FINC19011 -Knowledge & Valuation Assignment

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FINC19011 BUSINESS FINANCE TERM 2, 2018

 

Assessment Task 1 – Knowledge & Valuation Assignment

Weighting:      30%

Marking

This assignment is worth 50 marks. The total marks will be weighted to 30%. The assignment is to be attempted individually or in a group of maximum two students. You are allowed to form groups across campuses or study modes. Only one member of the group should submit for any group submission. Marks will be allocated for this assignment for completeness, accuracy of the calculations and explanations, and presentations like explicitly labelled answers to each question and appropriately referenced if required.

Please include the formulae, figures inserted into the formulae and then your calculation steps (either financial calculator steps or further steps using the equation).

Rounding and Answer Presentation:

Math answers should be shown appropriately.

  • Please keep at least 5 and preferably 7 or 9 decimal places in intermediate calculation steps.
  • The final answer should be shown up to two decimal places.
  • If the answer is a percentage, please show the percentage results up to two decimal places in percentage format (e.g. 12.25%).
  • If the answer is a monetary value, please show as either a whole figure (e.g., $50,000) or up to 2 decimal places only ($50,000.18). Please use the proper currency symbol if the currency in the question is different from $.

There can be some discrepancies among answers due to the number of decimal places chosen in intermediate rounding. The grading will consider this and marks will not be deducted for discrepancies that may arise from intermediate rounding.

Word Limit:

None. Although recommended maximum word limit is specified for the discussion questions, the grading is somewhat lenient on word length and going a bit over the recommended length is fine.

Academic Integrity and Partial Marking:

Maintaining academic integrity is absolutely essential. The unit’s marking team highly reward sincere efforts in answers. For math questions, answering inaccurately does not necessarily mean the mark awarded will be 0. Rather, for all math questions, partial marks are allotted to showing the proper formula, calculation steps and then the final answer. Partial marks also apply for the discussion questions, provided the answer is relevant and properly cited. Thus, please try your best to answer the questions. Detailed feedback will be provided during grading.

The questions you need to answer are indicated in the following pages.

Reflective discussion questions (Week 1): Theory   [15 marks]

Background:

In week 1, we cover the concept of financial decisions faced by financial manager. This question comprises a set of sub-questions, designed for you to reflect on this concept and research relevant resources. The questions are mostly open-ended. Please think about the question, read over the relevant sections in the prescribed textbook and slides. Then write your answers based on your thoughts, supported by peer-reviewed academic literature you researched using the Library search engine. Please ensure proper academic writing convention and respond using your own words and styles.

Question 1:

  • Identify the key financial decisions facing the financial manager of any company. [3 marks]
  • Explain the key financial decisions facing the financial manager of any company. [6 marks]
  • Give an example for each of the financial decisions facing the financial manager of any company. [6 marks]

Hints and Instructions:

Recommended maximum length is 500 words, combining responses to all questions. You are encouraged to cite varied resources, additional to the book, to substantiate your answer and arguments. The references, in-text citation etc. do not contribute to the word length; and grading is somewhat lenient on word length. Please, however, do not produce unusually lengthy answers like that with more than 800 words. It’s the quality of the answer, rather than the length, that will be assessed.

For (a), please note we want you to identify the three key financial decisions.

For (b), please note we are looking for an explanation of the three financial decisions. An explanation is written to explain how and why something in the world happens. Can you find any evidence from researching peer-reviewed literature to support your explanation?

For (c), please note consider examples evident in a company a financial manager may face and needs to make a decision.  

 

 

Case study 1 (Annuity and loan: Week 2 & 4): Calculation-based and applying the theory [15 marks]

Question 2:

You are about to make an offer to purchase a property in Surfers Paradise for $1.8 million. You will pay 50% of this purchase price from your personal deposit. You will cover the rest of the purchase price using a 25-year mortgage loan from a bank. You seek advice from a mortgage broker who suggests the following two loan choices:

Bank Name Interest Rate Interest Compounded Loan Application Fee
Bank A 3.67% p.a. Fortnightly $500
Bank B 3.67% p.a. Monthly $250

 

The loan application fee will be added to the amount you borrow from the bank and the repayment will be based on the total amount borrowed (inclusive of loan application fee).

Your repayment frequency per year will be the same as the frequency of interest compounding per year. Thus, if you take the mortgage from Bank A, you will repay at the end of every fortnight. Whereas, if you take the mortgage from Bank B, you will repay at the end of every month.

Considering the above information, please answer the following:

  • Determine the amount borrowed if you take the loan from:
    1. Bank A. [1 mark]
    2. Bank B. [1 mark]
  • Determine the annual repayment if you borrow from:
    1. Bank A. [3 marks]
    2. Bank B. [3 marks]
  • Prepare an amortization schedule for the loan that involves the lesser annual repayment. [7 marks]

 

Hints:

Please note that this case study entails multiple calculation steps. It is composed of multiple math you have encountered in the lecture slides. You may use Microsoft-Excel for the calculations, but make sure you show your formula and workings.

For (a), first determine the money you will pay from your own deposit (i.e., 50% of the price of the property). Then, determine the loan amount. As mentioned, please just add the loan application fee to the amount you will take as loan. For example, if the loan amount to take is $1,000 and the loan application fee is $50, the amount borrowed is $1,050.

