Assessment Task – Tutorial Questions Assignment Unit Code: HC2091 Unit Name: Business Finance Assignment: Tutorial Questions Assignment (Individual) Due: Friday 23rd October 2020 (11:30pm) Weighting: 50% Purpose: This assignment is designed to assess your level of knowledge of the key topics covered in this unit Unit Learning Outcomes Assessed: • Explain financial markets and different types of securities and the processes related to their investment; • Interpret the impact of future developments in the financial markets on business structure and performance; • Understand the concept of the time value of money and apply it in investment and portfolio evaluation and management; • Critically understand and practice valuation of financial instruments, including ordinary shares, preferred shares and bonds; • Critically analyze finance alternatives to manage short- and long-term debts; • Evaluate the firm capital structure policy, dividend payout policy, and alternative funding policies and instruments available to businesses. Description: Each week students were provided with three tutorial questions of varying degrees of difficulty. The tutorial questions are available in the Black Board/ Tutorial Materials/ Tutorial Questions for Final Assessment for each week. The Interactive Tutorials are designed to assist students with the process, skills and knowledge to answer the provided tutorial questions. Your task is to answer a selection of tutorial questions from week 1 to week 11 inclusive and submit these answers in a single document. 2 The questions to be answered are: Question 1 (11 marks) (This question is from the Week 1 and Week 5 Tutorials) 1. Which of the following types of markets can the NASDAQ market in the USA be classified as: (Note – Please tick ALL of the options which are correct)? (1.5 marks) ☐ Primary Market ☐ Secondary Market ☐ Auction Market ☐ Dealers Market ☐ OTC market ☐ Exchange market ☐ Capital market ☐ Monetary Market ☐ Underlying Market ☐ Derivative Market 2. You are the CFO of Black Gold Mining Ltd, which is offering an investment in two (2) large projects with the cash flows presented in the table below. Your company can only choose one of the projects (I or II), as shown in the table. (9.5 marks in Total) Project I Project II Cost $550 000 $640 000 Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 230 000 210 000 200 600 150 000 120 000 330 000 300 000 250 000 180 000 150 000 Required: Undertake the project evaluation and identify which project Black Gold Mining should choose, using: a) The Net Present Value (NPV) method with the discount rate of 12% (5 marks) b) The Payback Period (PBP) method with benchmark of maximum 2 years (3.5 marks) c) If there is a conflict between the NPV method and the PBP method, which investment criteria should the company use to make the final capital budgeting decision and why? (1 mark) 3 Question 2 (11 marks) (This question is from the Week 3 and Week 4 Tutorials) Sally has $50 000. She wants to save $120 000 to deposit for her first home loan. She decided to put that $50 000 in an investment fund that pays an interest rate of 11% per annum (per year), compounding annually. Required: a. How long does she need to wait until she has saved $120 000? (2 marks) b. If Sally wishes to have that $120 000 in five years, how much does she need to put into the investment now with the same interest rate of 11%? (2 marks) c. Assume that Sally was offered an alternative investment, which requires an initial investment of $60,000 for 7 years. Calculate the amount of money Sally would accumulate after 7 years by this investment, if the rate of return is 11.5%, compounding quarterly? (2 marks) d. Assume that Sally was offered two (2) other alternative investments in the securities market: i. Option A pays an interest rate of 10% p.a. (per year), compounding semiannually. ii. Option B pays an interest rate of 9.87%, compounding monthly. Which option (A or B) should Sally choose? (2 marks) e. Assume that Sally has already got her $120,000 for the home loan deposit and now she wants to purchase a house which costs $450 000. Her plan is to pay that $120,000 down in cash and finance the balance over 30 years at the interest rate of 2.5%. What will be her monthly mortgage payment? (2 marks) f. At the end of this year Sally will receive a fixed income of $15,000 each year forever. If the required rate of return is 12%, what is the present value of this income flow? (1 mark) 4 Question 3 (7 marks) (This question is from the Week 7 and Week 8 Tutorials) APM Fund Management is considering the following options for their new investment portfolio: Option 1 - A non-callable corporate bond that pays coupon rate of 9% annually. The bond will be mature in 20 years. The year-to-maturity (YTM) of the bond is 7.5% and the face value of the bond is $1 000. Option 2 - An ordinary share which just paid a dividend of $7.50 with a constant dividend growth rate of 5% each year. The current market price of this share is $112.50. Option 3 - A $100 par value preference share which pays a fixed dividend of 13%. The required rate of return of the preference shares in the same group is 12%. Required: a. How much should APM pay for the corporate bond? If the coupon rate is paid semi-annually, how much is the bond value? (4 marks) b. Calculate the market required rate of return for the ordinary share. Calculate the share value if the market required rate of return is 10%? (2 marks) c. Compute