ARAB OPEN UNIVERSITY

FACULTY OF BUSINESS STUDIES

(MBA) Course Code: BB831
Course Title: Corporate Finance
TUTOR MARKED ASSESSMENT –Fall 2021/2022 SEMESTER I

BB831 TMA 02- Fall 2021-2022 Semester I

Cut-off Date _______________________

__________________________________

Please read these instructions carefully, and contact your tutor if you require any further
clarifications. You should submit your completed assignment to your tutor to arrive no later than
the cut-off Date ___________________________

Please use standard A4 size paper for submitting the hard copy of your TMA01. Your name,
personal identifier, course and assignment numbers must appear at the top of each sheet. A soft
copy of your TMA01 must be uploaded to the university moodle within the indicated cut-off
date. The hard & soft copies must be identical. Please leave wide margins and space at the end of
each sheet for tutor comments. It is better to use double spacing so that you can easily handwrite
corrections to your drafts and tutors have space to include their feedback on the script. Start each
question in the assignment on a new page.

Completing and sending your assignments

When you have completed your TMA01, you must fill in the assignment form (PT3), taking care
to fill all information correctly including your personal identifier, course code, section & tutor,
and assignment numbers. Each TMA01 and its PT3 form should be uploaded on the AOU branch
moodle within the cut-off date. Late submissions require approval from the branch course
coordinator and will be subject to grade deductions. All assignments are treated in strict
confidence.
In all your analyses and discussions, you should make sure that your arguments are coherent and
rooted in the frameworks we will be learning in this course. Moreover, you are encouraged to
develop and expand your own ideas and engage in a meaningful debate. Speculations and/or
hypothetical conceptions you might have regarding the firm will not help you for this assignment
unless you support them with sound analyses. If you feel that you are unable to meet the cut-off
date of the TMA01 because of unusual circumstances, please contact your tutor as soon as
possible to discuss a possible extension to the cut-off date.

1 | Course Code: BB831 TMA02 Fall 2021-2022 Semester I

Plagiarism

The Arab Open University Definitions of cheating and plagiarism

According to the Arab Open University By-laws, “The following acts represent cases of cheating
and plagiarism:

 Verbatim copying of printed material and submitting them as part of TMAs without
proper academic acknowledgement and documentation.
 Verbatim copying of material from the Internet, including tables and graphics.
 Copying other students’ notes or reports.
 Using paid or unpaid material prepared for the student by individuals or firms.
 Utilization of, or proceeding to utilize, contraband materials or devices in examinations.”

Penalty on plagiarism
The following is the standard plagiarism penalty applied across branches as per Article 11 of the
university by-laws:
1) Awarding of zero for a TMA wherein more than 20% of the content is plagiarized.
2) Documentation of warning in student record.
3) Failure in the course to dismissal from the University.
All University programmes are required to apply penalties that are consistent with the
University by laws.

Examples of Plagiarism
Copying from a single or multiple sources, this is where the student uses one or more of the
following as the basis for the whole, or a good part, of the assignment:
 Published or unpublished books, articles or reports
 The Internet
 The media (e.g.TV programmes, radio programmes or newspaper articles)
 An essay from an essay bank
 A piece of work previously submitted by another student
 Copying from a text which is about to be submitted for the same assignment

In your TMA, you should have explored both academic (e.g. journal articles) and non- academic
services (e.g., websites), examining the underlying assumptions of the theory or model you
chose. You should have also identified the benefits and challenges, weaknesses and strengths of
the models and theories.