For (b), please note the loan payment calculation process in the early part of week 4 slides, and also the payment calculation slides in week 2 (slide#80). This math is similar except for the different numerical values. Note that both loan choices involve loan amortized or paid back in 2 years.

 For (c), please note the loan amortization schedule math indicated in the early part of week 4 slides. For the loan amounts determined in (b), please choose the one with lower annual repayment and develop the schedule considering the relevant interest rate and compounding. While determining amortization schedule, please note that periodic payments (rather than annual payments) are to be considered. Please note the math on slides indicating amortization schedule for m greater than 1.

Case study 2 (Holding period return, Portfolio, CAPM: Week 3 & 5): Calculation-based and applying the theory [10 marks]

Background:

In Week 5 lecture slides, you may have noted the use of Yahoo7! Finance (https://au.finance.yahoo.com/) to determine share prices and dividends for Telstra Ltd, Commonwealth Bank of Australia and AGL Energy Limited for particular dates. In Week 3, you have come across the idea of portfolio. In this case study, you will gain experience of using the knowledge from both weeks in solving a practical problem.

Question 3:

Please note the closing prices of the shares for Telstra Ltd (code: TLS.AX), Commonwealth Bank of Australia (CBA.AX) and AGL Energy Limited (AGL.AX) on 3 January 2017 and 30 January 2018 from Yahoo! 7Finance. Please also note any dividends paid for these companies between these two dates. Please then answer the following.

  • Suppose, an investor bought some shares of each of these companies on 3 January 2017 for the respective closing prices. The investor then sold these shares on 30 January 2018 for the respective closing prices. Assume that the investor received any dividends paid between these dates for each of the companies. What are the holding period returns for each of these companies considering the indicated purchase and sell prices and any dividends received? [3 Companies x 1.5 marks = 4.5 marks]
  • Assume that the holding period returns for these companies’ shares, as determined in (a), are also the expected returns of these shares for foreseeable future. With such assumption, determine the expected return of a portfolio constituting respectively 40%, 20% and 40% of the investment in the shares of TLS.AX, CBA.AX and AGL.AX. [1.5 marks]
  • If the beta of shares of TLS.AX, CBA.AX and AGL.AX are respectively 0.6916, 1.1038 and 0.6133, determine the beta of the portfolio mentioned in (b). [1.5 marks]
  • Suppose the risk-free rate of return is 2.67%. Considering the expected return of the portfolio and beta of the portfolio determined respectively in (b) and (c), determine the market risk premium.
    [2.5 marks]

Hints:

For (a), for each of the companies, please note the closing share prices on 3 Jan 2017 and 30 Jan 2018. Please also note the total dividends paid between these two dates. Then, considering the holding period (HPR) formula, determine the holding period returns (i.e. HPR for each of the two companies’ shares). Please note the relevant Week 5 slides on extracting information from Yahoo!7Finance; and Week 3 slides for HPR concept.

For (b), please use the expected return of portfolio formula and assume the results derived in (a) as the expected returns for these companies’ shares. Please note the relevant concepts in Week 3 slides.

For (c), please note the beta of portfolio formula and relevant concepts from Week 3 slides. Please use the proportion of investments suggested in (b).

For (d), please note the week 5 slide examples on CAPM for Portfolio. Once you know the expected return from the portfolio in (b) and the beta of the portfolio in (c), the calculation is very similar to a math example indicated in the slide.

Short math questions (Week 1, 2, 4, 5): Calculation-based and applying the theory [10 marks]

Question 4:

  • You have $5,000 in a term deposit account that provides 2.8% p.a. interest compounded semi-annually. To what amount will your investment grow after 4 years? [2 marks]
  • How many years will it take an investment of $10,000 to grow to $30,500 if the investment pays 2.8% p.a. compounded every two months? [2 marks]
  • A zero-coupon bond matures in 30 years. The interest is compounded semi-annually and the face value of the bond is $1,000. The market interest rate for similar bonds is 3.99%. What is the value of this bond? How many of these bonds sold will raise $1m?  [2.5 marks]
  • For a rapidly growing British company, the growth rate forecast suggests an expected 27% per annum for the next two years and 15% for the subsequent year (i.e. 3 years from now). At the end of 3 years, the growth rate settles to an expected 8% per annum and remain so for the near future. The company expects to pay a dividend of £220 per share next year. Assume that the investors’ required rate of return for the company’s shares is 17%. Determine the value of this company’s share. Is the share a desirable purchase if its market price is £3,500 per share? [£ = Pound Sterling] [3.5 marks]

 

Hints:

All these math problems involve very few steps and can be solved quite quickly.

For (a), please note week 1 resources. Please also note what information (i.e., PV, FV, i, m, & n) are given and which information the question asks to determine. Please then use the relevant formula – a straightforward and quick calculation.

For (b), please note week 2 resources – a straightforward calculation.

For (c), please determine the price of the bond using the formula – this is what is referred to as the value of the bond. Then determine the number of bonds. Please note the week 4 slides.

For (d), please note the concepts introduced in week 5 slides and the relevant section of the book. Notably, although we are using Deutsche mark (DM) as the currency, the approach introduced for similar math in lecture slides and tutorials and entailing Dollar ($) applies here also. The answer should be indicated in the currency the question refers to. By the way, please also note the dividend information to understand whether D0 is given or D1 is given. Please also note when the constant growth starts and proceed with the calculation accordingly. Once the value has been determined, compare it with the market price to decide whether it is a desirable purchase.