Note: Please note that references are not required for this assessment.
Question 1 ( 7 marks)
You are a newly employed finance manager for Finance Adventure Ltd. The following data is available for the company as of 31 June 2020:
Current assets of $293,950
Current liabilities $68,700
Total assets $765,600
Equity $305,890
Required:
a. The company’s Management Board required you to evaluate two alternative options of debt funding and equity funding for a new project. What is the job are you doing to complete the task? (referring to one out of 3 important questions of corporate finance for your answer) (1 mark)
b. Calculate non-current assets, non-current liabilities and build a balance sheet for the company? (3 marks)
c. Calculate the return on assets (ROA) of the company given that return on equity (ROE) is 35%? (2 marks)
d. What is the price earnings ratio (PE) of the company, given total number of outstanding ordinary shares is 57,000 and market price of each share is $22? (1 mark)
ANSWER: ** Answer box will enlarge as you type
Question 2 ( 11 marks)
You have $50,000 saving and are considering a 30-year investment which is offered in two phases:
Phase 1: Investing that $50,000 as a lump sum in an investment in the securities market for 20 years. Your securities broker recommends two alternative options: Option A pays interest rate of 11.87%, compounding daily. Option B pays interest rate of 12%, compounding quarterly.
Phase 2: At the end of 20 years, putting the total amount accumulated in the first phase into another investment, which will pay you an equal income at the end of each year for 10 years.
Required:
a) Identify which option should you choose in Phase 1 by computing the effective annual interest rate (EAR)? (2 marks)
b) Calculate the amount of money you would accumulate in Phase 1 after 20 years if you choose Option A? (2 marks)
c) If you would like to have exactly $600,000 after 20 years, how much the investment rate of return (compounding annually) should be? (3 marks)
d) Assume that after 20 years, you put totally $500,000 in the investment in Phase 2, calculate the amount of yearly income would you receive each year for 10 years if the required rate of return is 12.5%, compounding annually? (2 marks)
e) In phase 2, assume the payment of income is changed to 74,000 per year forever. Calculate the rate of return would you get from the investment? (2 marks)
ANSWER:
Question 3 (7 marks)
You are working as a finance manager for Fire Fox Transport Ltd. The company is considering to invest in one of the two following projects to buy a new equipment for their storage which is expected to boost the company’s revenue. Each equipment will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 9.5%. The cash flows of the projects are provided below.
Equipment 1 Equipment 2
Cost $157,000 $182,000
Future Cash Flows
Year 1
Year 2
Year 3
Year 4
Year 5
67 000
82 000
78 000
64 000
56 000
83 000
94 000
80 000
77 000
73 000
Required:
a) Identify which option of equipment should the company accept based on Net Present Value (NPV) method? (4 marks)
b) Identify which option of equipment should the company accept based on discounted pay back method if the payback criterion is maximum 3 years? (3 marks)
ANSWER:
Question 4 ( 7 marks)
You are an experienced investor in the securities market and you have established an investment portfolio of two blue chips five years ago: Diamond shares with current market value of $235,000 and Platinum shares with current market value of $355,000.
Required:
a) If your portfolio has provided you with returns of 10.5%, 12.6%, – 11.5%, 14.5% and 15.2% over the past five years, respectively. Calculate geometric average return of the portfolio for this period. (1 mark)
b) Assume that data in the table below is available for your portfolio performance, calculate the expected return, variance and standard deviation of the portfolio? (4 marks)
Diamond Platinum
Expected return 16.5% 23.5%
Standard Deviation of return 7% 11%
Correlation of coefficient (p) 0.45
c) Assume that beta of the Diamond shares in your portfolio is 1.5. The market portfolio expected return is 13.5%, the risk-free rate of return is 7.2%. Calculate expected return of this stock using Capital Asset Pricing Model (CAPM) (1 mark)?
d) Assume that you bought 2000 of Platinum shares in your portfolio for a price of $95 each, the dividend paid for this stock is $3/stock each year. Calculate the total return of this investment after five years (1 mark)?
ANSWER:
Question 5 (11 marks)
Treasure Island Ltd. currently has the following capital structure:
Debt: $3,500,000 par value of outstanding non-callable bond that pays annually 10% coupon rate with an annual before-tax yield to maturity of 8.5%. The bond issue has face value of $1,000/bond and will mature in 20 years.
Ordinary shares: 70,000 outstanding ordinary shares. The firm plans to pay a $4.50 dividend per share in the next financial year. The firm is maintaining 5% annual growth rate in dividend, which is expected to continue indefinitely.
Preferred shares: 45 000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 13%.
Company tax rate is 30%.
Required: Complete the following tasks:
a) Calculate the current price of the corporate bond? (3 marks)
b) Calculate the current price of the ordinary share if the average return of the shares in the same industry is 11%? (2 marks)
c) Calculate the current value of the preferred share if the average return of the shares in the same industry is 10.5% (2 marks)
d) Calculate the current market value (rounded off to the nearest whole number) and capital structure of the firm (rounded off to two decimal places). Identify the total weights of equity funding (2 marks)
e) Compute the weighted average cost of capital (WACC) under the traditional tax system for the firm (2 marks)
ANSWER:
Question 6 (7 marks)
You are working for an imports-exports company. In the current financial year, your company has a net income of $851,000 and plans to use a part of it as retained earnings for a new project which will cost $500,000 next year. The company’s stock is currently listed and actively traded on ASX. Required:
a) Calculate the amount of net income available for the company to pay dividends to current shareholders if it maintains a capital structure of 46% in debt funding and 54% in equity funding, assuming residual dividend theory applies. (2 marks)
b) Your company is going to pay an annual dividend of $5 per share and extra dividend of $2 per share in 4 weeks. The standard process of settlement in ASX is T+2. If tomorrow is the ex-dividend date, when is the record date for dividend payment? calculate the ex-dividend price if today’s market price is $43.5, given the dividend tax rate is 13%. (2 marks)
c) Your company needs to make a payment of AUD 245,000 to a partner in Tokyo. If the direct quote of Japanese Yen in Sydney is 0.004782, how much Japanese Yen the partner in Tokyo will receive? (1 mark)
d) Your company has an extra cash of A$216 000. The AUD/USA exchange rate in New York is 0.77923. The USD/AUD rate in Sydney is 1.29135. Is there any arbitrage profit possible? Set up an arbitrage scheme with the extra cash, disregarding bid-ask spread. What is the potential gain in AUD dollar? (2 marks)
ANSWER:
END OF TUTORIAL ASSIGNMENT
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