**ACC501 Business Finance Assignment 1 Solution & Discussion Spring 2020**

**ACC501 Assignment 1 Solution idea:**

**Question No 1:**

Star Cement Limited is a leading cement manufacturer in the country. Presently, it holds the majority of the industry share in black cement. In recent years, the company has seen rapid growth in the sale of white cement - its new product into its existing product line. This white cement is considered as very effective for removing salinity in walls. In the company’s board meeting held at the beginning of the year, it has been decided to pay a dividend of Rs. 2.50 per share at the year-end. At the end of the current year, the yearly growth rate of 20% has also been estimated for the next four years followed by a constant growth rate of 15%.

**Required:**

- Determine the present value of the company’s share using 18% required rate of return.
**(10 Marks)** - What would be the total return on the stock if the stock price is Rs. 30 and the current dividend is Rs. 3 which is expected to grow at 15%.
**(3 Marks)**

**Solution:**

D_{1}=D_{0}x(1+R)^{1}

=2.5x(1+.20)^{1}

=3

D_{2}=D_{0}x(1+R)^{2}

=2.5x(1+.20)^{2}

=3.6

D_{3}=D_{0}x(1+R)^{3}

=2.5x(1+.20)^{3}

=4.32

D_{4}=D_{0}x(1+R)^{4}

=2.5x(1+.20)^{4}

=5.18

D_{5}=D_{0}x(1+R)^{1}

=2.5x(1+.15)^{1}

=5.95

Price

P_{4}=D_{5}xR-G

=5.95x.18-.15

=198

Present value

P_{4}x(1+.18)^{4}

=198x(1+.18)^{4}

=382

**Part 2**

Total return=D1/P0 +g*100

=3/30 +0.15*100

=.25*100

=25%

**Question 2**

In continuation of the Question 1, assume that the company decides to establish a new production plant to smooth manufacturing process of its white cement. This plant requires an investment of Rs. 12 million. The company estimates Rs. 18M as net income and Rs. 20M as annual cash flows from this investment.

**Required:**

- Determine the following:
**a)**The time period required to recover the initial investment.**(3 Marks)****b)**Average accounting return (AAR) for the project.**(3 Marks)**- Does the project is feasible for the company based upon the results of parts A & B above.
**(1 Mark)**

**Solution:**

**A: Total time period=investment/cash flow**

=12/20

=0.6 years

**B: Average accounting return (AAR)**

Average net income=18/4=3.5

Average book value=12/2=6

AAR=Average net income/average net value

=3.5/6

=58.33%

**C: Does the project is feasible for the company based upon the results of parts A & B above.**

Because total time period is low So this project is feasible

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**ACC501 Business Finance Assignment 1 Solution & Discussion Spring 2020**

**ACC501 Assignment 1 Solution idea:**

QueryVU WhatsApp Groups subject wise : Join Now