ACCACC ACC 25988 1.101.102 1.10 ACC=-$53.382 Decision: Alternative one should be chosen, as its annualised cost of capital is less The cash flows of the project can be summarised as follows Capital Investment 6,000,000) Change in WC (150000(150000 300.000 Revenues 1,0003120,004,056,0003714,592 Cash er Variable Costs 250.00515000 663.063 546.364 Labour costs 108,000 222815 230.613 DEpreciation 1.500.000 5000001500001.50000 Pre-tax Profits (3580008897201.670,1221097615 Taxes 125300311402[5845433841651 let Op. Cash Flows 1267.300 078318 85579 213.450 Net Cash flows (6,150.0001,11730020783182.5855792.513450 s Note: we assume that the company as a whole(inc. the cash flow from the project) will be profitable in Using the nominal discount rate of 12%, the project NPV is-$57, 881 Question 4 a. Because we are considering company managers here, we are talking about strong form efficiency Because the observation states that managers are successful in exploiting their(presumably) private information, it must be that their company's share price did not reflect the information when managers traded on it. Therefore, the observation is inconsistent with SFE. It may imply consistency with SSFE Presumably the statement implies that managers use private information when trading in their own ompany and that share prices reflect this private information when it eventually becomes public However, we can't say for sure whether it implies SSfe because we don,'t know anything about how quickly or correctly the market responded to the information when it became public. In general inconsistency with SfE has no implications for either SSFE or WFE Consistency with SFe in general, would imply both SSFE and WFE because these are weaker requirements on their private information. Some recent evidence in the UK(Gregory, Matatako, Tonks, and Purle kisting evidence is inconclusive about whether corporate insiders earn abnormal returns from tradi Economic Journal, January 1994), finds that neither directors themselves nor outside investors who attempt to mimic the trades of directors, earn high profits. (Outside investors mimic insiders by copying the trades of directors when these become public information. Companies have to notify details of these trades to the Stock Exchange who make the details publicly available-see, for example, C Gary Xu AcF2 14 Princip les of Finance 2© Gary Xu AcF214 Principles of Finance 2 2 7 1.10 1.10 1.10 259,888 ACC ACC ACC − = + ++  ACC = −$53,382 Decision: Alternative one should be chosen, as its annualised cost of capital is less. Question ３ The cash flows of the project can be summarised as follows: Year 0 Year 1 Year 2 Year 3 Year 4 Capital Investment (6,000,000) Change in WC (150,000) (150,000) 0 0 300,000 Revenues 1,500,000 3,120,000 4,056,000 3,374,592 Cash Expenses Variable Costs Labour Costs 250,000 108,000 515,000 215,280 663,063 222,815 546,364 230,613 Depreciation 1,500,000 1,500,000 1,500,000 1,500,000 Pre-tax Profits (358,000) 889,720 1,670,122 1,097,615 Taxes (125,300)* 311,402 584,543 384,165 Net Op. Cash Flows 1,267,300 2,078,318 2,585,579 2,213,450 Net Cash Flows (6,150,000) 1,117,300 2,078,318 2,585,579 2,513,450 * Note: we assume that the company as a whole (inc. the cash flow from the project) will be profitable in year 1. Using the nominal discount rate of 12%, the project NPV is −$57,881. Question ４ a. Because we are considering company managers here, we are talking about strong form efficiency. Because the observation states that managers are successful in exploiting their (presumably) private information, it must be that their company's share price did not reflect the information when managers traded on it. Therefore, the observation is inconsistent with SFE. It may imply consistency with SSFE. Presumably the statement implies that managers use private information when trading in their own company and that share prices reflect this private information when it eventually becomes public. However, we can't say for sure whether it implies SSFE because we don't know anything about how quickly or correctly the market responded to the information when it became public. In general, inconsistency with SFE has no implications for either SSFE or WFE. Consistency with SFE in general, would imply both SSFE and WFE because these are weaker requirements. Existing evidence is inconclusive about whether corporate insiders earn abnormal returns from trading on their private information. Some recent evidence in the UK (Gregory, Matatako, Tonks, and Purkis, Economic Journal, January 1994), finds that neither directors themselves nor outside investors who attempt to mimic the trades of directors, earn high profits. (Outside investors mimic insiders by copying the trades of directors when these become public information. Companies have to notify details of these trades to the Stock Exchange who make the details publicly available-see, for example