1

FINM 1415 Assignment Questions

Semester 1 2020

Due: 2 pm Monday 1st of June 2020

Total Marks: 35 marks

GUIDELINES: ASSIGNMENT LAYOUT AND PRESENTATION

1. Your document should be typed in Times New Roman font, size 12.

2. The assignment should be double spaced and have margins of 2.54 cm.

3. For calculation questions, you need to show all your workings (including timeline if

appropriate) and round your answers to three decimal places.

4. If you use any reference (e.g. Journal, Book, website etc.), you must reference it according to

Harvard Referencing Style. You must also format your reference list in line with Harvard

Referencing Style which can be accessed here: https:

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ary.uq.edu.au

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eferencing-style-guides

QUESTION 1 TIME VALUE of MONEY (5 marks)

A total debt of $ 1,000 due now, $4000 due 2 years from now, and $6000 due 5 years from now is

to be repaid by 3 payments.

(1) The first payment is made now.

(2) The second payment, which is 80% of the first, is made at the end of 30 months from now.

(3) The third payment, which is 60% of the second, is made at the end of 4 years from now.

The annual interest rate is 4%, compounded semi-annually. Calculate the amount of each of the

three payments. A timeline is required for full points.

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2

QUESTION 2 Cash Flow Analysis (10 marks)

You are considering a 5-year investment project which is expected to cost $1, 000, 000. In each

year, you have decided that there are 3 possible states of the economy: good, average, and poor. In

each individual year there is a 35% chance of the economy being good and a 15% chance of it

eing poor. You forecast the following net cash flows for the project:

Economy Year 1 Year 2 Year 3 Year 4 Year 5

Good 300,000 350,000 400,000 350,000 250,000

Average 250,000 275,000 325,000 275,000 175,000

Poor 200,000 225,000 250,000 225,000 150,000

(a) What is the expected net cash flow each year? (3 marks)

Hint: Do some research on how to calculate expected cash flow given probabilities in each scenario.

You have a

anged the following sources of funding:

(i) $200,000 from a 5-year fixed interest loan whose annual loan payments are $48,126.91.

(ii) $250,000 from a 5-year zero-coupon bond with a face value of $350,000.

(iii) $300,000 from an ordinary share issue where a dividend of $18,000 will be paid in one

year and it is expected to grow at 3% per annum.

(iv) $250,000 from a 5-year coupon-paying bond issue whose coupon rate is 7% and face

value is $250,000.

(b) what is the discount rate given above sources of financing? (5 marks)

Hint: The discount rate should be the weighted average cost of capital.

(c) What is the NPV of this investment project and should you invest in this project? (2 marks)

3

QUESTION 3 STOCK VALUATION: (20 Marks)

− Use the spreadsheet “Q2-Stock-FLT.xlsx” on Blackboard to complete this question. The

spreadsheet contains information output from Bloomberg Terminal.

− All financial statement numbers are in millions of dollars unless otherwise indicated.

− Assume today is 30th June 2017 and you have just been paid a dividend and that the next

dividend will be received in exactly one year (assume dividend is paid annually).

− The stock price as at 30th June 2017 was $38.30.

a) You expect Flight Centre Ltd. to maintain the same dividend payout ratio as at 30th June 2017

for the next three years. After three years, the company will increase the dividend payout ratio to

70%. Assume company’s return on new investment is 16.6% and the required rate of return is

10%. Using the dividend discount model, calculate the intrinsic value for stock today.

(5 marks)

) Based on your answer in Part (a), would you recommend to buy, sell or hold the stock? Give

the recommendation and

iefly discuss the difference between the intrinsic value and stock price.

(no more than 200 words XXXXXXXXXXmarks)

c) Calculate the following ratios for financial year ending at 30th June 2017

- Forward Price-Earnings Ratio and Trailing Price-Earnings Ratio. Briefly discuss the difference

etween these two ratios.

- If the stock was fairly priced according to the dividend discount model, what would be its Price-

Earnings ratio (both Forward and Trailing)?

