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1 FINM 1415 Assignment Questions Semester 1 2020 Due: 2 pm Monday 1st of June 2020 Total Marks: 35 marks GUIDELINES: ASSIGNMENT LAYOUT AND PRESENTATION 1. Your document should be typed in Times New Roman font, size 12. 2. The assignment should be double spaced and have margins of 2.54 cm. 3. For calculation questions, you need to show all your workings (including timeline if appropriate) and round your answers to three decimal places. 4. If you use any reference (e.g. Journal, Book, website etc.), you must reference it according to Harvard Referencing Style. You must also format your reference list in line with Harvard Referencing Style which can be accessed here: https://web.library.uq.edu.au/research-tools- techniques/referencing-style-guides QUESTION 1 TIME VALUE of MONEY (5 marks) A total debt of $ 1,000 due now, $4000 due 2 years from now, and $6000 due 5 years from now is to be repaid by 3 payments. (1) The first payment is made now. (2) The second payment, which is 80% of the first, is made at the end of 30 months from now. (3) The third payment, which is 60% of the second, is made at the end of 4 years from now. The annual interest rate is 4%, compounded semi-annually. Calculate the amount of each of the three payments. A timeline is required for full points. https://web.library.uq.edu.au/research-tools-techniques/referencing-style-guides https://web.library.uq.edu.au/research-tools-techniques/referencing-style-guides 2 QUESTION 2 Cash Flow Analysis (10 marks) You are considering a 5-year investment project which is expected to cost $1, 000, 000. In each year, you have decided that there are 3 possible states of the economy: good, average, and poor. In each individual year there is a 35% chance of the economy being good and a 15% chance of it being poor. You forecast the following net cash flows for the project: Economy Year 1 Year 2 Year 3 Year 4 Year 5 Good 300,000 350,000 400,000 350,000 250,000 Average 250,000 275,000 325,000 275,000 175,000 Poor 200,000 225,000 250,000 225,000 150,000 (a) What is the expected net cash flow each year? (3 marks) Hint: Do some research on how to calculate expected cash flow given probabilities in each scenario. You have arranged the following sources of funding: (i) $200,000 from a 5-year fixed interest loan whose annual loan payments are $48,126.91. (ii) $250,000 from a 5-year zero-coupon bond with a face value of $350,000. (iii) $300,000 from an ordinary share issue where a dividend of $18,000 will be paid in one year and it is expected to grow at 3% per annum. (iv) $250,000 from a 5-year coupon-paying bond issue whose coupon rate is 7% and face value is $250,000. (b) what is the discount rate given above sources of financing? (5 marks) Hint: The discount rate should be the weighted average cost of capital. (c) What is the NPV of this investment project and should you invest in this project? (2 marks) 3 QUESTION 3 STOCK VALUATION: (20 Marks) − Use the spreadsheet “Q2-Stock-FLT.xlsx” on Blackboard to complete this question. The spreadsheet contains information output from Bloomberg Terminal. − All financial statement numbers are in millions of dollars unless otherwise indicated. − Assume today is 30th June 2017 and you have just been paid a dividend and that the next dividend will be received in exactly one year (assume dividend is paid annually). − The stock price as at 30th June 2017 was $38.30. a) You expect Flight Centre Ltd. to maintain the same dividend payout ratio as at 30th June 2017 for the next three years. After three years, the company will increase the dividend payout ratio to 70%. Assume company’s return on new investment is 16.6% and the required rate of return is 10%. Using the dividend discount model, calculate the intrinsic value for stock today. (5 marks) b) Based on your answer in Part (a), would you recommend to buy, sell or hold the stock? Give the recommendation and briefly discuss the difference between the intrinsic value and stock price. (no more than 200 words) (3 marks) c) Calculate the following ratios for financial year ending at 30th June 2017 - Forward Price-Earnings Ratio and Trailing Price-Earnings Ratio. Briefly discuss the difference between these two ratios. - If the stock was fairly priced according to the dividend discount model, what would be its Price- Earnings ratio (both Forward and Trailing)? - The P/E ratio of the “S&P/ASX 200 Consumer Discretionary Sector GICS Level 1 Index” is 25.07 as at the end of financial year of 2017, use this number as the average industry P/E ratio for Flight Centre. Comparing your estimate of P/E ratio for Flight Centre with the industry average P/E ratio, what conclusion could you make? (6 marks) Now assume you bought this share two years ago: d) If you bought share in the company on the 1st July 2015 at $34 and the share price exactly one year ago was $31, what is your capital gain per share today? (2 mark) e) Use the information in part (d), if you reinvested the dividends you received in more FLT shares, what is your wealth on 30th June 2017 on a per share basis? Assume that you have bought 1000 shares. (4 marks)