Questions 2. You are the newly
Questions 2.You are the newly recruited Finance Officer of FYG PharmaceuticalLtd, a household pharmaceutical enterprise based in Kumasi. Youascertained that FYG Pharmaceutical Ltd is considering investingGH¢5,175,000.00 in a COVID-19 related vaccine project that isexpected to yield an average return of 6.67% on the investment forfour years. At the end of this period, the project shall beliquidated for a value determined as 25% of the initial investment.FYG Pharmaceutical Ltd’s weighted average cost of capital (WACC) is10%.
Required:a. With the aid of memo, you are required to submit for theattention of the Finance Director your estimation of the presentvalue of FYG Pharmaceutical Ltd’s cash flow expectations at theend of the fourth ear.
b. In your memo, suggest three (3) potential sourcesof finance for this project. You are to include your possiblerecommendation(s) together with reasons.
c. Differentiate between capital market and primarymarket.
Answer:
Answer to Part a :
Present Value = Cash flows discounted at WACC
i.e. = 5,175,000 * 6.67% * PVAF @ (10% , 4) + 5,175,000 * 25% *PVIF @ (10% , 4)
i.e. = 5,175,000 * 6.67% * 3.17 + 5,175,000 * 25% * 0.683
i.e. = 1,094,196.83 + 883,631.25
i.e. = GH¢ 1,977,828.08
Answer to Part b :
Three potential sources of finance for this project can be :
1. Debt Capital : The company raise debt capital by eithertaking a medium term bank loan or issue debentures to public. Costof debt capital is relatively less than company’s WACC of 10% andhence will be cheaper. Also, its interest cost should be less thanprojects’ average return.
2. Equity Capital : The company can raise equity capital tofinance this project as equity capital has no committed recurringpayments and are to be repaid last in case of liquidation.
3. Preference Share capital : Preference shares can be issued topublic to get funds. This source is a hybrid of debt and equity andhence can be used to combine their benefits.
Answer to Part c :
Capital Market is a market where capital securities like equityshares, bonds, etc. are issued and traded. It consists of Primarymarket and Secondary Market. Primary market is a part of capitalmarket wherein new securities are issued and subscribed throughIPOs (Initial Public Offer) and FPOs (Further Public Offers). It isalso called the new issue market. Secondary market is the stockexchange market wherein securities are traded/exchanged betweenpublic/security holders.
Hence, Primary market is a subset of CapitalMarket.
"Our Prices Start at $11.99. As Our First Client, Use Coupon Code GET15 to claim 15% Discount This Month!!"