- The P/E ratio of the “S&P/ASX 200 Consumer Discretionary Sector GICS Level 1 Index” is

25.07 as at the end of financial year of 2017, use this number as the average industry P/E ratio for

Flight Centre. Comparing your estimate of P/E ratio for Flight Centre with the industry average

P/E ratio, what conclusion could you make? XXXXXXXXXXmarks)

Now assume you bought this share two years ago:

d) If you bought share in the company on the 1st July 2015 at $34 and the share price exactly one

year ago was $31, what is your capital gain per share today? XXXXXXXXXXmark)

e) Use the information in part (d), if you reinvested the dividends you received in more FLT shares,

what is your wealth on 30th June 2017 on a per share basis? Assume that you have bought

1000 shares XXXXXXXXXXmarks)

FINM 1415 Assignment Questions

Semester 1 2020

Due: 2 pm Monday 1st of June 2020

Total Marks: 35 marks

GUIDELINES: ASSIGNMENT LAYOUT AND PRESENTATION

1. Your document should be typed in Times New Roman font, size 12.

2. The assignment should be double spaced and have margins of 2.54 cm.

3. For calculation questions, you need to show all your workings (including timeline if

appropriate) and round your answers to three decimal places.

4. If you use any reference (e.g. Journal, Book, website etc.), you must reference it according to

Harvard Referencing Style. You must also format your reference list in line with Harvard

Referencing Style which can be accessed here: https:

web.li

ary.uq.edu.au

esearch-tools-

techniques

eferencing-style-guides

QUESTION 1 TIME VALUE of MONEY (5 marks)

A total debt of $ 1,000 due now, $4000 due 2 years from now, and $6000 due 5 years from now is

to be repaid by 3 payments.

(1) The first payment is made now.

(2) The second payment, which is 80% of the first, is made at the end of 30 months from now.

(3) The third payment, which is 60% of the second, is made at the end of 4 years from now.

The annual interest rate is 4%, compounded semi-annually. Calculate the amount of each of the

three payments. A timeline is required for full points.

https:

web.li

ary.uq.edu.au

esearch-tools-techniques

eferencing-style-guides

https:

web.li

ary.uq.edu.au

esearch-tools-techniques

eferencing-style-guides

2

QUESTION 2 Cash Flow Analysis (10 marks)

You are considering a 5-year investment project which is expected to cost $1, 000, 000. In each

year, you have decided that there are 3 possible states of the economy: good, average, and poor. In

each individual year there is a 35% chance of the economy being good and a 15% chance of it

eing poor. You forecast the following net cash flows for the project:

Economy Year 1 Year 2 Year 3 Year 4 Year 5

Good 300,000 350,000 400,000 350,000 250,000

Average 250,000 275,000 325,000 275,000 175,000

Poor 200,000 225,000 250,000 225,000 150,000

(a) What is the expected net cash flow each year? (3 marks)

Hint: Do some research on how to calculate expected cash flow given probabilities in each scenario.

You have a

anged the following sources of funding:

(i) $200,000 from a 5-year fixed interest loan whose annual loan payments are $48,126.91.

(ii) $250,000 from a 5-year zero-coupon bond with a face value of $350,000.

(iii) $300,000 from an ordinary share issue where a dividend of $18,000 will be paid in one

year and it is expected to grow at 3% per annum.

(iv) $250,000 from a 5-year coupon-paying bond issue whose coupon rate is 7% and face

value is $250,000.

(b) what is the discount rate given above sources of financing? (5 marks)

Hint: The discount rate should be the weighted average cost of capital.

(c) What is the NPV of this investment project and should you invest in this project? (2 marks)

3

QUESTION 3 STOCK VALUATION: (20 Marks)

− Use the spreadsheet “Q2-Stock-FLT.xlsx” on Blackboard to complete this question. The

spreadsheet contains information output from Bloomberg Terminal.

− All financial statement numbers are in millions of dollars unless otherwise indicated.

− Assume today is 30th June 2017 and you have just been paid a dividend and that the next

dividend will be received in exactly one year (assume dividend is paid annually).

− The stock price as at 30th June 2017 was $38.30.

a) You expect Flight Centre Ltd. to maintain the same dividend payout ratio as at 30th June 2017

for the next three years. After three years, the company will increase the dividend payout ratio to

70%. Assume company’s return on new investment is 16.6% and the required rate of return is

10%. Using the dividend discount model, calculate the intrinsic value for stock today.

