FIN1034 / FIN1044 / FEL1234 Fundamentals of Business Finance Assignment 2026

FIN1034 / FIN1044 / FEL1234 Assignment

Respond to ALL 5 questions based on the financial information provided. You are allowed to include any reasonable assumptions necessary, stated clearly to support your findings.

A. Up-front capital outlay (to)

Equipment purchase price: $300,000

Shipping & installation: $20,000

Spare-parts inventory: $15,000 (fully recoverable at t4)

Training & commissioning: $5,000

Total initial cash outflow: $340,000

B. Depreciation & salvage

MACRS vyear class (33%, 45%, 15%, 7%).

Expected salvage value at t4: $42,000 (pre-tax). Tax rate = 30 %.

C. Operating forecasts (all incremental)

Fixed overhead (cash) = S20,OOO p.a. No impact on existing product lines,

D. Working-capital requirement

WC = 15 % ot next year’s sales; fully reversed at t4.

WC is financed 60 % witn free-trade credit (no explicit cost) and 40 % via a revolving bank line at 7 % (before tax).

E. Capital-structure data (market values)

F.  Capital-market parameters

Risk-tree rate (10-yr T-bond) = 4 %

Market risk premium = 6 %

Flotation cost: new common 8 0/0, new preferred 4   new debt 1

Retained earnings available this year: $1.5 m (sufficient for dioFiIm equity portion).

G. Short-term financing choice

Supplier terms: 2/10 net 30. Stretching Alp to 45 days is possible without damaging credit rating but the firm would lose the 2 % discount

Bank offers a $500k committed line at 7% (monthly interest compensating balance

Required

Question 1

i) Compute the project’s WACC using:

(2 marks)

(a) target-market-value weights,

(2 marks)

(b) CAPM cost ot equity,

(2 marks)

(c) after-tax cost of debt.

(2 marks)

(d) Should Pro Enviro issue new common shares or tund equity internally for dioDivQJustity.

(2 marks)

Question 2

(a) Prepare the incremental cash-flow table.

(5 marks)

(b) Explain why an increase in sales can cause negative operating cash flow in the short run for Pro Enviro, despite positive EdlT. Use the cash-flow identity and the concept ot cash conversion cycle.

(5 marks)

Question 3

Calculate:

(c) discounted pay-back at the WACC,

(2 marks)

(d) Explain why the Net Present Value rule is superior to the pay-back rule when Pro Enviro evaluates long-lived recycling extrusion lines. use the concepts of time value of money and reinvestment ot cash flows.

(4 marks)

Question 4

(a) The current bonds nave a YTM of 6.5%. Given the 30% tax rate, the after-tax cost ot debt is low. Should the firm consider increasing its debt weight to take turner advantage ot the tax shield, or would that jeopardize its AA rating?

(5 marks)

(b) Witn a common equity growth rate of 5%, is the retention ot Sl .5 million tor this project more beneficial to shareholders than distributing it as dividends, considering the 10.9% required return on equity calculated via CAPM?

(5 marks)

Question 5

(a) Since the MACRS 3-year schedule tully depreciates the equipment by Year 4 and sales are forecasted to drop by 25% in the final year, should the firm consider a permanent exit at t4 or reinvestment in a newer technology?

(5 marks)

(b) At t4, the firm expects to recover $15,000 in spare parts plus the tull reversal of working capital. Is there a contingency plan it the fully recoverable spare parts are obsolete by the end ot the tour-year term?

(5 marks)

[Total: 50 marks]