 Question 1 (50 marks)

2 | Course Code: BB831 TMA02 Fall 2021-2022 Semester I
Billingham Packaging is considering expanding its production capacity by purchasing a new
machine, the XC-750. The cost of the XC-750 is $2.75 million. Unfortunately, installing this
machine will take several months and will partially disrupt production. The firm has just
completed a $50,000 feasibility study to analyze the decision to buy the XC-750, resulting in the
following estimates:
■ Marketing: Once the XC-750 is operating next year, the extra capacity is expected to
generate $10 million per year in additional sales, which will continue for the 10-year
life of the machine.
■ Operations: The disruption caused by the installation will decrease sales by $5
million this year. Once the machine is operating next year, the cost of goods for the
products produced by the XC-750 is expected to be 70% of their sale price. The
increased production will require additional inventory on hand of $1 million to be
added in year 0 and depleted in year 10.
■ Human Resources: The expansion will require additional sales and administrative
personnel at a cost of $2 million per year.
■ Accounting: The XC-750 will be depreciated via the straight-line method over the 10-
year life of the machine. The firm expects receivables from the new sales to be 15%
of revenues and payables to be 10% of the cost of goods sold. Billingham’s marginal
corporate tax rate is 35%.
a. Determine the incremental earnings from the purchase of the XC-750 (10 marks).
b. Determine the free cash flow from the purchase of the XC-750. (10 marks)
c. If the appropriate cost of capital for the expansion is 10%, compute the NPV of the
purchase. (10 marks)
d. While the expected new sales will be $10 million per year from the expansion,
estimates range from $8 million to $12 million. What is the NPV in the worst case? In
the best case? (10 marks)
e. What is the break-even level of new sales from the expansion? What is the break-
even level for the cost of goods sold? (5 marks)
f. Billingham could instead purchase the XC-900, which offers even greater capacity.
The cost of the XC-900 is $4 million. The extra capacity would not be useful in the
first two years of operation, but would allow for additional sales in years 3–10. What
level of additional sales (above the $10 million expected for the XC-750) per year in
those years would justify purchasing the larger machine? (5 marks)

 Question 2 (50 marks)

Use the tables for the question(s) below.
3 | Course Code: BB831 TMA02 Fall 2021-2022 Semester I
Estimated 2005 Income Statement and Balance Sheet Data for Ideko Corporation
Year 2005 Year 2005
Income Statement ($ 000) Balance Sheet ($ 000)
1 Sales 75,000 Assets
2 Cost of Goods Sold 1 Cash and Equivalents 12,664
3 Raw Materials (16,000) 2 Accounts Receivable 18,493
4 Direct Labor Costs (18,000) 3 Inventories 6,165
5 Gross Profit 1,000 4 Total Current Assets 37,322
6 Sales and Marketing (11,250) 5 Property, Plant, and Equipment 49,500
7 Administrative (13,500) 6 Goodwill ---
8 EBITDA 16,250 7 Total Assets 86,822
9 Depreciation (5,500) Liabilities and Stockholder's Equity
10 EBIT 10,750 8 Accounts Payable 4,654
11 Interest Expense (net) (75) 9 Debt 4,500
12 Pre-tax Income 10,675 10 Total Liabilities 9,154
13 Income Tax (3,736) 11 Stockholder's Equity 77,668
14 Net Income 6,939 12 Total Liabilities and Equity 86,822

The following are financial ratios for three comparable companies:

Ratio Oakley, Inc. Luxottica Group Nike, Inc.
P/E 24.8x 28x 18.2x
EV/Sales 2x 2.7x 1.5x
EV/EBITDA 11.6x 14.4x 9.3x
EBITDA/Sales 17.0% 18.5% 15.9

1. Based upon the average P/E ratio of the comparable firms, Ideko's target market value of
equity is closest to (5 marks):
2. Based upon the average EV/Sales ratio of the comparable firms, Ideko's target economic
value is closest to (5 marks):
3. Based upon the average EV/Sales ratio of the comparable firms, if Ideko holds $6.5
million of cash in excess of its working capital needs, then Ideko's target market value of
equity is closest to (5 marks):
4. Based upon the average EV/EBITDA ratio of the comparable firms, Ideko's target
economic value is closest to (5 marks):
5. Based upon the average EV/EBITDA ratio of the comparable firms, if Ideko holds $6.5
million of cash in excess of its working capital needs, then Ideko's target market value of
equity is closest to (5 marks):

