Questions

Questions


FNCE90065 FUNDAMENTALS OF FINANCE ASSIGNMENT 2 Instructions to Students: 1. You may elect to complete the Assignment as an individual or member of a group of three students. 2. If you SUBMIT AS AN INDIVIDUAL : answer question 1 only. 3. If you SUBMIT AS A GROUP OF THREE OR FOUR : answer ALL questions. Each question is of equal value. 4. Assignments should be typed; as a guide, your answer should be about 300 words per question. 5. Please make sure group members’ names and student numbers are at the top of the assignment. 2 Question 1. You have been given the following information about a company. The centre column is based on audited results for its financial year ending 30 June 2019, while the right column is an expert’s forecast of future change. Assume: all cash flows are at financial year end; corporate tax is 30 percent, depreciated value of PPE equals $750 million and average depreciation is 10 percent on a straight line basis; the company’s only debt is a loan of $300 million with fixed interest of 8 percent per annum, with principal repayable in 2030; the company has 500 million shares on issue. a) Use discounted cash flow analysis with a discount rate of 12 percent PA to calculate the company’s net present value at 30 June 2020 b) Use an alternative method to validate your estimate of the company’s NPV c) On 25 June 2020, the company’s share price closed at $8.50. In light of valuations above, what advice would you give an investor who is considering buying shares in the company. Clearly describe any assumptions you made and their justification. Question 2 Think of an example of a real option. Describe it, and the elements of the option. Question 3 A corporation is considering purchasing one of two machines, A and B. The cash flows of each of the projects are represented below. The project’s required rate of return is 10% per annum. Since these projects are mutually exclusive, which proposal (if any) should the manufacturer choose? Year 0 1 2 3 4 5 6 Project A –10,000 4,000 4,000 4,000 4,000 4,000 4,000 Project B –12,000 5,000 5,000 5,000 5,000 5,000 5,000 2018-9 Actual ($ mill) Expected change (% PA) Gross revenue 1200 3 Fixed costs 250 1 Variable costs 700 2.5 Working capital 120 3 Annual investment 125 3 FNCE90065 FUNDAMENTALS OF finance ASSIGNMENT 2 Instructions to Students: Question 3