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FIN1101 Major Assignment Task Sheet The data (prices, interest rates, bond maturities etc.) for this assignment are real. So this gives you a chance to do some real-world tasks. We have also tried to...

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FIN1101 Major Assignment Task Sheet

The data (prices, interest rates, bond maturities etc.) for this assignment are real. So this gives you a chance to do some real-world tasks. We have also tried to make the experience more realistic by portraying the 2-hour window that you have to complete the question set as a ‘meeting’ with executives during which you answer questions. This is supposed to be both authentic and fun. The unrealistic bit is that all the questions are multiple choice! Do not worry! It is not difficult and everyone who puts in a genuine effort should do well. I expect the average score for this assignment will be very high. And it is good exam practice too.

This assignment refers to the task detailed below. Some parts can be calculated in advance while other parts will need to be calculated once you access the assignment question set. Read the task below and prepare as much as you can in Excel (or longhand) and then log in once the assignment question set opens to answer a series of questions.

The online question set, which works just like a quiz, must be completed by midnight (USQ time) May XXXXXXXXXXIt will become available on May 18 at 9.00 a.m. The link to the question set is at the top of the course homepage (right under the link to the quiz). This question set will close at midnight on May XXXXXXXXXXand grades will be released once the deadline passes. In accordance with USQ policy, no attempts will be allowed once the deadline passes and the correct answers are available. USQ policy allows extensions to be granted, in compelling circumstances, if the application is received before the due date.

Task Details

You work in funds management at BlackRock. The company manages almost $6 trillion worldwide. Your position is within the group managing the BlackRock balanced fund in Australia. You are scheduled to answer questions from senior executives on matters relevant to the fund and its performance. Based on the agenda that has been circulated, you can undertake a number of preliminary calculations in preparation but there will be some problems and scenarios that you will have to deal with ‘on the run’ during the 2-hour meeting. Fortunately, you have an excellent mentor who has experience with these types of meetings and she has provided some guidance as to what you might expect (in addition to having to provide the results of your preliminary calculations).

Agenda Item 1. With Reference to the Fund’s Investment in Telstra Corp. Shares

From early March 2017 to February 2018, Telstra’s share price fell from almost $5.00 per share to $3.50 per share. Telstra has 12 billion shares on issue. The executive team have been monitoring this fall and want you to tell them whether or not Telstra Corp represents value at the current share price. You have data on Telstra’s free cash flow. In the last financial year, Telstra generated $2.7 billion in free cash flow. An appropriate discount rate for Telstra is 16 percent. The executive team wants to know whether $3.50 per share represents good value if free cash flow remains constant in every year from now on.

Page 264: formula 8.2

Your mentor’s guidance: In addition to answering this question, be prepared for a question about the value Telstra represents if free cash flow grows at some constant rate.

You should be extra prepared by finding out what constant growth rate would be necessary to ensure that Telstra’s value exceeds its market price (you can do this in a few steps by trial and error).

Agenda Item 2. The Fund’s Investment in Australian Government Treasury Bonds

The fund holds 40,000 Australian government treasury bonds. The bonds expire in 2035 (that is, 17 years from now). The coupon rate is 2.75% p.a. paid semi-annually. The face value of the bonds is $1,000. The yield to maturity is 2.50%. The executive team want to know what the current price of these bonds is and how much the fund’s total investment is worth.

The executive team has noted that there are other issues of Australian government treasury bonds (i.e. with different maturity dates) in which the fund might invest. In particular, they note the issue that expires in 2026 (that is, 8 years from now). The coupon rate for these is 4.75% p.a. paid semi-annually. The face value is $1,000. The yield to maturity is 2.85%. The executive team want to know the current price of bonds in this issue and how many bonds could be purchased if the currently held issue was sold and the money invested in this issue instead.

Your mentor’s guidance: You should also know the factors that might need to be considered if the fund was to switch from the bond issue it holds now to this issue. The executive team might ask, for example, which bond issue is more sensitive to interest rates. The team might also ask you to calculate how much the total investment value would rise (fall) if interest rates fell (increased) by some amount.

