CORPORATE FINANCE MANAGEMENT

An investor is planning to buy an asset which will cost 5000000. The asset has a useful life of 5 years and will have a scrap value of 500000 at the end of the fifth year. There is a 60% chance that the asset will bring in additional revenue of 1500000 per year and a 40% chance that the asset will bring in additional revenue of 1200000 per year for five years and will incur additional costs of 300000 per year for five years. The machine will also require additional investment in working capital of 600000 on installation. The tax rate is given as 40%. Assume that depreciation is provided on straight line basis. The investors required rate of return is given as 10%:

SCHOOL OF BUSINESS AND LEADERSHIP
CORPORATE FINANCE MANAGEMENT
CAT 1 MAY-AUG SEM
2024
Q1
An investor is planning to buy an asset which will cost 5000000. The asset has a useful life of 5 years and
will have a scrap value of 500000 at the end of the fifth year. There is a 60% chance that the asset will
bring in additional revenue of 1500000 per year and a 40% chance that the asset will bring in additional
revenue of 1200000 per year for five years and will incur additional costs of 300000 per year for five
years. The machine will also require additional investment in working capital of 600000 on installation.
The tax rate is given as 40%. Assume that depreciation is provided on straight line basis. The investors
required rate of return is given as 10%:
Required
a. Determine cash flows from this project.
b. Determine the NPV, IRR,PI and PBP of the project.
(6mks)
(6mks)
Q2
Company management normally encounters some challenges in the process of management.
Discuss five challenges of agency theory and how these challenges can be overcome (10mks)
Q3
Dura coat Industries bond has a 10 percent coupon rate and a $1000 face value. Interest is paid
semiannually, and the bond has 20 years to maturity. If investors require a 12% yield.
i.
ii.
Calculate the bond’s value?
Calculate the effective annual yield on the bond?
(4mks)
(4mks)