FollowingarethesetsofinformationaboutSumiManufacturingCompany.Youarerequired tor
ID: 2771065 • Letter: F
Question
FollowingarethesetsofinformationaboutSumiManufacturingCompany.Youarerequiredtoreadandunderstandtheinformationcarefullyandthenattemptthequestionsprovidedatthe
end.
Set(1):
The Company is considering replacing one of its machines witheither of two new
machines – machine X or machine Y. Machine X is a highlyautomated, computer
controlledmachine;machineYisalessexpensivemachinethatusesstandardtechnology.estimatesofthe
Toanalyzethesealternatives,Mr.Hamid,afinancialanalyst,prepared
initialinvestmentandexpectedcashinflowsassociatedwitheachmachine,whichare
showninthefollowingtable: MachineX MachineY
InitialInvestment(II) Rs.700,000 Rs.400,000
Years(t) CashInflows(CF)
t
1 Rs.130,000 Rs.90,000
2180,000120,000
3170,000 100,000
4165,00085,000
5450,000205,000NotethatMr.Hamidplanstoanalyzebothmachinesovera5yearperiod.Attheendof
thattime,themachineswouldbesold,thusaccountingforthelargefifthyearcash
inflows.Hedecidestoapplyfirm’s12percentcostofcapitalforanalyzingthemachines. Set(2):
Mr.AnwarBaig,thechieffinancialofficerforSumiManufacturingCompanyhasgathered
thefollowingrelevantdataonthefirm’sbondsandstockstoperformsomenecessary
analysis:
BONDS:ThefirmhasaRs.1,000parvaluebondwithan9percentcouponinterestrateremainingtoitsmaturitydate.
outstanding.Thebondhas10years
STOCKS:Thefirm’scommonstockcurrentlypaysanannualdividendofRs.1.50pershare.
Therequiredreturnonthecommonstockis10percent.
Set(3):
IfyouanalyzethecapitalstructureoftheCompany,youwillfindfollowingTargetcapital
structure:
Debentures Rs.3,000,000
PreferredStock Rs.480,000
CommonStock Rs.6,520,000
Total Rs.10,000,000
Undertheprevailingmarketconditions,financialanalystshaveestimatedariskfreerateof
returnof10%andamarketrateofreturnof14%.Thecorporation’scommonstockshave
)of1.5.Bondscarryaninterestrateof9.5%.Preferredstockshaveareturnof
9.5%.Preferredstockshaveareturnof
10%p.a.andcorporatetaxrateis40%.
Basedontheinformationprovidedinset(1),answerthefollowingquestions:
(Choosethemostappropriateanswerfromthegivenoptions) 1. WhatisthepaybackperiodforMachineX?
a. 3.00Years
b. 3.80Years
c. 4.12Years
d. 4.49Years
2. WhatisthepaybackperiodforMachineY?
a. 3.10Years
b. 3.85Years
c. 4.02Years
d. 4.12Years
3. WhatistheNetPresentValue(NPV)forMachineX?
a. Rs.17,539
b. Rs.25,120
c. Rs.40,772
d. Rs.45,956 4. WhatistheNetPresentValue(NPV)forMachineY?
a. Rs.11,085
b. Rs.17,539
c. Rs.25,132
d. Rs.40,772
5. WhatistheInternalRateofReturn(IRR)forMachineX?
a. 12.1%
b. 13.9%
c. 15.3%
d. 16.1%
6. WhatistheInternalRateofReturn(IRR)forMachineY?
a. 12.4%
b. 13.6%
c. 15.3%
d. 16.1%
7. Wh fitabilityIndex(PI)forMachineX?atisthePro
.a 1.00
b. 1.02
c. 1.04
d. 1.06 8. WhatistheProfitabilityIndex(PI)forMachineY?
.a 1.01
b. 1.02
c. 1.03
d. 1.04
9. Whshouldbeselectedifboththeprojectsaremutuallyexclusive?ichmachine(s)X. (a)Machine
. b) MachineY
c. BothmachineXandmachineYXnorMachineY(d). Neithermachine
10. Whboththeprojectsareindependent?ichMachine(s)shouldbeselectedif
a. MachineX
. b MachineY
c. BothmachineXandmachineYXnorMachineY(d). Neithermachine 11.Ifinterestispaidannually,whatisthevalueofthebondwhentherequiredstatedreturn
is9percent?
a. Rs.830
b. Rs.1,000
c. Rs.1,14
d. Rs.1,295
12. Ifiny,whatisthevalueofthebondwhentherequiredstatedreturnterestispaidannuall
is12percent?
