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Homework answers / question archive / 1)Suppose that instead of plowing back money bank into lucrative ventures, Tencent China’s management is going to invest in the capital market where expected return on equity (ROE) is 5%, which is below the return of 6
1)Suppose that instead of plowing back money bank into lucrative ventures, Tencent China’s management is going to invest in the capital market where expected return on equity (ROE) is 5%, which is below the return of 6.8% that investors could expect to get from comparable securities. It is expected to pay a dividend next year of RM0.63. Assume the zero growth value of Tencent China is RM13.51. Required: (a) Find the sustainable growth rates for the dividends and earnings in these circumstances. Assume a 68.6% payout ratio. (5 marks) (b) Find the new value of the investment opportunities. Explain why this value is negative despite the positive growth rate in earnings and dividends. (5 marks) (c) If you were a corporate raider, would Tencent China be a good target for a takeover?(5 marks) (d) In your opinion, how would Tencent China’s decision to pay out a higher percentage of its earnings as dividends presently affect its future share price?
2)The Statement of Comprehensive Income for 2019 and 2018 given below were extracted from the accounting records of Teddy Manufactures limited: Teddy Manufactures Limited Statement of Comprehensive Income for the year ended 31 December 2019 2018 Net sales Cost of sales Gross profit (R) 1 003 600 (905 600) (R) 901 300 (744 300) 98 000 (92 000) 157 000 (65 000) Selling, general and administrative expenses Income from operations 6 000 92 000 Other income/expenses Non-operating income Interest expense Profit before tax 124 500 (90 500) 18 000 (57 000) Income tax Net profit 40 000 (12 000) 53 000 (15 900) 28 000 37 100 Required: Refer to the Statement of Comprehensive Income of Teddy Manufacturers Limited for 2019 and 2018 and comment on the performance of the company including the operating profit earned. Take into account that the profit margin (percentage Profit after tax to sales) for the industry was 4.51% in 2018 and 2.60% in 2019. (4) )
3)Marvel Corp buys an automobile at $18,000 list price and $2,000 customs duty. Marvel estimates to use it in next five years, after five years the vehicle's value estimated as $4,000. According to straight line method the vehicle's depreciation expense per year will be:
4)
gennings Mining Co. acquires a silver mine at $24,000,000. Company estimates 60,000 tones silver there. After extracted all the mine residual value estimated is $1,000,000. What's the per tone depletion? *
$233.73
$400
$433
$383.33
5)
On December 31, 2020, the Statement of Financial Position of ABC partnership with profit or loss ratio of 4:1:5 is presented below:
Cash 2,100,000
Liability to third person 5,600,000
Noncash asset 11,200,000
Alucard, capital 4,900,000
Baxia, capital 2,100,000
Claude, capital 700,000
On January 1, 2021, ABC partnership has been subjected to installment liquidation. As of January 31, 2021, the following data concerning liquidation are provided:
o Noncash asset with book value of P8,700,000 has been sold at a loss of P2,800,000.
o Liquidation expense amounting to P560,000 has been incurred for the month of January.
o P840,000 cash has been withheld for future liquidation expense. o P4,200,000 liability has been paid.
What is C’s share in the maximum possible loss on January 31, 2021?
a. P1,050,000 b. P1,680,000 c. P1,820,000 d. P2,100,000
What is the amount received by B on January 31, 2021?
a. P700,000 b. P840,000 c. P1,540,000 d. P2,240,000
What is the cash balance on January 31, 2021?
a. P700,000 b. P840,000 c. P1,540,000 d. P2,240,000
1)(a) Growth= Retention ratio(b) × return on equity(r)
Retention ratio= 1- Payout ratio
= 1- 0.686 = 0.314
Growth = 0.314× 0.05= 1.57%
(b) New Value of investment to be calculated as follows:
Cost of equity(ke) = 6.8%, g= 1.57%
= Dividend per share at next year/ ke - g
= 0.63/ 6.8 - 1.57 = RM 12.04
As Tencent china has return on equity less than cost of equity, value is less than zero growth value. company should focus on increasing payout ratio which will in turn increase the value.
(c) Considering zero growth rate as the actual market rate, Tencent china is not a good target company to takeover at this stage as its market price is more than fair price calculated in part (b) above
(d) Yes, with more dividend and less retention share price will increase in future. Higher the dividend higher the share price.
2)
Calculation of Operating Profit margin ratio for 2018 & 2019
Operating Profit Margin ratio = (Operating profit / Net sales )*100
for 2018 : ( 92000 / 901300 ) * 100 = 10.2%
For 2019 : ( 6000 / 1003600 ) * 100 = 0.597%
The operating Profit margin Ratio of teddy manufactures ltd has decreased from 10.2% in 2018 to 0.597 % in 2019. This is because of increase in operating expenses ( general , administrative & selling expenses ) by 41.5%.
Calculation of Gross profit margin Ratio for 2018 & 2019
Gross profit margin ratio = (Gross profit / net sales ) * 100
For 2018 : (157000 / 901300 ) * 100 = 17.42%
For 2019 : ( 98000 / 1003600 ) *100 = 9.76%
The gross profit margin ratio of teddy manufactures ltd has decreased from 17.42% in 2018 to 9.76% in 2019. Though there was an increase in the net sales by 102300 in 2019 still the Gross profit ratio Declined. The reason for decrease in gross profit ratio is increase in cost of goods sold .
Net Profit margin ratio ( given in question )
for 2018 :4.51%
for 2019 : 2.60%
The net profit margin ratio of teddy manufactures ltd has also decreased from 4.51% in 2018 to 2.6% in 2019.
Increase in cost of goods sold , increase in operating expenses and increase in non operating expenses all resulted in downfall of net profit margin ratio od teddy manufactures ltd.
3)
| Cost of Asset | $ 20,000 |
| Less: Salvage value | $ (4,000) |
| Depreciable value | $ 16,000 |
| Life of Asset | 5 Years |
| Depreciation per year (16,000/5) | $ 3,200 |
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4)please see the attached file.
5)
Please find below link pertaining to the working related to this: https://www.dropbox.com/s/rkagsb80enq8c65/ABC.xlsx?dl=0
Ans 1: C's share of Maximum loss is P2,100,000
Ans 2: Amount received by B is P1,820,000
Ans 3: Cash balance on January 31,2021 is P2,240,000
