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FIN 204: Financial Management       Final Take-Home Exam Spring 2020            

Date and Time for opening the Question Paper: April 28, 2020   12.00 P.M (Noon) 

Date and Time for uploading Answer scripts:    April 30, 2020    12:00 P.M (Noon)              

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Question No 1: (Marks 12)

Use the data set which is labeled on your name in Excel sheet. Names are given alphabetical from A to Z. [ Click on left or right to find the sheet with your name]

Al Abri Gold Mining

Ahmed Al Abri, the owner of Al Abri Gold Mining, is evaluating new gold mines in South Africa. Mohamed Al Balushy, the company’s geologist, has just finished her analysis of the mine site. He has estimated that the South mine would be productive for eight years, North – nine years, East – ten years. After which the gold would be completely mined. Mohamed has taken an estimate of the gold deposit to Zainab Al Farsi, the company’s financial officer. Ahmed asked Zainab to conduct an analysis of the new mines (South, North and East) and provide her recommendation on whether the company should open a new mine and which project is better than others.

Zainab has used the estimates provided by Mohamed to determine the revenues that could be expected from the mine. She has also projected the expenses of opening the mines and the annual operating expenses If the company opens a mine, it will have certain large expenses for the purchase and installation of equipment, and at the end of the project the company will incur some expenses associated with the liquidation of the mine. The expected cash flows each year from the mine for project South mine, North mine and East mine are shown in the tables.

1. Calculate the payback period, internal rate of return, net present value, profitability index of proposed projects. Determine which project is better and explain why.
2. Based on your analysis, explain what advantages and disadvantages each method of evaluating investment projects has.
3. If the company finds financial resources for the development of two mines, which two projects would you recommend. Provided that the required rate of return is reduced by 2%.

Question No 2. (Marks 4)

Dah Al Naabi and Mouza Ali, the owners of April Air, have decided to expand their operations. They instructed their newly hired financial analyst, Masaod Al Said, to enlist an underwriter to help sell $20,000,000 in new 10-year bonds to finance construction. Masaod want to know which bond feature April Air should consider and what coupon rate the issue will likely have.

Although Masaod is aware of the bond features, he is uncertain as to the cost and benefits of some features, so he isn’t clear on how each feature would affect the coupon rate of the bond issue.

1. You are his assistant, and he has asked you to prepare a memo to him describing the effect of each of the following bond feature on the coupon rate of the bond.
2. He would also like you to list any advantages and disadvantages of each feature.

• The security of the bond, that is, whether the bond has collateral.
• The seniority of the bond.
• The presence of a sinking fund.
• A call provision with specified call dates and call prices.

Question No 3. (Marks 4)

Sahara Inc., was founded nine years ago by brother and sister Fatema and Muhanad Al Balushi. The company manufactures and installs commercial heating, ventilation, and cooling units. Sahara Inc. has experience rapid growth because of a proprietary technology that increases the energy efficiency of its units. The company is equally owned by Fatema and Muhanad. The original partnership agreement between the siblings gave each 50,000 shares of stock. In the event either wished to sell stock, the shares first had to be offered to the other at a discounted price.

Although neither sibling wants to sell, they have decided they should value their holdings in the company. To get started, they have gathered the following information about their main competitors:

	EPS Earnings per share	DPS Dividend per share	Stock price	ROE Return on equity	R Required return
Arctic Inc.	$0.82	$0.16	$15.19	11%	10%
Heating & Cooling Inc.	$1.32	$0.52	$12.49	14%	13%
Breese Inc.	$ -0.47	$0.40	$11.47	14%	12%
Industry Average	$0.56	$0.36	$13.05	13%	11.7%

Expert Breese Inc. negative earnings per share were the result of an accounting wright-off last year. Without the wright-off, earnings per share for the company would have been $0.97.

Last year, Sahara Inc., had an EPS of $4.32 and paid dividend to Fatema and Muhanad of $54,000 each. The company also had a return on equity of 25%. The siblings believe that 20% is an appropriate required return for the company:

1. Assuming Sahara Inc., use the Zero Growth model, what is the value of share of stock today (P₀)? Compare with stock prices for other companies and the industry average and give recommendations on changing dividend policy.

• To verify the calculations, Fatema and Muhanad have hired Josh Smith as a consultant. Josh has examined the company’s financial statements, as well as examining its competitors. Although Sahara Inc., currently has a technological advantage, his research indicates that other companies are investigating methods to improve efficiency. Josh believes that the required return used by the company is too high. He believes the industry average required return is more appropriate. Under this assumption, what is your estimate of Sahara stock price today? Do you agree with Josh’s analysis? Justify your answer.

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