3 marks ). 3 marks ). rosie B u s i n e s s F i n a n c e
Where necessary, students should state any assumptions, they have made. When answering questions students should show all workings, otherwise penalties will be applied for failing to do so.
Students will be assessed on:
– choice of method for solving the problem (20%);
– application of techniques and the accuracy of the answer (30%);
– research techniques (20%);
– critical thinking and analysis (30%).
General Rules and Requirements:
The report should be prepared as an individual report. Reports must be confined to 3,500 words. There are 10 Compulsory Questions to be Answered to equal a total of 100 marks. A title page, table of contents (based on your report headings), introduction, body of the report, conclusion and a list of references actually cited should be included in your assignment paper. Font type – Times New Roman (size 12), paragraph spacing – 1,5. Assignments should be submitted electronically via Turnitin on Format Requirements:
Title page
This must include:
Name of the Institute (ICM – Top Education Institute) The assignment title
The name and code of the unit
Full details of the students who prepared the report (official names and student numbers) The due date of the report
Full name of the unit coordinator
Table of Contents:
Final report should include the list of the headings and appendices. It is vital to double- check that the correct page numbers are shown opposite each section of the report.
Introduction:
In the introduction section, you should provide enough details about the purpose of the report, key tasks and generally what the report will cover.
Body:
Answers to questions should be organised under appropriate headings and sub-headings. It is vital to include analysis of the sources you are using to answer the questions and report on your research findings.
Conclusion:
In the final section of the report, you are expected to summarise all the main points of the report. You will need to list all the findings that are directly linked to the objectives of the report.
Reference List:
Includes a full list of references you have used to complete your report. Please follow a Harvard style system of referencing.
Appendices:
Each appendix normally includes tables, figures, annual financial statements, which are too detailed for them to be included in the body of the report. Appendices are placed at the very end of the report. Each appendix should have a separate number.
Failure to adhere to these format requirements will attract a deduction of 2 points from
the total mark.
Q1. Ross Nicholls retired few years ago at the age of 60. Ross has considered starting his own business. Ross has hired the consulting firm for which your group works to give him a brief tutorial on business and finance. To begin his lesson, Ross has asked you to answer the following questions: (10 Marks).
A. What finance entails, and why is it essential to understand finance to run an effective and successful business? (2 Marks).
B. What are the alternative types of business organisation in Australia? What are the advantages and disadvantages of each? (2 Marks).
C. Explain what differences in tax rates exist between different business organisations in Australia? (2 Marks).
D. What does it mean to maximise value? (2 Marks).
- Explain the concerns that Australian companies should consider before moving the operation to foreign countries. (2 Marks).
Q2. Assume that you are nearing graduation and that you have applied for a job with a local bank. As part of the bank’s evaluation process, you have been asked to take an examination that covers several financial analysis techniques. See how you would do by answering the following questions. (10 Marks)
A. Daniela needs $100,000 as a deposit on a house in 5 years. How much does she need to invest today in a saving account paying 5.25 per cent per annum? (1 Mark for correct formula, 1 Mark for correct calculation and 1 Mark for correct answer to equal a total of 3 Marks).3 Marks).
- Rosie is buying a car for $25,500; She is Scheduled to make 7 annual instalments. Given an interest rate of 8%, what is the annual payment? (1 Mark for correct formula, 1 Mark for correct calculation and 1 Mark for correct answer to equal a total of 3 Marks). 3 Marks).
C. The Sunshine Resort is redoing its golf course at a cost of $2,500,000. It expects to generate cash flows of $1,250,000, $2,200,000, and $2,800,000 over the next three years. If the appropriate discount rate for the company is 12.5 percent, what is the NPV of this project? (1 Mark for correct formula, 1 Mark for correct calculation and 2 Marks for correct answer to equal a total of 4 Marks).
Q3A). Heather recently invested in a Dog Grooming business intending to sell the business one year from today. She has demonstrated the profits on that investment based on three monetary scenarios. She accepts that if the economy stays strong and healthy, then her investment will generate a 40 per cent return. However, if the economy softens, as anticipated, the investment will generate 20 per cent return, while the investment will be (negative) –15 per cent return if the economy slips into a downturn. If the probabilities of the healthy, soft, downturn states are 0.3, 0.5 and 0.2, accordingly, then what are the standard deviation and expected return on Heather’s investment? (1 Mark for correct formula, 2 Marks for correct workings, 2 Marks for correct answer to equal a total of 5 Marks).
Q3B). SantiZer Ltd currently has $200 million of market value debt outstanding. The 9 per cent coupon bonds (semi-annual pay) have a maturity of 15 years, a face value of $1000 and are currently priced at $1,024.87 per bond. The company also has an issue of 2 million preference shares outstanding with a market price of $20. The preference shares offer an annual dividend of $1.20. SantiZer also has 14 million ordinary shares outstanding with a price of
$20.00 per share. The company is expected to pay a $2.20 ordinary dividend 1 year from today, and that dividend is expected to increase by 7 per cent per year forever. If the corporate tax rate is 40 per cent, then what is the company’s weighted average cost of capital? (1 Mark for correct formula, 2 Marks for correct workings, 2 Marks for correct answer to equal a total of 5 Marks).
Q4. Mary is the Finance Manager for FGH Pty Ltd. FGH is buying a 30-year bond that has a coupon of 6 per cent and pays either annual, semi-annual or quarterly interest. The current market rate is 5 per cent, and the bond has a face value of $1,000. Which option should FGH take, annual, semi-annual or quarterly interest, and why? Please prove your chosen option? (1 Mark for correct formula for each option to equal 3 Marks, 1 Mark for correct calculations for each option to equal 3 Marks, 1 Mark for each correct answer for each option and 1 Mark for the correct investment decision to equal a total of 10 Marks).