(5 marks)

) Based on your answer in Part (a), would you recommend to buy, sell or hold the stock? Give

the recommendation and

iefly discuss the difference between the intrinsic value and stock price.

(no more than 200 words XXXXXXXXXXmarks)

c) Calculate the following ratios for financial year ending at 30th June 2017

- Forward Price-Earnings Ratio and Trailing Price-Earnings Ratio. Briefly discuss the difference

etween these two ratios.

- If the stock was fairly priced according to the dividend discount model, what would be its Price-

Earnings ratio (both Forward and Trailing)?

- The P/E ratio of the “S&P/ASX 200 Consumer Discretionary Sector GICS Level 1 Index” is

25.07 as at the end of financial year of 2017, use this number as the average industry P/E ratio for

Flight Centre. Comparing your estimate of P/E ratio for Flight Centre with the industry average

P/E ratio, what conclusion could you make? XXXXXXXXXXmarks)

Now assume you bought this share two years ago:

d) If you bought share in the company on the 1st July 2015 at $34 and the share price exactly one

year ago was $31, what is your capital gain per share today? XXXXXXXXXXmark)

e) Use the information in part (d), if you reinvested the dividends you received in more FLT shares,

what is your wealth on 30th June 2017 on a per share basis? Assume that you have bought

1000 shares XXXXXXXXXXmarks)

Answered Same Day
May 25, 2021
FINM1415
University of Queensland

Question 1

Time Period

0

1

2

3

4

5

Loan Amount due

1000

4000

6000

Interest Rate =

4%

Compounded Semi Annually

NPV =

9617.471

Time Period

0

2.5

4

Payments

x

0.8x

0.8*0.6x

1

0.8

0.48

NPV =

+ +

We know that NPV of Loan is equal to NPV of Payments

Therefore, solving for x

NPV

9617.471

x=

4506.232

Payment today =

4506.232

Payment after 30 months =

3604.985

Payment After 4 years =

2162.991

Question 2

Cost

(10,00,000)

Economy

1

2

3

4

5

Good

3,00,000

3,50,000

4,00,000

3,50,000

2,50,000

Average

2,50,000

2,75,000

3,25,000

2,75,000

1,75,000

Poo

2,00,000

2,25,000

2,50,000

2,25,000

1,50,000

Economy

Probability

Good

35%

Average

50%

Poo

15%

Part a.

1

2

3

4

5

Expected Net Flow in every yea

2,60,000

2,93,750

3,40,000

2,93,750

1,97,500

Part b.

(i)

Present Value

$2,00,000

Time (years)

5

Annual Payment

$(48,126.91)

Discounted Rate

6.50%

(ii)

Zero Coupon Bond

Present Value

$(2,50,000)

Future Value

$3,50,000

Time (year)

5

Discounted Rate

6.961%

(iii)

Present Value

$3,00,000

Dividend

$18,000

Growth...

Time Period

0

1

2

3

4

5

Loan Amount due

1000

4000

6000

Interest Rate =

4%

Compounded Semi Annually

NPV =

9617.471

Time Period

0

2.5

4

Payments

x

0.8x

0.8*0.6x

1

0.8

0.48

NPV =

+ +

We know that NPV of Loan is equal to NPV of Payments

Therefore, solving for x

NPV

9617.471

x=

4506.232

Payment today =

4506.232

Payment after 30 months =

3604.985

Payment After 4 years =

2162.991

Question 2

Cost

(10,00,000)

Economy

1

2

3

4

5

Good

3,00,000

3,50,000

4,00,000

3,50,000

2,50,000

Average

2,50,000

2,75,000

3,25,000

2,75,000

1,75,000

Poo

2,00,000

2,25,000

2,50,000

2,25,000

1,50,000

Economy

Probability

Good

35%

Average

50%

Poo

15%

Part a.

1

2

3

4

5

Expected Net Flow in every yea

2,60,000

2,93,750

3,40,000

2,93,750

1,97,500

Part b.

(i)

Present Value

$2,00,000

Time (years)

5

Annual Payment

$(48,126.91)

Discounted Rate

6.50%

(ii)

Zero Coupon Bond

Present Value

$(2,50,000)

Future Value

$3,50,000

Time (year)

5

Discounted Rate

6.961%

(iii)

Present Value

$3,00,000

Dividend

$18,000

Growth...

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