.a Rs.830
b. Rs.966(c). Rs.1,068(d). Rs.1,123
13. Usi required return, what is the bond’s value wheninterest is paidng 8 percent
semiannually?
.a Rs.830
b. Rs.966(c). Rs.1,068(d). Rs.1,123 ifdividendsareexpectedtogrowatanannual
14. Wh valueofcommonstockatwillbethe
rate nttoinfinity?ofzeroperce
.a Rs.12.5
b. Rs.15.0
c. Rs.22.0
d. Rs.31.5 15.Whvalueofcommonstockifdividendsareexpectedtogrowataconstantatwillbethe
ann percenttoinfinity?ualrateof5
. a Rs.12.5
b. Rs.15.0
c. Rs.22.0
d. Rs.31.5 Basedormationprovidedinset(3),answerthefollowingquestions:ontheinf
(Choos propriateanswerfromthegivenoptions)ethemostap
16. Whatpercentageoffinancingincludescommonstocks?
a. 4.80%
b. 30.0%
c. 50.0%
d. 65.2% 17. Whcentageoffinancingthatisdebt?atistheper
a. 4.80%
. b) 30.0%
c. 50.0%
65.2%
d.
18. WhllowingcapitalsourceisNOTincludedinWACCcalculation?ichofthefo
nStocka. Commo
. PreferredStockb
c. Bonds
noptionsd. Noneofthegive 19. Wh tofcommonstock?atisthecos
a. 9.50%
.b 10.0%
c. 12.5%
d. 16.0%
20. Whedaveragecostofcapital(WACC)forSumiManufacturingCompany?atisweight
a. 4.80%
.b 10.4%
c. 12.6%
d. 14.2%
FollowingarethesetsofinformationaboutSumiManufacturingCompany.Youarerequired
toreadandunderstandtheinformationcarefullyandthenattemptthequestionsprovidedatthe
end.
Set(1):
The Company is considering replacing one of its machines witheither of two new
machines – machine X or machine Y. Machine X is a highlyautomated, computer
controlledmachine;machineYisalessexpensivemachinethatusesstandardtechnology.estimatesofthe
Toanalyzethesealternatives,Mr.Hamid,afinancialanalyst,prepared
initialinvestmentandexpectedcashinflowsassociatedwitheachmachine,whichare
showninthefollowingtable: MachineX MachineY
InitialInvestment(II) Rs.700,000 Rs.400,000
Years(t) CashInflows(CF)
t
1 Rs.130,000 Rs.90,000
2180,000120,000
3170,000 100,000
4165,00085,000
5450,000205,000NotethatMr.Hamidplanstoanalyzebothmachinesovera5yearperiod.Attheendof
thattime,themachineswouldbesold,thusaccountingforthelargefifthyearcash
inflows.Hedecidestoapplyfirm’s12percentcostofcapitalforanalyzingthemachines. Set(2):
Mr.AnwarBaig,thechieffinancialofficerforSumiManufacturingCompanyhasgathered
thefollowingrelevantdataonthefirm’sbondsandstockstoperformsomenecessary
analysis:
BONDS:ThefirmhasaRs.1,000parvaluebondwithan9percentcouponinterestrateremainingtoitsmaturitydate.
outstanding.Thebondhas10years
STOCKS:Thefirm’scommonstockcurrentlypaysanannualdividendofRs.1.50pershare.
Therequiredreturnonthecommonstockis10percent.
Set(3):
IfyouanalyzethecapitalstructureoftheCompany,youwillfindfollowingTargetcapital
structure:
Debentures Rs.3,000,000
PreferredStock Rs.480,000
CommonStock Rs.6,520,000
Total Rs.10,000,000
Undertheprevailingmarketconditions,financialanalystshaveestimatedariskfreerateof
returnof10%andamarketrateofreturnof14%.Thecorporation’scommonstockshave
)of1.5.Bondscarryaninterestrateof9.5%.Preferredstockshaveareturnof
9.5%.Preferredstockshaveareturnof
10%p.a.andcorporatetaxrateis40%.
Basedontheinformationprovidedinset(1),answerthefollowingquestions:
(Choosethemostappropriateanswerfromthegivenoptions) 1. WhatisthepaybackperiodforMachineX?
a. 3.00Years
b. 3.80Years
c. 4.12Years
d. 4.49Years
2. WhatisthepaybackperiodforMachineY?
a. 3.10Years
b. 3.85Years
c. 4.02Years
d. 4.12Years
3. WhatistheNetPresentValue(NPV)forMachineX?
a. Rs.17,539
b. Rs.25,120
c. Rs.40,772
d. Rs.45,956 4. WhatistheNetPresentValue(NPV)forMachineY?
a. Rs.11,085
b. Rs.17,539
c. Rs.25,132
d. Rs.40,772
5. WhatistheInternalRateofReturn(IRR)forMachineX?
a. 12.1%
b. 13.9%
c. 15.3%
d. 16.1%
6. WhatistheInternalRateofReturn(IRR)forMachineY?
a. 12.4%
b. 13.6%
c. 15.3%
d. 16.1%
7. Wh fitabilityIndex(PI)forMachineX?atisthePro
.a 1.00
b. 1.02
c. 1.04
d. 1.06 8. WhatistheProfitabilityIndex(PI)forMachineY?
