Microsoft Word - Business Finance - Assignment part 2 - SP XXXXXXXXXXQuestions) (Final).docx
Business Finance Assignment (Part B) — Topics 1-7To be completed and submitted individually Due Date: 5 pm (S.A. Time) Friday 19 July, 2019
Instructions
1. Your answers for this assignment are to be typewritten in a new Microsoft word document.
2. Read the Assignment Instructions that can be accessed from the Course Outline.
3. Marks will not be given for any calculation type of questions without showing full calculations.
4. Ensure you keep a copy of your assignment. Please include your name, student ID number and page numbers in the footer of your document before saving and submitting this file via Gradebook on the learnonline course website.
5. The report must have 1.5 line spacing with margins of two (2) centimetres. Marks will be deducted for both bad grammar and poor spelling. General report formatting requirements of any good report will be expected.It is important that you document how you a
ived at your answer, particularly detailing calculator key strokes used for your calculations. For some problems, it is beneficial to draw a time line to identify the amount and timing of cash flows.
6. Most of the marks for each question will be given for the process used to a
ive at your answer. Therefore, if you just provide an answer that is wrong and there are no supporting details as to how you a
ived at that answer, you won’t get any marks. But if you have detailed your process (which may have been co
ect but you made some e
or with your calculations) then you have the opportunity to get some marks for the question. If you provided a co
ect formula but the workings are wrong, you won’t get marks for just providing a co
ect formula.
7. Ignore inflation in your answers and where possible interest rates should be calculated as percentages to 4 decimal places (e.g XXXXXXXXXX%).
8. You must ensure that your assignment answers are your own work.
The Academic Integrity section of the Course Outline Booklet details the various University policies that will apply to academic misconduct.
1 | P a g e
Brief:
Previously you provided advice to a client who had little knowledge of finance. As a result of your advice on financial theory and investment options, the client has again contacted you for further advice on additional aspects of finance, though this time at a much higher level of financial literacy. Again, it will be your responsibility to provide the mathematical calculations for the investment(s) they select and the theoretical questions they pose.
Background:
Your client, whom you are writing the report for, is a nurse by profession. She has two children
· aged 18 and 10, with a steady income. Her knowledge of financial theory and financial mathematics is now at an intermediate level. She (and her partner) is in a position to invest into sound investments for both short-term and long-term returns. She has done some research and has found a number of investments that she wishes to have analysed. As such, you do not have to search for viable investments for her.
You also note that she wishes to invest into securities for retirement, with only the viability of the investment being considered in this report.
While we can garner a degree of information to the clients financial position, we still do not know her (and her partners) financial position. In the same manner as the previous report you presented to them, it is impossible to know how many of these investments they can purchase
invest. Therefore you are expected to provide advice on each investment in isolation from the other investments, i.e. not as a portfolio of investments.
Requirements:
The report should contain the following information:
· Introduction (100 words)
Comprising a discussion on the purpose and context of the report.
· Discussion / Workings
Consisting of a discussion regarding your client’s financial questions and full workings regarding your client’s investment suggestions.
· Conclusion (100 words)
Summarising the discussion and possible investments and providing guidance and recommendations to the queries provided by your client.
· References
The presentation of the report should be using a report style (see the ‘Report Information’ link within the Assessment section of the BANK 2007 learnonline website) which follows the formatting requirements stated on the first page of the assignment (above).
Clients Financial Questions: (25 marks)
· If both dividends and capital gains/losses form part of the return a shareholder will receive from investing in shares, why are only the dividends taken into account when pricing the share using a constant dividend model or constant dividend growth model?
(6 marks)
· Under what situation can a zero-coupon bond be selling at a premium?
(5 marks)
· Your client approaches you for advice on the mechanisms within the financial market, how prices are set and the concept of incorporation of information into prices. With reference to efficient markets, provide your client with a short, 300 word description regarding how prices are set and how this information is incorporated into prices. In addition, what is the implication for finance managers and their decision making process?
· What is the assumption about risk when using WACC to evaluate a project?
(12 marks)
(2 marks)
Clients Investments: (40 marks)
1. Your client has some money to invest for 12 months and is considering purchasing shares in the retail sector. After reviewing the historical performance and future prospects of Elite Jewellery Ltd. and So Lo Supermarkets Ltd, you have prepared the following information that you will use for your client’s investment decision:
Elite Jewellery Ltd
Lo Supermarkets Ltd
Cu
ent share price
$9.00
$11.60
Cu
ent EPS
$1.20
0.90
Cu
ent Beta
0.85
0.60
Elite Jewellery Ltd So Lo Supermarkets Ltd
Probability of Return
Likely Return over next 12 mths
Probability of
Return
Likely Return over next 12 mths
0.15 -1% 0.10 1%
0.60 12% 0.40 7%
0.25 18% 0.30 10%
0.20 14%
Other relevant information:
· Cu
ent risk free rate of return: 5% p.a.