the value of the preference share and explain why the preference share is considered a hybrid between an equity and a debt instrument? (1 mark) Question 4 (7 marks) (This question is from the Week 9 Tutorial) Alice has an investment portfolio that paid the rate of return of 23%, 12%, - 34%, 18% and 10% over the last five (5) years. Required: a. Calculate the arithmetic average return and the geometric average return of this portfolio (2 marks)? b. If the following information is available for Alice’s portfolio in the forecast for next year, calculate the expected return and identify the risk of return by computing the variance and the standard deviation. (4 marks) State of economy Probability of the economic state Rate of Return Boom 0.55 25% Normal 0.30 17% Recession 0.15 -8% c. If the beta of this portfolio is 1.2, the risk-free rate of return is 7%, how much is the risk premium applied in calculating the systematic risk of this portfolio using the Capital Asset Pricing Model (CAPM)? (1 mark) 5 Question 5 (7 marks) (This question is from the Week 10 Tutorial) Big Water Ltd currently has the following capital structure: Debt: $4,500,000 paying 9.5% coupon bonds outstanding with 12 years to maturity, an annual before-tax yield to maturity of 8% on a new issue. The bonds currently sell for $1,113 per $1,000 face value. Ordinary Shares: 65,000 shares outstanding currently selling for $75 per share. The company just paid a $6.50 dividend per share and is experiencing a 6% growth rate in dividends, which it expects to continue indefinitely. (Note - The firm's marginal tax rate is 30%.) Required: a) Calculate the current total market value of the company. (3 marks) b) Calculate the capital structure of the company. (2 marks) c) Calculate the weighted average cost of capital (WACC) for the firm. (2 marks) Question 6 (7 marks) (This question is from the Week 11 Tutorial) The following data available for ABC company. Account Beginning balance Ending Balance Use/source of cash Accounts payable 20,300 24,400 Inventory 60,600 67,200 Long term debts 127,500 125,800 Common stock 200,400 215,900 Required: a) Calculate and identify the source of cash or the use of cash for each account change by filling into the column next to the ending balance. (2 marks) b) Assume that beginning balance of accounts receivable is $23 400 and ending balance of accounts receivable of $22 300, total revenue is $237 000, total cost of sales is $ 165 000 and all sales are on credit. Calculate the operating cycle and cash cycle and interpret the outcomes (5 marks) 6 Submission Directions: The assignment will be submitted via Blackboard. Each student will be permitted only ONE submission to Blackboard. You need to ensure that the document submitted is the correct one. Academic Integrity Holmes Institute is committed to ensuring and upholding Academic Integrity, as Academic Integrity is integral to maintaining academic quality and the reputation of Holmes’ graduates. Accordingly, all assessment tasks need to comply with academic integrity guidelines. Table 1 identifies the six categories of Academic Integrity breaches. If you have any questions about Academic Integrity issues related to your assessment tasks, please consult your lecturer or tutor for relevant referencing guidelines and support resources. Many of these resources can also be found through the Study Skills link on Blackboard. Academic Integrity breaches are a serious offence punishable by penalties that may range from deduction of marks, failure of the assessment task or unit involved, suspension of course enrolment, or cancellation of course enrolment. Table 1: Six categories of Academic Integrity breaches Plagiarism Reproducing the work of someone else without attribution. When a student submits their own work on multiple occasions this is known as self-plagiarism. Collusion Working with one or more other individuals to complete an assignment, in a way that is not authorised. Copying Reproducing and submitting the work of another student, with or without their knowledge. If a student fails to take reasonable precautions to prevent their own original work from being copied, this may also be considered an offence. Impersonation Falsely presenting oneself, or engaging someone else to present as oneself, in an in-person examination. Contract cheating Contracting a third party to complete an assessment task, generally in exchange for money or other manner of payment. Data fabrication and falsification Manipulating or inventing data with the intent of supporting false conclusions, including manipulating images. Source: INQAAHE, 2020 If any words or ideas used the assignment submission do not represent your original words or ideas, you must cite all relevant sources and make clear the extent to which such sources were used. 7 In addition, written assignments that are similar or identical to those of another student is also a violation of the Holmes Institute’s Academic Conduct and Integrity policy. The consequence for a violation of this policy can incur a range of penalties varying from a 50% penalty through suspension of enrolment. The penalty would be dependent on the extent of academic misconduct and your history of academic misconduct issues. All assessments will be automatically submitted to Safe - Assign to assess their originality. Further Information: For further information and additional learning resources please refer to your Discussion Board for the unit.