.a 1.01
b. 1.02
c. 1.03
d. 1.04
9. Whshouldbeselectedifboththeprojectsaremutuallyexclusive?ichmachine(s)X. (a)Machine
. b) MachineY
c. BothmachineXandmachineYXnorMachineY(d). Neithermachine
10. Whboththeprojectsareindependent?ichMachine(s)shouldbeselectedif
a. MachineX
. b MachineY
c. BothmachineXandmachineYXnorMachineY(d). Neithermachine 11.Ifinterestispaidannually,whatisthevalueofthebondwhentherequiredstatedreturn
is9percent?
a. Rs.830
b. Rs.1,000
c. Rs.1,14
d. Rs.1,295
12. Ifiny,whatisthevalueofthebondwhentherequiredstatedreturnterestispaidannuall
is12percent?
.a Rs.830
b. Rs.966(c). Rs.1,068(d). Rs.1,123
13. Usi required return, what is the bond’s value wheninterest is paidng 8 percent
semiannually?
.a Rs.830
b. Rs.966(c). Rs.1,068(d). Rs.1,123 ifdividendsareexpectedtogrowatanannual
14. Wh valueofcommonstockatwillbethe
rate nttoinfinity?ofzeroperce
.a Rs.12.5
b. Rs.15.0
c. Rs.22.0
d. Rs.31.5 15.Whvalueofcommonstockifdividendsareexpectedtogrowataconstantatwillbethe
ann percenttoinfinity?ualrateof5
. a Rs.12.5
b. Rs.15.0
c. Rs.22.0
d. Rs.31.5 Basedormationprovidedinset(3),answerthefollowingquestions:ontheinf
(Choos propriateanswerfromthegivenoptions)ethemostap
16. Whatpercentageoffinancingincludescommonstocks?
a. 4.80%
b. 30.0%
c. 50.0%
d. 65.2% 17. Whcentageoffinancingthatisdebt?atistheper
a. 4.80%
. b) 30.0%
c. 50.0%
65.2%
d.
18. WhllowingcapitalsourceisNOTincludedinWACCcalculation?ichofthefo
nStocka. Commo
. PreferredStockb
c. Bonds
noptionsd. Noneofthegive 19. Wh tofcommonstock?atisthecos
a. 9.50%
.b 10.0%
c. 12.5%
d. 16.0%
20. Whedaveragecostofcapital(WACC)forSumiManufacturingCompany?atisweight
a. 4.80%
.b 10.4%
c. 12.6%
d. 14.2%
Set(2):
Mr.AnwarBaig,thechieffinancialofficerforSumiManufacturingCompanyhasgathered
thefollowingrelevantdataonthefirm’sbondsandstockstoperformsomenecessary
analysis:
BONDS:ThefirmhasaRs.1,000parvaluebondwithan9percentcouponinterestrateremainingtoitsmaturitydate.
outstanding.Thebondhas10years
STOCKS:Thefirm’scommonstockcurrentlypaysanannualdividendofRs.1.50pershare.
Therequiredreturnonthecommonstockis10percent.
Set(3):
IfyouanalyzethecapitalstructureoftheCompany,youwillfindfollowingTargetcapital
structure:
Debentures Rs.3,000,000
PreferredStock Rs.480,000
CommonStock Rs.6,520,000
Total Rs.10,000,000
Undertheprevailingmarketconditions,financialanalystshaveestimatedariskfreerateof
returnof10%andamarketrateofreturnof14%.Thecorporation’scommonstockshave
)of1.5.Bondscarryaninterestrateof9.5%.Preferredstockshaveareturnof
9.5%.Preferredstockshaveareturnof
10%p.a.andcorporatetaxrateis40%.
