ue: Friday 22nd October 2020.

Word limit: Maximum 800 words ( work on the answer as final exam and don’t worry about words limit)

Assignment Requirment: For each question, formulas and data info must be given before performance and presentation of calculations as presented in the interactive tutorial solutions. Formulas and presentation of calculation can be copied and pasted from given formulas and solutions in Black Board Tutorial Materials.

No Financial Calculator, Excel Calculations and No Excel files are accepted. You are allowed only one attempt to submit your assignment. Do it very carefully, no wrong assignment claim is accepted and no other attempt to be provided.The assignment must be in MS Word format, no spacing, 12-pt Arial font and 2 cm margins on all four sides of your page with appropriate section headings and page numbers. All wrong file for other unit, blank file, files in PDF or other formats will be given zero mark. A template of assignment cover page is attached for your usage. Please work on the questions like you answer questions in your final exam.

Purpose:

This assignment is designed to assess your level of knowledge of the key topics covered in this unit

Unit Learning Outcomes Assessed:

• Explain financial markets and different types of securities and the processes related to their investment;

• Interpret the impact of future developments in the financial markets on business structure and performance;

• Understand the concept of the time value of money and apply it in investment and portfolio evaluation and management;

• Critically understand and practice valuation of financial instruments, including ordinary shares, preferred shares and bonds;

• Critically analyze finance alternatives to manage short- and long-term debts;

• Evaluate the firm capital structure policy, dividend payout policy, and alternative funding policies and instruments available to businesses.

The questions to be answered are:

Answering Guidelines: There is no reference needed nor word limit applied for any question in the Assignment. However, brief and concise answers which use the knowledge and infromation from your lecture notes and interactive tutorial sessions are expected.

Question 1 (11 MARKS)

1. Which of the following types of markets can the NASDAQ market in the USA be classified as: (Note – Please tick ALL of the options which are correct)? (1.5 Marks)

?

Primary Market

?

Secondary Market

?

Auction Market

?

Dealers Market

?

OTC market

?

Exchange market

?

Capital market

?

Monetary Market

?

Underlying Market

?

Derivative Market

2. You are the CFO of Black Gold Mining Ltd, which is offering an investment in two (2) large projects with the cash flows presented in the table below. Your company can only choose one of the projects (I or II), as shown in the table. (9.5 marks)

Project I Project II

Cost $550 000 $640 000

Future Cash Flows

Year 1

Year 2

Year 3

Year 4

Year 5

230 000

210 000

200 600

150 000

120 000

330 000

300 000

250 000

180 000

150 000

Required:

Undertake the project evaluation and identify which project Black Gold Mining should choose, using:

a) The Net Present Value (NPV) method with the discount rate of 12%

b) The Payback Period (PBP) method with benchmark of maximum 2 years

c) If there is a conflict between the NPV method and the PBP method, which investment criteria should the company use to make the final capital budgeting decision and why?

SHOW YOUR WORKING

Question 2 (11 Marks)

Sally has $50 000. She wants to save $120 000 to deposit for her first home loan. She decided to put that $50 000 in an investment fund that pays an interest rate of 11% per annum (per year), compounding annually.

Required:

a. How long does she need to wait until she has saved $120 000?

b. If Sally wishes to have that $120 000 in five years, how much does she need to put into the investment now with the same interest rate of 11%?

c. Assume that Sally was offered an alternative investment, which requires an initial investment of $60,000 for 7 years. Calculate the amount of money Sally would accumulate after 7 years by this investment, if the rate of return is 11.5%, compounding quarterly?

d. Assume that Sally was offered two (2) other alternative investments in the securities market:

i. Option A pays an interest rate of 10% p.a. (per year), compounding semi-annually.

ii. Option B pays an interest rate of 9.87%, compounding monthly.

Which option (A or B) should Sally choose?

e. Assume that Sally has already got her $120,000 for the home loan deposit and now she wants to purchase a house which costs $450 000. Her plan is to pay that $120,000 down in cash and finance the balance over 30 years at the interest rate of 2.5%. What will be her monthly mortgage payment?

f. At the end of this year Sally will receive a fixed income of $15,000 each year forever. If the required rate of return is 12%, what is the present value of this income flow?

SHOW YOUR WORKING

Question 3 (7 Marks)

APM Fund Management is considering the following options for their new investment portfolio:

Option 1 – A non-callable corporate bond that pays coupon rate of 9% annually. The bond will be mature in 20 years. The year-to-maturity (YTM) of the bond is 7.5% and the face value of the bond is $1 000.

Option 2 – An ordinary share which just paid a dividend of $7.50 with a constant dividend growth rate of 5% each year. The current market price of this share is $112.50.

Option 3 – A $100 par value preference share which pays a fixed dividend of 13%. The required rate of return of the preference shares in the same group is 12%.

Required:

a. How much should APM pay for the corporate bond? If the coupon rate is paid semi-annually, how much is the bond value?

b. Calculate the market required rate of return for the ordinary share. Calculate the share value if the market required rate of return is 10%?

c. Compute the value of the preference share and explain why the preference share is considered a hybrid between an equity and a debt instrument?

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Question 4 (7 Marks)

Alice has an investment portfolio that paid the rate of return of 23%, 12%, – 34%, 18% and 10% over the last five (5) years.

Required:

a. Calculate the arithmetic average return and the geometric average return of this portfolio?

b. If the following information is available for Alice’s portfolio in the forecast for next year, calculate the expected return and identify the risk of return by computing the variance and the standard deviation.

State of economy Probability of the economic state Rate of Return

Boom 0.55 25%

Normal 0.30 17%

Recession 0.15 -8%

c. If the beta of this portfolio is 1.2, the risk-free rate of return is 7%, how much is the risk premium applied in calculating the systematic risk of this portfolio using the Capital Asset Pricing Model (CAPM)?

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Question 5 (7 Marks)

Big Water Ltd currently has the following capital structure:

Debt: $4,500,000 paying 9.5% coupon bonds outstanding with 12 years to maturity, an annual before-tax yield to maturity of 8% on a new issue. The bonds currently sell for $1,113 per $1,000 face value.

Ordinary Shares: 65,000 shares outstanding currently selling for $75 per share. The company just paid a $6.50 dividend per share and is experiencing a 6% growth rate in dividends, which it expects to continue indefinitely.

(Note – The firm’s marginal tax rate is 30%.)

Required:

a) Calculate the current total market value of the company.

b) Calculate the capital structure of the company.

c) Calculate the weighted average cost of capital (WACC) for the firm.

SHOW YOUR WORKING

Question 6 (7 Marks)

The following data available for ABC company.

Account Beginning balance Ending Balance Use/source of cash

Accounts payable 20,300 24,400

Inventory 60,600 67,200

Long term debts 127,500 125,800

Common stock 200,400 215,900

Required:

a) Calculate and identify the source of cash or the use of cash for each account change by filling into the column next to the ending balance.

b) Assume that beginning balance of accounts receivable is $23 400 and ending balance of accounts receivable of $22 300, total revenue is $237 000, total cost of sales is $ 165 000 and all sales are on credit. Calculate the operating cycle and cash cycle and interpret the outcomes.

SHOW YOUR WORKING

Submition Guidelines: There is no reference needed nor word limit applied for any question in the Assignment. However, brief and concise answers which use the knowledge and infromation from your lecture notes and interactive tutorial sessions are expected.