Running Head:PASE PLC

PASE plc

PASE plc

Project Appraisal

Calculations:

Cost of Equity:

Market Value of Ordinary Shares: $3.50

Dividend per Share:

Dps/Market Price per share = Dividend Yield

5.75%=Dps/3.50

DPS=$0.20

Growth Rate of Dividend: 8.25%

Cost of Equity = (Dps/MV of stocks)+Growth rate of Dividends

(0.20/3.5)+8.25% = 14%

Cost of Debt:

10-year unsecured syndicated sterling bank loan at an interest rate = 7.5%

Tax Rate = 35%

Kd = 7.5%(1-35%) = 4.88%

Weighted Average Cost of Capital (WACC):

Market Value of Ordinary Shares: $4200 million (1200*3.5)

Total Debt: $200 million

WACC = [(4200/4400)*14%]+[(200/4400)*4.88%] = 14%

Hurdle Rate = WACC + 5% = 19%

Net Present Value:

G$ Mn

US$ Mn

2010

30

49

2011

200

325

2012

250

407

2013

300

488

2014

330

537

2015

350

569

2016

380

618

2017

380

618

2018

380

618

2019

380

618

NPV

$655.76

NPV 7 yrs

$1,363.89

Payback Period

5

According to the criteria defined by PASE plc, investment in Gujistan yields a positive NPV of US $655 million and also returns a positive Payback in 07 years. Therefore, the company should move ahead with the investment but should also consider the limitations of the calculations done in order to determine the viability of the investment. Following are some of the major limitations for PASE plc,

Cash earned after the payback period is ignored,

It does not take into account the effects of inflation on the value of money over a time period.

Ignores qualitative aspects of the decision

Takes no account of what is happening with interest rates

Doesn't take account of the fact that future returns may be less valuable

Ignores the current political crisis of Gujistan

Ignores the foreign currency exchange rates problems

b) Discuss the major risks which PASE plc will face if it decides to implement the project. Your answer should include a discussion of how the risks can be mitigated or managed by the company.

Risk Mitigation is all about forecasting the possible

problems that might arise in future and finding out ways to

prevent it from occuring or do alternate ways to avoid the

problems from happening. Reduction of risk to an acceptable level. Risk Mitigation involve all steps and task which Project Manager will take to reduce Risk to an acceptable level or to minimum possible level.

Foreign Exchange Risk Mitigation

The globalization of business generates foreign currency risks. This process is irreversible and critical to the survival of most industries and businesses. The “globalization process” affords enormous opportunities to diversify business risk, generate economies of scale and capture additional market share.

Companies can no longer state “Our company deals only in US dollars” since this approach is not sustainable in global trade. It is estimated that 40% of all international trade is denominated in foreign currency. Trillions per day move through the foreign exchange markets. Political factors determine that not all currencies are convertible. Commercial trade is full of challenges, many of which may be overcome by utilizing the options available in this section.

Fixed rate of exchange:

A fixed rate of exchange is a ratio established by the government at which foreign currencies can be exchanged. The value of the national currency is based on parity with other currencies. Sustaining the parity is the question: if other factors force a market change to a floating rate, the impact could negatively impact the country.

Floating rate of exchange:

A floating rate of exchange allows open market conditions ...