Basedontheinformationprovidedinset(1),answerthefollowingquestions:
(Choosethemostappropriateanswerfromthegivenoptions) 1. WhatisthepaybackperiodforMachineX?
a. 3.00Years
b. 3.80Years
c. 4.12Years
d. 4.49Years
2. WhatisthepaybackperiodforMachineY?
a. 3.10Years
b. 3.85Years
c. 4.02Years
d. 4.12Years
3. WhatistheNetPresentValue(NPV)forMachineX?
a. Rs.17,539
b. Rs.25,120
c. Rs.40,772
d. Rs.45,956 4. WhatistheNetPresentValue(NPV)forMachineY?
a. Rs.11,085
b. Rs.17,539
c. Rs.25,132
d. Rs.40,772
5. WhatistheInternalRateofReturn(IRR)forMachineX?
a. 12.1%
b. 13.9%
c. 15.3%
d. 16.1%
6. WhatistheInternalRateofReturn(IRR)forMachineY?
a. 12.4%
b. 13.6%
c. 15.3%
d. 16.1%
7. Wh fitabilityIndex(PI)forMachineX?atisthePro
.a 1.00
b. 1.02
c. 1.04
d. 1.06 8. WhatistheProfitabilityIndex(PI)forMachineY?
.a 1.01
b. 1.02
c. 1.03
d. 1.04
9. Whshouldbeselectedifboththeprojectsaremutuallyexclusive?ichmachine(s)X. (a)Machine
. b) MachineY
c. BothmachineXandmachineYXnorMachineY(d). Neithermachine
10. Whboththeprojectsareindependent?ichMachine(s)shouldbeselectedif
a. MachineX
. b MachineY
c. BothmachineXandmachineYXnorMachineY(d). Neithermachine 11.Ifinterestispaidannually,whatisthevalueofthebondwhentherequiredstatedreturn
is9percent?
a. Rs.830
b. Rs.1,000
c. Rs.1,14
d. Rs.1,295
12. Ifiny,whatisthevalueofthebondwhentherequiredstatedreturnterestispaidannuall
is12percent?
.a Rs.830
b. Rs.966(c). Rs.1,068(d). Rs.1,123
13. Usi required return, what is the bond’s value wheninterest is paidng 8 percent
semiannually?
.a Rs.830
b. Rs.966(c). Rs.1,068(d). Rs.1,123 ifdividendsareexpectedtogrowatanannual
14. Wh valueofcommonstockatwillbethe
rate nttoinfinity?ofzeroperce
.a Rs.12.5
b. Rs.15.0
c. Rs.22.0
d. Rs.31.5 15.Whvalueofcommonstockifdividendsareexpectedtogrowataconstantatwillbethe
ann percenttoinfinity?ualrateof5
. a Rs.12.5
b. Rs.15.0
c. Rs.22.0
d. Rs.31.5 Basedormationprovidedinset(3),answerthefollowingquestions:ontheinf
(Choos propriateanswerfromthegivenoptions)ethemostap
16. Whatpercentageoffinancingincludescommonstocks?
a. 4.80%
b. 30.0%
c. 50.0%
d. 65.2% 17. Whcentageoffinancingthatisdebt?atistheper
a. 4.80%
. b) 30.0%
c. 50.0%
65.2%
d.
18. WhllowingcapitalsourceisNOTincludedinWACCcalculation?ichofthefo
nStocka. Commo
. PreferredStockb
c. Bonds
noptionsd. Noneofthegive 19. Wh tofcommonstock?atisthecos
a. 9.50%
.b 10.0%
c. 12.5%
d. 16.0%
20. Whedaveragecostofcapital(WACC)forSumiManufacturingCompany?atisweight
a. 4.80%
.b 10.4%
c. 12.6%
d. 14.2%
15.Whvalueofcommonstockifdividendsareexpectedtogrowataconstantatwillbethe
ann percenttoinfinity?ualrateof5
. a Rs.12.5
b. Rs.15.0
c. Rs.22.0
d. Rs.31.5 Basedormationprovidedinset(3),answerthefollowingquestions:ontheinf
(Choos propriateanswerfromthegivenoptions)ethemostap
16. Whatpercentageoffinancingincludescommonstocks?
a. 4.80%
b. 30.0%
c. 50.0%
d. 65.2% 17. Whcentageoffinancingthatisdebt?atistheper
a. 4.80%
. b) 30.0%
c. 50.0%
65.2%
d.
18. WhllowingcapitalsourceisNOTincludedinWACCcalculation?ichofthefo
nStocka. Commo
. PreferredStockb
c. Bonds
noptionsd. Noneofthegive 19. Wh tofcommonstock?atisthecos
a. 9.50%
.b 10.0%
c. 12.5%
d. 16.0%
20. Whedaveragecostofcapital(WACC)forSumiManufacturingCompany?atisweight
a. 4.80%
.b 10.4%
c. 12.6%
d. 14.2%
Explanation / Answer
FollowingarethesetsofinformationaboutSumiManufacturingCompany.Youarerequired tor