· Long run average return on market portfolio: 12% p.a.
Required:
(a) Calculate the expected return (R*) and standard deviation () for each share.
(4 marks)
(b) Briefly explain the meaning of expected return and standard deviation and outline what your calculations indicate about a relationship between risk and return.
(3 marks)
(c) Briefly outline in words such that an average person can understand, the difference between standard deviation and beta as measures of risk.
(3 marks)
(d) Calculate the return investors with a diversified portfolio should require from each share.
(2 marks)
(e) With reasons based on your computations, in (a) and (d) above, provide a
ecommendation of which share (if any) your client should purchase/not purchase.
(2 marks)
(f) On the basis of your analysis in (e) above, detail what you would expect to happen to the price of each share in the market.
(2 marks)
(g) Briefly explain what is likely to occur, in relation to the risk exposure of your client’s investment portfolio, as your client increases the number of diversified investments in her investment portfolio.
(2 marks)
2. From the recently published financial statements for Entroc Ltd., your client has obtained the following information
Balance Sheet as at 31 March 2019
Long-term Debt
$
Bonds: Par $100, semi-annual coupon 14% p.a., 6 yrs to maturity
1,000,000
Equity
Preference Shares: Par $10, annual dividend 60 cents per share
100,000
Ordinary Shares: - 1 million issued
2,000,000
TOTAL
From the financial markets, your client has ascertained the following:
$3,100,000
· Yield to maturity on 6 yr Entroc Ltd. corporate bonds: 6% p.a.
· Required return on Entroc Ltd. preference shares: 9% p.a.
· Entroc Ltd. ordinary shares last dividend declared: $0.20
· Forecast future growth rate of Entroc Ltd. ordinary share dividend: 5% p.a.
· Required return on Entroc Ltd. ordinary shares: 12% p.a.
(a) Calculate the intrinsic/market valuation on 31 March 2019 of one Entroc Ltd.:
(i) bond
(ii) preference share
(iii) ordinary share.
(5 marks)
(b) Calculate the total intrinsic/market valuation on 31 March 2019 of Entroc Ltd’s:
(i) long-term debt
(ii) preference shares
(iii) ordinary shares.
(3 marks)
(c) Compare the book and market values for each of the long-term sources of finance cu
ently used by Entroc Ltd. and
iefly explain why any differences that your client observes have occu
ed.
(6 marks)
3. Your client is investigating two start-up companies that operate in the same mining sector in Australia. These two companies are investigating similar projects (not both) in which they will invest. However, your client is not sure which is better and has sent the relevant details to you for advice. The characteristics of the two projects are given below:
Project 1
Project 2
Initial Outlay (IO)
$17,000,000
$21,000,000
Annual Cash Flows (CF)
$4,500,000
$8,500,000
Life of system
10 years
7 years
Notes: 1) All cash flows are after tax and depreciation.
2) A flat rate of 14% p.a. is estimated as the risk in both of these projects.
Your client wishes you to provide detailed calculations indicating which project you believe to be the best. The client will then decide whether to invest into the company looking to invest in the project you recommended.
(8 marks)
Business Finance Study Period 4, 2019 Assignment Part B
Student Name: ID#:
Key Components of the assignment
Very Good
Good
Fai
Poo
Comment
A
Introduction: (10%) Purpose and limitations explained
B
Standard of analysis and discussion:
· an appropriate standard of discussion relating to the financial questions (25 %)
· co
ect and informative analysis of the client’s investment opportunities (40%)
C
Conclusion and Recommendation (10%)
D
Standard of presentation (5%) (an appropriate standard for the report)
E
Standard of language (5%) (an appropriate standard of grammar and co
ect spelling)
F
Standard of referencing (5%) (an appropriate standard within text and in the reference list)
Penalties
Total Mark
/100
General Comments
Capital budgeting Investment Criteria (NPV)
Capital budgeting
Investment Criteria (NPV)
Business Finance
Topic 7
Capital Budgeting
General Principles
Net Present Value
Equivalent Annual Annuities
2
Business Finance Topic 7 – Capital Budgeting – Investment Criteria (NPV)
General Principles
Value (e.g. share price) comes from future cash flows resulting from investment in projects and assets
To choose between alternative investments need to measure their value today
From the perspective of wealth you should select those projects that enhance owners’ (shareholder) wealth
3
Business Finance Topic 7 – Capital Budgeting – Investment Criteria (NPV)
Net Present Value (NPV)
NPV – the difference between the present value of future cash inflows and the present value of cash outflows
Minor differences relative to the valuation of assets like stocks and bonds
Generally associated with a company’s projects
Projects have setup costs – Initial outlays
4
Business Finance Topic