TFIN603 NA T5 INDIVIDUAL ASSIGNMENT
DUE DATE: 4th of December 2021 – 11:59PM
Total Marks: 100 marks; Weighting 25%
The assignment consists of two parts: Part A of the assignment focus on the financial instruments of
financial institutions: QBE Ltd and IAG Ltd. Part B of the assignment focuses on the fundamental
of corporate finance. To Successfully complete this project, you will use/apply not only theories
studied in TFIN603 but also other appropriate resources.
Part A: QBE and IAG Share Price
Question 1 (25 marks)
a. What is the cu
ent price of ordinary shares in QBE Ltd. and IAG Ltd. ? How has each evolved
over the last 5 years? Graph each series and discuss their evolution, noting the salient points.
(10 marks)
. Define the systematic and unsystematic risk, relative to QBE and IAG. Identify at least two
factors that affected the systematic risk of the institution in the last 5 years and reflected in the
movement its share price. Which share price was more volatile, QBE or IAG ? (15 marks)
Part B: Corporate Finance
Question 1 (20 marks)
(a) What is the future value of $1200 invested for 3 years at an interest rate of 6% p.a., compounded
quarterly? (4 marks)
(b) What is the Effective Annual Rate in part (a)? (4 marks)
(c) What is the present value of an annuity consisting of payments of $265 every six months for
12 years, if the discount rate is 9% p.a., compounded semi-annually? (4 marks)
(d) You deposit $100 into a bank account where it remains for 9 years, at the end of which time
the money has grown to $ XXXXXXXXXXWhat is the annual interest rate on the account (5 marks)
(e) If the nominal rate of interest is 11% and the expected inflation rate is 8%, what is the
approximate real interest rate? (3 marks)
Questions 2 (20 marks)
1. Two mutually exclusive projects, C and D, will have an initial cost of $20,000 each and are
expected to yield the following after‐tax cash flows.
Year C D
1 $4,000 $8000
2 $6,000 $6,000
3 $5,000 $6,000
4 $4,000 $1,000
5 $6,000 $3,000
6 $2,000 $4,000
7 $2,000
8 $2,000
(a) Based on the payback technique, if the maximum acceptable Payback Period is 4 years, would you
accept Project C, Project D, neither or both (6 marks)
(b) Based on the NPV technique, if the required rate of return is 12%, would you accept Project C,
Project D, neither or both? (7 marks)
(c) Based on the EAA technique, if the required rate of return is 12%, would you accept Project C,
Project D, neither or both? (7 marks)
Question 3 [20 marks]
(a) Yin Zhang bought an investment property last year for $350,000. This year the value of the
property has gone up to $400,000. Yin Zhang also received $12,000 in rental income for the
year. What is Yin Zhang’s holding-period return on the investment? [7 marks]
(b) You have invested in Huawei Ltd whose dividend per share has grown 10% per annum for
the past 10 years. Assume that Huawei’s growth rate is expected to be maintained
indefinitely. The latest dividend per share was 90 cents was yesterday. If your required rate
of return is 15 per cent, what is the value of Huawei’s shares? [7 marks]
(c) The Treasury bond rate is 3%, the average return on the All Ords Index is 12%, and ANZ
has a beta of 1.2. According to the CAPM, what should be the required rate of return on
ANZ shares? [7 marks]
Question 4 (15 marks)
Some financial managers prefer capital budgeting model such as internal rate of return (IRR) or no
discounted payback models over the net present value (NPV) model, which is prefe
ed by academic
financial analysts. Why ? Briefly discuss. (Word Limit:500 words)
fwd (1).zip
Week 2 Part I_Project Evaluation Principles and Methods.ppt
TFIN 603 NA CORPORATE FINANCE
LECTURE – WEEK 2
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Learning Objectives
Understand how to identify the sources and types of profitable investment opportunities
Outline the general principles in selecting capital-budgeting criteria
Evaluate projects using discounted-cash-flow criteria
Evaluate projects using non-discounted-cash-flow criteria
Understand the effects of taxation in capital budgeting
Explain the importance of ethical considerations in capital-budgeting decisions
Understand cu
ent business practice with respect to the use of capital-budgeting criteria
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The sources and types of profitable investment projects
Capital budgeting is the process by which a firm adapts old projects to the cu
ent market conditions, or finds new projects
Capital-budgeting decisions are critical in defining a company’s business
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The sources and types of profitable investment projects (cont’d)
A capital-budgeting decision is made every time a firm starts up, expands its facilities or operations, or replaces an asset
Very large investments are frequently the result of many smaller investment decisions that define a business strategy
Successful investment choices lead to the development of managerial expertise and capabilities that influence the firm’s choice of future investments
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Capital-budgeting decision
A framework for capital-budgeting decisions:
1. Find profitable projects
2. Assess the project
3. Accept / reject
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Assessing the project
Once a project is found that appears profitable, financial managers must assess the project
Assessment is according to capital-budgeting criteria
Selection of the relevant criteria is at the discretion of the financial manage
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Principles for selecting capital-budgeting criteria
The four main guiding principles financial managers should use when assessing capital-budgeting criteria:
Rely on cash flows rather than accounting profits to measure a project’s costs and benefits
Be consistent with the goal of maximising shareholders’ wealth
Allow for the time value of money
Be able to account for the risks of projects
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Cash flows
Ensure the data considers only cash inflows and outflows
Things to watch for:
Depreciation: not a cash flow!
Interest expenses: avoid double-counting!
Changes in net working capital: a cash outflow!
Changes in capital spending: new assets cost money, but are not expensed!
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Discounted-cash-flow capital-budgeting criteria
Three capital-budgeting criteria:
Net present value (NPV)
Profitability index (PI)
Internal rate of return (IRR)
All are discounted-cash-flow (DCF) criteria, as they are based on the time value of money
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Net present value (NPV)
NPV is the total present value of the annual net cash flows, less the initial outlay:
(11-1)
where ACFt = the annual cash flow in year t
k = cost of capital
IO = the initial cash outlay
n = expected life
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Accept the project if NPV ≥ 0
Reject the project if NPV < 0
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NPV (cont’d)
The NPV is equal to the present value of the future cash flows returned by a project, minus the initial investment
NPV is an assessment of the expected addition to shareholder wealth
It is used to decide if an investment is:
worthwhile, and
etter than alternative investments
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Example: NPV
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Example: NPV solution
Using equation 11.1, the NPV is:
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Profitability Index
PI is the ratio of the present value of the future net cash flows to the initial outlay (the benefit-cost ratio)
where ACFt = the annual cash flow in year t
k = cost of capital
IO = the initial cash outlay
n = expected life
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Accept the project if PI ≥ 1.0
Reject the project if PI < 1.0
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Profitability index (cont’d)
Compare PI and NPV:
NPV and PI give the same accept-reject decision
Whenever the PV of the project’s net cash flows is greater than its initial cash outlay, the NPV will be positive, and the PI will be greater than 1.0
Accept if NPV ≥ 0
Accept if PI ≥ 1.0
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Example: Using PI
A firm is considering a $40,000 investment in new equipment, for which the expected cash flows are as follows (see Example 11.3):
Cash Flow
Initial outlay –$40,000
Year 1 $15,000
Year 2 $14,000
Year 3 $13,000
Year 4 $12,000
Year 5 $11,000
If the firm has a 12% required rate of return, what is the profitability index for this investment?
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