11:43 PM A O A ••.253B/s10FM for Policy (EP.April 2022.docxPhoenix FilesSalamano Co. is a profitable company based in Malambo Constituency of Mambwe District of Zambia and it is finaned by equity with a market value of ZMW200 million and by debt with a market value of ZMW 45 million. The company is considering an investment project in the production of Kawawasha juice based on the folowing financialforecasts over a four-year period:Year1234Sales and Production (Units' 000)2,5004,0003,5003,000Selling Price per unit (ZMW)1112.513.514Direct Materials cost (ZMWmillion)6.38.8710.5312.36Other variable costs (ZMW'milion)4.186.628.158.57Fixed Costs (ZMWmillion)5.55.55.55.5The initial investment cost is ZMW36 million. All the operating costs are stated at current prices. The fixed costs are expected to increase by 6% per year. Fixed costs include accounting depreciation amounting to ZMW600,000 peryear. The current financing structure will not change significantly. Salamano Pc pays tax on profit at a rate of 30%per year and tax liabilities are settled in the year in which they arise.The interest rate is 10% on the debt which is redeemable at par in 4 years' time. The debt was issued at a par valueof ZMW1,000 and the book value of the debt is ZMW50 million. The company asset beta is 0.85 and the equity premiumis 9.5% The interest rate on Government bonds is 7%.Required:(a) Calculate the Weighted Average Cost of Capital (WACC) using the market values as weighting factors(b) Evaluate the financial viability of the proposed investment using the Net Present Value (NPV) method.(c) Calculate the Internal Rate of Return (IRR) of the investment and advise whether the proposed investment is acceptable(d) Discuss the reasons Net Present Value investment appraisal technique is superior to other investmentappraisal methods such as Payback, Accounting Rate of Return and Internal Rate of Retum!s)(e) Discuss how the wealth of shareholders can be maximised in the context of Salamano Plc.s)(f) Discuss the reasons maximisation of shareholder wealth is the primary objective of profit-oriented organisations compared with other financial objectives such as profit maximisation, expansion of market share and increased earnings per share.(g) Identify and explain the possible stakeholder conflicts and how you could minimize them at SalamanoPlc.QEditSearchSave as

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Salamano Co. is a profitable company based in Malambo Constituency of Mambwe District of Zambia and it is fina noed by equity with a market value of ZMW200 million and by debt with a market value of ZMW 45 million. The co mpany is considering an investment project in the production of Kawawasha juice based on the folowing financial forecasts over a four-year period Year 2 3 Sales and Production (Units' 000) Seling Price per unit (ZMW) Direct Materials cost (ZMWmillion) 6.3 Other variable costs (ZMW'milion) 418 Fixed Costs (ZMWmillion) 2,500 4,000 3,500 3,000 11 12.5 13.5 14 8.87 10.53 12.36 6.62 8.15 8.57 5.5 5.5 5.5 5.5 The initial investment cost is ZMW36 milion. All the operating costs are stated at current prices. The fixed costs ar e expected to increase by 6% per year. Fixed costs indude accounting depreciation amounting to ZMW600,000 per year. The current financing structure will not change significantly. Salamano Pc pays tax on profit at a rate of 30% per year and tax liabities are settled in the year in which they arise. The interest rate is 10% on the debt which is redeemable at par in 4 years' time. The debt was issued at a par value of ZMWI,000 and the book value of the debt is ZMW50 milion. The company asset beta is 0.85 and the equity pre miumis 9.5% The interest rate on Government bonds is 7%. Required: (a) Calaulate the Weighted Average Cost of Capital (WACC) using the market values as weighting factors (b) Evaluate the financial viability of the proposed nvestment using the Net Present Value (NPV) method. (c) Calculate the Internal Rate of Retum (IRR) of the investment and advise whether the proposed investm ent is acceptable.

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q