Assessment 2: Business Case Studies 1

1FinanceAssessment 2: Business Case Studies 1General overviewSee the Unit Information Guide for this assessment’s weighting, due date, topic coverage and wordlimit. Overall, the assignment consists of:a. 6 (six) questions on time value of money and bond valuation (part 1);b. 3 (three) tasks related to a risk and return analysis (parts 2 and 3).Instructions:Do NOT include a coversheet on your assessment document. Your details are known to us becauseyou submit electronically through your login.In Week 4, find the ASX code for your allocated case company for this assessment in ‘Grades andFeedback’ on the unit’s MySCU Learning site. Also at that time, download the spreadsheet (referredto in the requirements below) in the Assessment 2 folder of the Assessment Tasks and Submissionsection of the unit’s MySCU site.Use S&P Capital IQ (see the Web Links section of this unit’s MySCU site) to collect all missing inputsfor calculations in Part 2a. This database will also be useful for more general background research onyour allocated company.Required:1. TVM and bond valuation questions (1 mark each, give answers to 2 decimal places):a. Your case company has an issue of $1,000 par value semi-annual coupon bonds with 7 yearsremaining until maturity. The annual coupon rate and yield to maturity for these bonds aregiven in the spreadsheet. What is the price of the bonds?b. Your case company is considering a contract in which its customer will make end-of-monthpayments of the amount shown in the data spreadsheet (see instructions above) for 3 years.Your company’s discount rate is also shown in the spreadsheet. What is the value of thecontract to your case company at its commencement?c. Your case company needs to invest funds and has several alternatives available to it, A, B andC, all of equal risk. The interest rates for these options are given in the spreadsheet. What isthe EAR of the alternative the company should choose if it wishes to maximise value?d. Your case company has gross profit as shown in the spreadsheet. Assuming the gross profitgrows continuously over time at a given rate (see spreadsheet), what will the share price bein 10 years?e. Your case company is buying land for the amount given in the spreadsheet. The transactionwill be financed by an amortised loan at 4.2% APR, quarterly compounding, with 20 years ofend-of-quarter payments. What is the amount of the quarterly payment?Assessment 2 Finance2f. Your case company has an issue of $100 par value annual coupon bonds with 5 yearsremaining until maturity. The annual coupon rate is given in the spreadsheet, along with thecurrent price of the bonds. What is the YTM of the bonds?2. Risk and return estimates (4 marks):a. Use CAPM to estimate the expected return for the shares of: i) your case company; and ii) ahypothetical company with a beta of 1.40. To do this, use the yield to maturity of a 10-yearAustralian Government bond on 29 March 2021 as a proxy for the risk-free rate, assume themarket risk premium is 5% and use your case company’s current 5-year beta.b. Using the data from part 2a, estimate portfolio expected return and beta, assuming a portfoliowith 20% invested in your case company and the remainder invested in the hypotheticalcompany.3. Risk and return analysis (15 marks):a. Interpret and discuss your risk and return measures from parts 2a and 2b.Marking Criteria:Part 1The answer to each TVM and bond valuation question in part 1 will be marked as correct (1 mark) orincorrect (0 marks).List the question numbers with your final answers (no workings) on the first page of your assignmentsubmission document with each answer on a separate line.Give all answers in two decimal places, rounding to the nearest hundredth or cent. No part marks willbe provided. It is therefore important that you round decimals correctly. If you are not sure about this,see the relevant link in the Web Links section of the unit site.Parts 2 and 3These will be marked using the rubric that follows.Assessment 2 Finance3 Marking criteria for risk and return estimates (Part 2)MARKING CRITERIAExcellentVery GoodGoodSatisfactoryPoorAccurate calculation ofexpected returns forcompanies andportfolio and accuratecalculation of portfoliobeta (4 marks)Correct input data used.Technique and all finalcalculated figures are correct(4 marks)Mostly correct input data.Correct techniques andcalculations. (3.5 marks)Correct input data. Mostlycorrect techniques andcalculations. (2.5 marks).Mostly correct input data.Mostly correct techniquesand calculations. (2 marks).Mostly incorrect data andtechniques. (0 to 1.5 marks)Marking criteria for written risk and return analysis and its presentation (Part 3)MARKING CRITERIAExcellentVery GoodGoodSatisfactoryPoorInsightful and relevantdiscussion of risk andreturn (10 marks)Accurately andcomprehensively interpretsall calculated risk and returnmeasures. Correctlycompares appropriatemeasures and explainsdifferences, drawing onrelevant theory. Accuratelyweaves relevant context (e.g.company industry, marketconditions) into explanations.Uses tables or graphseffectively to enhance thediscussion. Uses and explainsrelevant technical terms. (9to 10 marks)Accurately interprets nearlyall calculated risk and returnmeasures. Correctlycompares appropriatemeasures and explainsdifferences, drawing onrelevant theory. Weavesrelevant context intoexplanations. Uses tables orgraphs effectively to enhancethe discussion. Uses andexplains most relevanttechnical terms. (8 marks)Accurately interprets mostcalculated risk and returnmeasures. Correctlycompares appropriatemeasures and explains somedifferences, drawing onrelevant theory. Incorporatessome relevant context. Usestables or graphs but may notbe effective or explained.Uses and explains sometechnical terms. (7 marks)Accurately interprets mostcalculated risk and returnmeasures. Correctlycompares some appropriatemeasures and explains somedifferences. Tables or graphs,if used, may not be effectiveor explained. Uses andexplains some technicalterms. Context and theoryare limited or incorrect (5 to6 marks)While an explanation oftechnical terms may havebeen attempted, there islittle or no accurateinterpretation or comparisonof risk and return measures.Context, theory andexplanations are limited,incorrect or absent. (0 to 4marks)Presentation, sourcesand written expression(5 marks)Overall presentation is wellorganised and looksprofessional. All data sourcesand other references areprovided where needed inappropriate format anddetail. Use of languagemakes meaning consistentlyclear. There are no or veryfew grammar, syntax andspelling errors. (5 marks)Overall presentation ismostly well-organised andprofessional. All necessarydata sources and otherreferences are provided,mostly in appropriatepositions, format and detail.Use of language makesmeaning consistently clear.There are very few grammar,syntax and spelling errors. (4marks)Overall presentation ismostly well-organised andneat. All necessary datasources and other referencesare provided, mostly inappropriate positions, formatand detail. Use of languagemostly makes meaning clear.There may be severalgrammar, syntax and spellingerrors. (3.5 marks)Overall presentation is fairlyneat and organised. Not allnecessary data sources areprovided or most are not inappropriate positions, formatand detail. Use of languagemostly makes meaning clear.There are several grammar,syntax and spelling errors.(2.5 marks)Overall presentation isgenerally unprofessional. Notall necessary data sourcesare provided or most are notin appropriate positions,format and detail. Use oflanguage often makesmeaning unclear. There maybe many grammar, syntaxand spelling errors. (0 to 2marks)