6. What range for the market value of equity for Ideko is implied by the range of P/E
multiples for the comparable firms? (5 marks)
7. What range for the market value of equity for Ideko is implied by the range of EV/Sales
4 | Course Code: BB831 TMA02 Fall 2021-2022 Semester I
 multiples for the comparable firms if Ideko holds $6.5 million of cash in excess of its
working capital needs? (10 marks)
8. What range for the market value of equity for Ideko is implied by the range of
EV/EBITDA multiples for the comparable firms if Ideko holds $6.5 million of cash in
excess of its working capital needs? (10 marks)

5 | Course Code: BB831 TMA02 Fall 2021-2022 Semester I

 Faculty of Business Studies Spring
2020/2021
Arab Open University

Harvard Style - References / bibliography

How -to guide

Note: It is a requirement that all students include a header/footer of the following information on
every single page of the TMA: Name, ID, Course Code, TMA #, Tutor name, section, and
semester.

 You have to use the Times New Roman Font Size 12 (except for the cover page).
 Line spacing should be 1.5
 All pages should be numbered
 Keep wide margins for your instructors' comments
 Align your text to the left. Don’t justify leaving spaces between words

Harvard Style Referencing:

 There are various ways of setting out references / bibliographies for an assignment.
 “Harvard Style” is a generic term for any referencing style which uses in-text references such as
(Smith, 1999), and a reference list at the end of the document organized by author name and year
of publication.

In this guide, we are using a “Harvard Style” which is based on the author-date system for books, articles
and “non-books”.
NOTE: When you write your list of references/bibliography, please keep in mind the following
points:
 Your bibliography should identify an item (e.g. book, journal article, cassette tape, film, or
internet site) in sufficient detail so that others may identify it and consult it.

6 | Course Code: BB831 TMA02 Fall 2021-2022 Semester I

  Your bibliography should appear at the end of your TMA with entries listed alphabetically.
 If you have used sources from the Internet, these should be listed in your bibliography.

FOR A BOOK
The details required in order are:
1. name/s of author/s, editor/s, compiler/s or the institution responsible
2. year of publication
3. title of publication and subtitle if any (all titles must be underlined or italicized)
4. series title and individual volume if any
5. edition, if other than first
6. publisher
7. place of publication
8. page number(s) if applicable
 One author
Berkman, RI 1994, Find it fast: how to uncover expert information on any subject, Harper
Perennial, New York.

 Two or more authors:

Cengel, YA & Boles, MA 1994, Thermodynamics: an engineering approach, 2nd edn, McGraw
Hill, London.
Cheek, J, Doskatsch, I, Hill, P & Walsh, L 1995, Finding out: information literacy for the 21st
century, MacMillan Education Australia, South Melbourne.
 Editor(s)
Pike, ER & Sarkar, S (eds) 1986, Frontiers in quantum optics, Adam Hilger, Bristol. Jackson, JA (ed.)
1997, Glossary of geology, 4th edn, American Geological Institute, Alexandria, Va.
 Sponsored by institution, corporation or other organization
Institution of Engineers, Australia 1994, Code of ethics, Institution of Engineers, Australia, Barton,
A.C.T
 Series
Bhattacharjee, M 1998, Notes of infinite permutation groups, Lecture notes in mathematics no.1698,
Springer, New York.
 Edition
Zumdahl, SS 1997, Chemistry, 4th edn, Houghton Mifflin, Boston.
 Chapter or part of a book to which a number of authors have contributed
Bernstein, D 1995, ‘Transportation planning’, in WF Chen (ed.), The civil engineering handbook,
CRC Press, Boca Raton.
 No author or editor
7 | Course Code: BB831 TMA02 Fall 2021-2022 Semester I
Kempe's engineer's year-book 1992, Morgan-Grampian, London.
FOR AN ARTICLE
The details required, in order, are:
1. name/s of author/s of the article
2. year of publication
3. title of article, in single quotation marks
4. title of periodical (underlined or italicised)
5. volume number
6. issue (or part) number
7. page number(s)
 Journal article
Huffman, LM 1996, ‘Processing whey protein for use as a food ingredient’, Food Technology, vol. 50, no.
2, pp. 49-52

