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Bman 30111 Exam Paper 2019/20
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BMAN30111THREE Hours
Formula Sheet attached
Normal Distribution Tables attached
THE UNIVERSITY OF MANCHESTER
ADVANCED CORPORATE FINANCE
20 January 2020
14:00 – 17:00
Answer ANY TWO questions.
All questions carry equal marks
THIS QUESTION PAPER MUST NOT BE REMOVED FROM THE EXAMINATION
ROOM
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Electronic calculators may be used in line with University regulations
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© The University of Manchester, 2020
PTO
Page 1 of 7
, BMAN30111
Answer ANY TWO questions
QUESTION 1
(a) You are the financial manager of a very profitable firm, which is currently evaluating
a new, large investment project at the start of 2020. The project involves the acquisition
of a plant, which requires an initial outlay of £300 million. The project’s investment
horizon is six years. Over this period, the initial capital investment in the plant should
be fully depreciated. Despite this, it is expected that at the end of the project (after six
years) the taxable salvage value of the plant will amount to £50 million. The project
requires an initial (at the start of 2020) working capital investment of £30 million, which
should be recovered in full at the end of 2025. Your accountants have put together the
following projections on expected sales and cash flows, and information on the cost of
capital of the company:
Table 1. Sales and cash flow projections
2020 2021 2022 2023 2024 2025
Sales 120 135 140 125 120 110
EBITD 60 75 80 65 60 50
Depreciation (50) (50) (50) (50) (50) (50)
EBIT 10 25 30 15 10 0
Tax (2) (5) (6) (3) (2) 0
expense
EBIAT 8 20 24 12 8 0
Table 2. Cost of capital
Risk-free Rate (Rf) 1%
Project Cost of Debt (Rd) 4%
Market Risk Premium 6%
Marginal Corporate Tax Rate (Tc) 20%
Asset Beta of comparable companies 0.8
Required:
Carry out the following calculations, always assuming that cash flows occur at the end
of their respective years:
(i) Estimate the NPV of the investment project at the start of 2020 if it is 100%
financed with equity. Comment on your findings. (20 marks)
Question 1 continued overleaf
Page 2 of 7
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