Question 1 (8 marks) Question 1 (8 marks) You have just been hired by HTC. The company R&D has found a new, revolutionary concept of ‘super-smartphone’. The study leading to this new approach has cost...

*Online exam, questions will resemble the practice exam attached* answers must be submitted via Microsoft Excel


Question 1 (8 marks) Question 1 (8 marks) You have just been hired by HTC. The company R&D has found a new, revolutionary concept of ‘super-smartphone’. The study leading to this new approach has cost 6 million euros. To implement this new phone HTC needs to spend 50 million euros on a new plant. The plant is linearly depreciated over 6 years. At the end of this 5 years project, the remaining assets will be “sold” at a market value expected to be 10 million euros. The capital gains tax rate is of 35%. The company expects to be able to sell 90000 phones for 500€ each during the first year. The sales are forecasted to grow by 5% every year. Fixed costs will be 12 million euros a year; variable costs are 45% of the price (depreciation excluded). The working capital requirements will be 1 month of turnover. Knowing that the tax rate is 30% and the cost of HTC’s capital was evaluated to be 7%, should the project be undertaken? Justify your recommendation to the board in non technical terms, using a) The net present value b) The payback period c) The internal rate of return. Question 2 (4 marks) Considering the following net dividends expected by the analysts of company M: Y1 Y2 Y3 Y4 33 24 29 31 You expect the dividend to grow after that, forever, at 2.5% a year. Knowing that the cost of equity of M is estimated at 10%, what should be the price of its stock? You believe that the price should be 400€ and that only the first dividend forecasted (33€ in year one) has meaning. What growth rate do you expect for the dividends? Question 3 (3 marks) An analyst explains to you that since your company has a beta of 1.5 and the market price of risk is estimated to be 6%, your stock should have an average yearly return of 13%. What model is he using, and what are the values of the parameters he/she does not speak about? Question 4 (2 marks) List the main methods for appraising an investment project and explain how they relate to each other and why some are preferred. Question 5 (2 marks) Explain why firms frequently try to obtain their financing from markets and list the main forms of such financings. Question 6 (1 mark) If a given bond has a coupon rate of 5% and is emitted at a price of $1012 when its face value is $1000, is the actuarial rate of bonds of similar risks higher or lower than 5%?