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CIMAPRA19-P03-1 Exam - Topic 3 Question 30 Discussion

RFG is considering a major expansion that will result in a more diversified business model.At present, RFG's market capitalisation is $240 million. This is based on a beta of 1.6. The risk free rate is 4% and the market rate of return is 9%. RFG is financed entirely by equity. The company generates an annual cash surplus of $28.8 million.The expansion will cost $50 million and will generate future cash flows of $12 million in perpetuity. This new business will reduce RFG's beta to 1.4.Calculate the adjusted present value of the expansion.
A) $81 million and B) $131 million and D) $59 million
C) $321 million

CIMAPRA19-P03-1 Exam - Topic 3 Question 30 Discussion

Actual exam question for CIMA's CIMAPRA19-P03-1 exam
Question #: 30
Topic #: 3
[All CIMAPRA19-P03-1 Questions]

RFG is considering a major expansion that will result in a more diversified business model.

At present, RFG's market capitalisation is $240 million. This is based on a beta of 1.6. The risk free rate is 4% and the market rate of return is 9%. RFG is financed entirely by equity. The company generates an annual cash surplus of $28.8 million.

The expansion will cost $50 million and will generate future cash flows of $12 million in perpetuity. This new business will reduce RFG's beta to 1.4.

Calculate the adjusted present value of the expansion.

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Suggested Answer: A, B, D

by Roselle at Jul 29, 2023, 01:27 AM

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Emilio
10 months ago
Not sure about that, the expansion cost is pretty high.
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Tori
10 months ago
I'm leaning towards option B, $131 million sounds right!
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Catalina
10 months ago
Wait, $12 million in perpetuity? That seems optimistic.
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Buffy
10 months ago
I think the new beta of 1.4 is a good move!
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Leslie
10 months ago
The current market cap is $240 million.
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Ernestine
11 months ago
I think the new beta will definitely lower the discount rate, but I can't recall the exact steps to find the adjusted present value.
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Ezekiel
11 months ago
I feel like I might be overthinking the cash surplus part. Should we factor that into the present value calculation or just focus on the expansion cash flows?
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Vashti
11 months ago
This question seems similar to one we did in class about adjusting for risk. I think I need to apply the CAPM formula here.
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Ty
11 months ago
I remember we practiced calculating the present value of cash flows, but I'm unsure about how to adjust for the new beta.
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Mitsue
11 months ago
Wait, I'm a little confused. Isn't a custodial arrest when you're actually arrested and taken into custody? I'm not sure the definition includes being read your rights. I'll have to double-check my notes on this.
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Mindy
11 months ago
If I recall correctly, the Foundation library is also open-source, so it could work for Lisa too. Not sure if it's the best choice though.
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Paulina
11 months ago
Hmm, I'm a bit confused by the wording here. I'll need to re-read the question a few times to make sure I understand what's being asked.
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Kimi
11 months ago
This seems pretty straightforward. I'm confident I can identify the correct style that will be used to render the code.
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Jessenia
1 year ago
Okay, let's do this step-by-step. I've got my calculator ready to crunch the numbers. This is going to be a breeze, I can feel it!
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Kenny
1 year ago
Finally, we subtract the present value of the cost from the present value of the cash flows to get the adjusted present value.
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Johna
1 year ago
Next, we need to calculate the present value of the cost of the expansion.
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Erick
1 year ago
Let's start by calculating the present value of the cash flows from the expansion.
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Cecily
1 year ago
Haha, I bet the person who wrote this question is laughing at us right now. 'Perpetuity' and 'adjusted present value' - they're really trying to trip us up!
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Merilyn
1 year ago
User 2
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Felice
1 year ago
User 1
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Myra
1 year ago
D) $59 million? Really? That's way too low. This question is testing our understanding of adjusted present value, not our ability to guess random numbers.
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Kimbery
1 year ago
I believe the adjusted present value of the expansion will be around $131 million, so I choose option B.
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Lanie
1 year ago
I agree, reducing the beta and generating future cash flows will increase the company's value.
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Dong
1 year ago
I'm pretty sure the answer is B) $131 million. The expansion will generate $12 million in perpetuity, and with a lower beta of 1.4, the present value should be higher than the initial $50 million investment.
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Freeman
1 year ago
That makes sense. So, the adjusted present value would be $131 million.
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Rosalia
1 year ago
The lower beta of 1.4 and perpetual cash flows of $12 million from the expansion should increase the present value.
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Ressie
1 year ago
But how did you come up with that calculation?
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Helene
1 year ago
I think the answer is B) $131 million.
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Kenny
1 year ago
I think the expansion will be beneficial for RFG.
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