Assignment Solutions

Business Finance

Questions Each team is required to make the following calculations using the statistical functions on Excel: 1. Mean (expected) return and standard deviation for the stock market and the two companies. 2. The coefficient of variation for the market and the two companies. 3. The correlation coefficient between bank West and Clip Industries. 4. The standard deviation of returns for a portfolio consisting of Bank West and Clip Industries (assume equal weightings). 5. Beta coefficient calculation for both Bank West and Clip Industries.

Bonds

Question 1 (25 marks) AMCOR Limited has a corporate bond outstanding with a 7% coupon, semi-annual interest, 15 years to maturity and a face value of $1,000. Similar bonds currently yield 13%. By prior agreement, the company will skip the coupon payments in years 6, 7 and 8 (6 payments in total; the payments at time 6 through to 8.5). These payments will be repaid, without interest, at maturity. What is the corporate bond’s value (the price for AMCOR’s bond)?

Value of Bonds and Stock

Based on what is happening in the markets today do you feel that bonds and stocks are either over- or under-valued? Conduct research on the web to this effect. Relate your thoughts to the fundamental "valuation" concepts discussed in the readings for bonds and stocks.

Managerial Finance

Managerial Finance Test 2 Using the first three chapters of the text and the assigned articles as your bibliography, write a paper that explains the development of finance theory from MPT to CAPM to EMH to Behavioral Finance. If the unifying theme of financial management is building value for stakeholders, explainhow each development moves the ball forward to accomplish that goal. At each point of development, explain the theory, assumptions, evidence and practical significance of the contributions made by Markowitz, Sharpe ,Fama, Thaler and the other researchers that have shaped the field of finance. You may use other sources if you like but the primary information should come from your reading and understanding of the text and readings. Part of critical thinking is organizing information and making connections in ways that create new knowledge and that’s really what this assignment asks you to do.So don’t be afraid to take chances or to make this material your own; your ideas and the relationships you discover are as valid as anyone elses’ provided you can make a well - reasoned argument in support. Make those arguments! Your paper should be typed, mechanically and grammatically correct and free of spelling errors. It should be of sufficient length to adequately fulfill the requirements of the assignment. Remember this paper is 10% of your grade in the course and the work product should show a commensurate effort. The paper will be due Thursday, November 3. Your paper should be typed, mechanically and grammatically correct and free of errors.

Capital Budgeting

Prompt: Provide your recommendation on a potential investment project for Home Depot Inc. based on the net present value (NPV) and internal rate of return (IRR). Compare these calculations for their use in evaluating a potential investment. Capital Budgeting Data A. Suppose the company is considering a potential investment project to add to its portfolio. Calculate the following items: 1. The net present value (NPV) of the project 2. The internal rate of return (IRR) of the project B. What are the implications of these calculations? In other words, based on each of the calculations, and being mindful of the need to balance portfolio risk with return, would you recommend that the company pursue the investment? Why or why not? Be sure to substantiate your claims.

Shareholder value

Should company managers focus on "shareholder value maximization" as the primary goal of a firm? What are the pros and cons of shareholder value maximum as the objective function of the firm? What kinds of conflicts can arise because of this goal? Please explain.

Financial Planning

In no more than 1,000 words, write a critical discussion, supported by academic literature, addressing the following for a PUBLIC LIMITED COMPANY: a) Explain why financial planning is important in assessing the finance needs of a business. (Assessment Criteria 1.1 and 2.2) b) Identify and evaluate both long term and short term sources of finance for a project implemented by a public limited company. Offer definitions, and assess the advantages and disadvantages for each of the sources you identify and when each would be most appropriate. (AC1.2 and AC1.3) c) Analyse the costs associated with different sources of finance and explain how these costs impact the financial statements (AC2.1 and AC2.4) d) Assess the financial information needs of three stakeholders – such as owners or financial institutions (AC2.3)

Capital Budgeting

GetItPacked is in food packaging business and it is considering purchasing a new machine. The company has to pay $590,000 for the machine and an extra $60,000 to install it. A working capital of $70,000 is also required. The machine has a useful life of 5 years and it can be sold for $65,000 at the end of the fifth year. The company will apply the straight-line method to depreciate the machine over the course of its useful life. As the machine is in operation, it is expected to generate additional revenues of $350,000 per annum and reduce the annual operating expenses by $40,000. The working capital is reimbursed at the end of the fifth year. The company’s cost of capital is 10% and tax rate is 30%. (Where decimals, round your answers to two decimal places) (i) Calculate the initial investment that the company has to make. (3 mark) (ii) Calculate the after-tax operating cash flow in Year 1. (Hint: Bear in mind you are being asked to calculate operating cash flow which is a step after you have calculated the earnings of the company) (3 mark) (iii) Calculate the after-tax operating cash flow in Year 5. (Hint: Need to consider the Net working capital which is assumed to be added back to the operating cash flow at the end of project’s life and consider the salvage value after tax.) (3 mark) (iv) Calculate the net present value (NPV) of the investment. (3 mark) (v) Calculate the payback period of the investment. (3 mark)

Corporate Finance

A. List and briefly describe the three general areas of responsibility for a chief financial officer (CFO) of a selected non-financial company which is listed on Australian Stock Exchange (ASX). Explain how those responsibilities can affect ultimate objective of the company. The name of company you choose should start with the first letter of your first, last or middle name. (1500 words) B. “If the efficient-market hypothesis is true, the pension fund manager might as well select a portfolio with a pin.” Explain why this is not the case. (500 words).

Ratio Analysis

Project 2 Ratio Analysis Use the five year annual ratio report to identify trends in liquidity, profitability, asset utilization (activity) and debt utilization (leverage). Prepare a table that shows the ratios for your company’s latest reporting year, compared to the same year for it’s two closest peer companies and the industry average. Identify areas where your company is performing well or needs improvement. Project 2 Format shows what this table should look like.