BJ Ple, a software company, has developed a new game, 'PUSH', which it plans to launch in the near future. Sales of the new game are expected to be very strong, following a favourable review by market analysts. Sales volumes, production volumes and selling prices for 'PUSH' over its four- year life are expected to be as follows: Year Sales and production (units) Selling price (K per game) Other financial information on production of 'BJ' is as follows: Direct material cost K5.12 per game Other variable production cost K5.67 per game Fixed costs K4.65 per game 1 160,000 K26 2 63,000 K24 3 60,000 K22 58,000 K21 Advertising costs to stimulate demand are expected to be K600,000 in the first year of production and K151,000 in the second year of production. No advertising costs are expected in the third and fourth years of production. Fixed costs represent incremental cash fixed production overheads. 'BJ' will be produced on a new production machine costing K820, 000. The current financing structure will not change significantly. BJ Plc pays tax on profit at a rate of 30% per year and tax liabilities are settled in the year in which they arise. BJ Ple is financed by Ordinary shares (50ngwee par value) K1 million trading at K1.72 per share and 8% bonds K600, 000 with par value of K100 on which the interest is payable annually on 31 December. The debt is due for redemption at par in four years' time. The market price of the bonds is K95. The market expected rate of return is 7%. KBM Ltd a company in the same industry as BJ Ple has an expected return of 8% from its ordinary shares and have a beta of 1.2. BJ Plc has a beta of 1.8. Required: a) Calculate the weighted average cost of capital using the market values as weighting factors. b) Calculate the net present value of the investment and advise whether the investment is acceptable. c) Calculate the Internal Rate of Return of the investment and advise whether the investment is acceptable.
BJ Ple, a software company, has developed a new game, 'PUSH', which it plans to launch in the near future. Sales of the new game are expected to be very strong, following a favourable review by market analysts. Sales volumes, production volumes and selling prices for 'PUSH' over its four- year life are expected to be as follows: Year Sales and production (units) Selling price (K per game) Other financial information on production of 'BJ' is as follows: Direct material cost K5.12 per game Other variable production cost K5.67 per game Fixed costs K4.65 per game 1 160,000 K26 2 63,000 K24 3 60,000 K22 58,000 K21 Advertising costs to stimulate demand are expected to be K600,000 in the first year of production and K151,000 in the second year of production. No advertising costs are expected in the third and fourth years of production. Fixed costs represent incremental cash fixed production overheads. 'BJ' will be produced on a new production machine costing K820, 000. The current financing structure will not change significantly. BJ Plc pays tax on profit at a rate of 30% per year and tax liabilities are settled in the year in which they arise. BJ Ple is financed by Ordinary shares (50ngwee par value) K1 million trading at K1.72 per share and 8% bonds K600, 000 with par value of K100 on which the interest is payable annually on 31 December. The debt is due for redemption at par in four years' time. The market price of the bonds is K95. The market expected rate of return is 7%. KBM Ltd a company in the same industry as BJ Ple has an expected return of 8% from its ordinary shares and have a beta of 1.2. BJ Plc has a beta of 1.8. Required: a) Calculate the weighted average cost of capital using the market values as weighting factors. b) Calculate the net present value of the investment and advise whether the investment is acceptable. c) Calculate the Internal Rate of Return of the investment and advise whether the investment is acceptable.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:BJ Plc, a software company, has developed a new game, 'PUSH', which it plans to launch in the
near future. Sales of the new game are expected to be very strong, following a favourable review
by market analysts. Sales volumes, production volumes and selling prices for 'PUSH' over its four-
year life are expected to be as follows:
Year
Sales and production (units)
Selling price (K per game)
Other financial information on production of 'BJ' is as follows:
Direct material cost K5.12 per game
Other variable production cost K5.67 per game
Fixed costs K4.65 per game
1
160,000
K26
2
63,000
K24
3
60,000
K22
4
58,000
K21
Advertising costs to stimulate demand are expected to be K600,000 in the first year of production
and K151,000 in the second year of production. No advertising costs are expected in the third and
fourth years of production. Fixed costs represent incremental cash fixed production overheads. 'BJ'
will be produced on a new production machine costing K820, 000. The current financing structure
will not change significantly. BJ Plc pays tax on profit at a rate of 30% per year and tax liabilities
are settled in the year in which they arise.
BJ Ple is financed by Ordinary shares (50ngwee par value) K1 million trading at K1.72 per share
and 8% bonds K600, 000 with par value of K100 on which the interest is payable annually on 31
December. The debt is due for redemption at par in four years' time. The market price of the bonds
is K95.
The market expected rate of return is 7%. KBM Ltd a company in the same industry as BJ Plc has
an expected return of 8% from its ordinary shares and have a beta of 1.2. BJ Plc has a beta of 1.8.
Required:
a) Calculate the weighted average cost of capital using the market values as weighting factor
b) Calculate the net present value of the investment and advise whether the investment is
acceptable.
c) Calculate the Internal Rate of Return of the investment and advise whether the investment
is acceptable.
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