 Newspaper article
Simpson, L 1997, ‘Tasmania’s railway goes private‘, Australian Financial Review, 13 October, p.
10
FOR A NON- BOOK
NON-BOOK
The details required are the same as for a book, with the form of the item (eg video recording, tape,
computer file, etc.) indicated after the year.
Get the facts (and get them organized) 1990, video recording, Appleseed Productions, Williamstown, Vic
FORM OF ITEM
Dr Brain thinking games 1998, CD-ROM, Knowledge Adventure Inc., Torrance, California
FOR WEB SITES AND OTHER ELECTRONIC SOURCES
􀂄 FOR WEB SITES AND OTHER ELECTRONIC SOURCES
 This could include sources from full text compact disk products, electronic journals or other
sources from the Internet.
 The basic form of the citations follow the principles listed for print sources (see above)
1. name/s of author/s
2. date of publication Note: If you cannot establish the date of publication, use n.d. (no date).
3. title of publication
4. edition, if other than first
5. type of medium, if necessary
6. date item viewed
7. name or site address on internet (if applicable)
Weibel, S 1995, ‘Metadata: the foundations of resource description’, D-lib Magazine, viewed 7
January 1997, <http://www.dlib.org/dlib/July95/07weibel.html>.
ASTEC 1994, The networked nation, Australian Science, Technology and Engineering Council,
8 | Course Code: BB831 TMA02 Fall 2021-2022 Semester I
Canberra, viewed 7 May 1997, <http://astec.gov.au/astec/net_nation/contents.html>
 If no author is given, the title is used as the first element of a citation.
Dr Brain thinking games 1998, CD-ROM, Knowledge Adventure Inc., Torrance, California
REFERENCES IN THE TEXT OF YOUR ESSAY
FERENCES IN THE TEXT OF YOUR ESSAY
 In an author-date style, a textual citation generally requires only the name of the author(s) and the
year of publication (and specific page(s) if necessary).

 This may appear at the end of a sentence, before the full stop.
Examples:
It is futile to maintain that the sexes are interchangeable (Moir & Jessel 1991).
It is futile to maintain that the sexes are interchangeable (Moir & Jessel 1991, p.94).
 Alternatively, the author’s surname may be integrated into the text, followed by the year of
publication in parentheses.
Examples:
Moir and Jessel (1991) have shown that it is futile to maintain that the sexes are interchangeable.
Moir and Jessel (1991, pp. 93-4) have shown that it is futile to maintain that the sexes are
interchangeable.
 If two or more works by different authors are cited at the same time, separate them with a
semicolon
Example:
The implications for land degradation have been much debated (Malinowski, Miller & Gupta 1995;
Thomson 1999).
 If two or more works by the same author are cited at the same time, do not repeat the author's
name. Separate the years of publication by a comma
 Alternatively, the author’s surname may be integrated into the text, followed by the year of
publication in parentheses.
Example:
Subsequent investigation confirmed these results (Watson & Clark 1996, 1998).
Public housing remains a neglected area (ACOSS 1997a, 1997b).
 If there are more than three authors, list only the first, followed by 'et al.'
Example:
Other researchers have questioned these findings (Larson et al. 1987).
 If you cannot establish the year of publication, use 'n.d.' (no date).
Example:
Recent advances have been made in this area (Bolton n.d.).
 If there is no author or authoring body, cite the work by title, in italics.
Example:
In military settings, leadership acquires a different significance (Be, know, do: leadership the Army
way, 2004).

9 | Course Code: BB831 TMA02 Fall 2021-2022 Semester I