Agenda Item 3. Investment Opportunities

The executive team notes that the current risk free rate of return is 2.50% and the expected return of the share market is 8%. They have a list of five companies along with each company’s current rate of return and its beta. The executive team wants to know whether any of these companies represents an attractive investment.

Company

Current Rate of Return

Beta

Flight Centre

4.88%

1.30

Aristocrat Leisure

3.94%

0.80

Webjet

6.31%

1.09

Amcor

9.05%

1.95

ANZ

7.80%

0.95

Mentor’s guidance: use the capital asset pricing model (CAPM) to calculate expected returns. Compare the actual returns to the expected returns in order to address the executive team’s enquiry. This is really easy!

Agenda Item 4. CSL’s Acquisition of Calimmune for $91 Million

The fund currently holds an investment in CSL, one of Australia’s largest pharmaceutical biotech firms. In late 2017, CSL announced that it had purchased Calimmune for $91 million. Over an 8 year life, this acquisition is expected to be characterised in each year by: sales revenues of $70,000,000, cost of goods sold of $6,000,000 and depreciation of $2,000,000. The taxation rate is 30%. The cost of capital in this relatively high-risk business is 21%. CSL also invested $3,000,000 in working capital. The investment took place in 2017 (year 0) and runs from 2018 (year 1) until 2025 (year 8). All working capital is returned at the end. For obvious reasons, the executive team want to know whether this acquisition will create market value for CSL’s shareholders.

Mentor’s guidance: compute the NPV and IRR for this acquisition project. Also, be prepared for questions about how the NPV and IRR will change if the sales revenue increases or decreases by some amount. You should set this up in a spreadsheet so that you can change the sales data and get your answer immediately.

Agenda Item 5. Portfolio Management.

The executive team have identified the potential for the fund to invest in two different commercial properties in Sydney. Both are very viable business propositions. Based on your calculations, Property A has an expected return of 12 percent and a standard deviation of 9 percent. Property B has an expected return of 15 percent and a standard deviation of 14 percent. The covariance of the returns generated by the two properties is – XXXXXXXXXXThe fund can invest in the following proportions: 50% in A, 50% in B; 80% in A, 20% in B; 60% in A, 40% in B. The executive team wants to know the expected return and risk (standard deviation) of each of these combinations.

Mentor’s guidance: Over time, the property market’s dynamics change. At the moment, these properties are occupied by quite different commercial tenants. However, it might be the case that one of the tenants will vacate and be replaced by a tenant who is in the same field of business as the tenant occupying the other property. The cash flows (rent) will then be much more positively correlated (the covariance of returns will be higher and positive). Make sure you set up you calculations in Excel so that you can change the covariance and immediately see the impact on portfolio risk.

END OF TASK DETAILS

You should approach this assignment as follows:

  1. Cover the necessary material (up to chapter 10).
  2. Prepare your calculations and organise your results.
  3. Prepare for the ‘open’ questions by either practicing the calculations or carefully preparing your spreadsheets so that inputs can be changed and new results determined easily.
  4. The question set will become available a few days before the due date. Once you are ready, click on the link and start your attempt.
  5. Like a quiz, the attempt must be completed once you start. The time limit is 2 hours. This should be more than enough time to answer the questions.
  6. The question set will close at midnight on the due date. Students must complete before that time. Grades will be released once the question set closes.

The questions are all multiple choice. There will be 20 questions. From the task, it is fairly clear what will be asked. For many of the 20 questions, you will already have the answers because they can be calculated ahead of time. For some questions, as explained above, you will have to be prepared to do some calculations during the 2 hour window. This is easier than a quiz because for a quiz you have to do all your calculations during the 2 hour window and you have no real idea what the questions will be. Again, do not worry. Everyone who is prepared should do well. Very well.



Answered Same Day May 15, 2020 FIN1101

Solution

Pulkit answered on May 28 2020
131 Votes
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