from a large

customer which has just gone into liquidation.

Extracts from AliExpress Income statement

Other information

· Selling prices are expected to remain constant

· Sales volumes are expected to rise at 7% pa for the next 3 years and then stay constant thereafter.

· Assume that cost of sales is a completely variable cost, and that other operating expenses are expected to stay constant.

· The discount factor is 9%

· Company has just paid a dividend of $75,000.

· Dividends are growing at 4% per annum.

· The P/E ratio is 4

· Aliexpress currently has 100,000 shares in issue

Requirements:

a) In the context of Amazon's proposed hostile takeover of Aliexpress, you are required to employ four distinct valuation methods to assess both the minimum and maximum price bid that Amazon should consider for the shares of Aliexpress. Your report should include a calculation of a range of bid prices using:

· Net Asset valuation

· P/E Ratio Valuation

· Dividend Valuation Model

· Free Cash Flow Valuation

Please provide detailed calculations using the financial data provided.

(20 marks) 

b) Critically evaluate the results obtained from each valuation method, explain advantages and disadvantages of the valuation methods.and provide well-reasoned justifications for your minimum and maximum price bid recommendations. Clearly state any assumptions.

(10 marks) 

c) Critically examine the advantages and disadvantages of merges and acquisitions. Evaluate the potential benefits and drawbacks for shareholders.

(15 marks)

TOTAL: 45 MARKS

Section C

Choose ONE (1) question only from this section. (ie Question 4 OR Question 5)

QUESTION 4: PORTFOLIO THEORY

Jaguar Land Rover UK, a publicly-traded company in the manufacturing sector, is considering two investment opportunities in a new production facility. The company's management is deliberating whether to proceed with the investments, which have the returns and probabilities below:

Requirements:

a) Calculate the Expected Returns for each of the projects presented above (Y and Z)      

(4 marks) 

b) What is the risk measured as standard deviation for each of the projects (Y and Z)?        

(8 marks) 

c) Calculate the coefficient of variation for each of the projects (Y and Z). Is Y comparatively a less risky investment?

(10 marks)

d) If the financial analysts v to invest equal amounts in project Y (50%) and Z (50%), would it reduce risk? Explain and calculate the portfolio risk.

(8 marks) 

e) Critically discuss the limitations and assumptions of CAPM in the context of making investment decisions.

(15 marks)

TOTAL: 45 MARKS
Choose ONE (1) question only from this section. (ie Question 4 OR Question 5)

QUESTION 5: Mergers and Acquisitions (M&A)

Pfizer, a global pharmaceutical giant, and Seagen, a biotechnology company specializing in cancer treatments, are contemplating a merger and acquisition (M&A) deal to expand their market presence and increase their competitive advantage in the pharmaceutical industry.

The Chief Executive Directors of both companies have submitted the data below for your consideration:

Dividend growth of Seagen is expected to be 6%, expected cost of equity capital is 13%, to be apply to the entities before and after merger, economies of scale will mean that Seagen / the combined entity’s dividends grow at 9%, the transaction costs involved will be $4,000,000.

Required:

a) You are required to calculate what value could be created from a merger?

(10 marks)

b) If Pfizer paid $130 cash for each of Seagen’s shares what value would be available for each group of shareholders?

(6 marks)

c) If Pfizer gave one of its shares for every five shares of Seagen’s what value would be available for each group of shareholders?

(10 marks)

d) Given the possible deal structures calculated above, discuss the optimal deal structure, consideration should be given to advantages and disadvantages, assumptions made and refinements that should be proposed.

(19 marks)

TOTAL: 45 MARKS