A. Price of a 30-year bond that has a coupon of 6 per cent and pays annual interest. The current market rate is 5 per cent and the bond has a face value of $1000.
B. Price of a 30-year bond that has a coupon of 6 per cent and pays semiannual interest. The current market rate is 5 per cent and the bond has a face value of
$1000.
C. Price of a 30-year bond that has a coupon of 6 per cent and pays quarterly interest. The current market rate is 5 per cent and the bond has a face value of $1000.
Q5. Maria is the Chief Executive Officer for A3Z Bank. She approached you to look at the price of the stock and dividend yield. She presented you with the following information. (10 Marks).
A. Current estimates are for A3Z Company to pay dividends of $2.80, $3.15, and $3.60 throughout the following three years, respectively. Toward the end of three years, you envision selling your stock at a market price of $120.00. If it is anticipated that 8% return, what is the price of the stock? (1 Mark for correct formula, 1 Mark for correct calculation and 1 Mark for correct answer to equal a total of 3 Marks).
B. A3Z stock was selling for $32.50 per share at the start of 2018. Dividend payments for the next year were expected to be $3.50 a share. Assuming no growth, what is the dividend yield? (1 Mark for correct formula, 1 Mark for correct calculation and 1 Mark for correct answer to equal a total of 3 Marks).
C. A3Z forecasts to pay an $6.50 dividend one year from now, which constitutes 100% of its income. This will provide investors with a 9% anticipated return. Instead, we decide to plowback 30% of the income at the company’s current profit for value of 15%. What is the approximated value of the stock before and after the plowback decision? (1 Mark for correct formula, 1 Mark for correct calculation and 1 Mark for correct answer to equal a total of 3 Marks).
D. What does the present value of growth opportunities (PVGO) mean? (1 Mark).
Q6. Peter would like to know more about the cash flows in a company. He asked Eric, the Finance Manager of the company the following questions? (10 Marks)
A. When there are projects with different useful lives, what are the two methods of comparing the projects? (2 Marks).
B. Why is depreciation and amortisation added back when calculating free cash flows generated by a project? (2 Marks).
C. What difficulties are associated with valuing real assets compared to financial assets? (3 Marks).
D. Explain under what circumstances the NPV and IRR could provide different decisions. (3 Marks).
Q7. Amanda started a home delivery cafe and need to buy a motorcycle for delivery orders. She has two models in mind. Model A is a Hyundai, costs $9000 and with an expected life of 6 years; model B is a Toyota, costing $14 000 and with an expected life of 10 years. The maintenance costs are $800 for model A and $700 for model B annually. Assume that the opportunity cost of capital is 10 per cent. Which one should Amanda buy using: (10 Marks).
A) the NPV perpetuity method and (2 Marks for correct formula, 2 Marks for correct workings and 1 Mark for correct answer to equal a total of 5 Marks).
B) the EAC method? (2 Marks for correct formula, 2 Marks for correct workings and 1 Mark for correct answer to equal a total of 5 Marks).
Q8. Andrew is evaluating two independent projects for ABX Pty Ltd. The costs and expected cash flows are given in the following table. The company’s cost of capital is 8 per cent. (10 Marks).
Year |
A |
B |
0 |
–$350,000 |
–$380,000 |
1 |
125,000 |
160,000 |
2 |
125,000 |
156,000 |
3 |
125,000 |
165,000 |
4 |
125,000 |
172, 000 |
5 |
125,000 |
200, 000 |
A. Calculate the project’s NPV. (2 Marks for each projects NPV to equal 4 Marks).
B. Calculate the project’s IRR. (2 Marks for each projects NPV to equal 4 Marks).
C. What is the decision based on NPV? What is the decision based on IRR? Is there a conflict? (1 Mark).
D. As the finance manager for the company, which project or projects will be accepted? Explain your reasoning. (1 Mark).
Q9. Darn is an overseas student from Vietnam studying finance at Sydney University. Darn would like to know more about the Australian financial system. He approached you with the following questions. (10 Marks).
- Darn would like to know who are the authorities in the Australian Financial System? (1 Mark).
- What are some potential approaches to resolve a conflict of interest in an organisation? (1 Mark).
- Investment banks were at the very centre of the Global Financial Crisis (GFC). With reference to the activities of investment banks, outline the ways in which investment banks’ involvement in pioneering financial innovations may have contributed to their prominence during the GFC. Explain the role and operation of investment bank in Australia and provide examples. (2 Marks).
- Representatives from 27 countries agreed to increase their banks’ capital requirements in an effort to reduce the risk that mega bank failures will cause future financial crises. How was the Australian economy affected as a result of GFC? What effect Basel III Accord will have on Australian financial institutions? (4 Marks).
B. What does RBA responsible for? (1 Mark).
D. What ethical conflict does insider trading present? (1 Mark).
Q10. Be Happy Ltd is expanding very fast and expects to grow at a rate of 25 per cent for the next 4 years. The company recently declared a dividend of $3.60 but does not expect to pay any dividends for the next 3 years. In year 4, they intend to pay a $5 dividend and thereafter grow it at a constant-growth rate of 6 per cent. The required rate of return on such shares is 20 per cent. (10 Marks).
A. Calculate the present value of the dividends during the fast growth period. (3 Marks).
B. What is the price of the share at the end of the fast growth period (P4)? (3 Marks).
C. What is the share price today? (2 Marks).
D. Would today’s share price be driven by the length of time you intend to hold the share? (2 Marks).
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