Complete ALL ten questions; each question is worth 6 marks

ASSIGNMENT SEMESTER 3, 2017 FIN 200: BUSINESS FINANCE DUE DATE: 11/2/2018 SUBMIT THE ASSIGNMENT IN THE MOODLE SHELL PROVIDED FOR THE SUBJECT THIS IS A GROUP ASSIGNMENT OF 3 STUDENTS Complete ALL ten questions; each question is worth 6 marks 1. Corporation is building a $25 million office building in Adelaide and is financing the construction at an 80 % loan-to-value ratio, where the loan is in the amount of $20,000,000. This loan has a ten-year maturity, calls for monthly payments, and is contracted at an interest rate of 8%. Using the above information, answer the following questions. 1. What is the monthly payment? 2. How much of the first payment is interest? 3. How much of the first payment is principal? 4. How much will Corporation owe on this loan after making monthly payments for three years (the amount owed immediately after the thirty-sixth payment)? 5. Should this loan be refinanced after three years with a new seven-year 7 per cent loan, if the cost to refinance is $250,000? To make this decision, calculate the new loan payments and then the present value of the difference in the loan payments. 6. Returning to the original ten-year 8 per cent loan, how much is the loan payment if these payments are scheduled for quarterly rather than monthly payments? 7. For this loan with quarterly payments, how much will Corporation owe on this loan after making quarterly payments for three years (the amount owed immediately after the twelfth payment)? 8. What is the annual percentage rate on the original ten-year 8 % loan? 9. What is the effective annual rate (EAR) on the original ten-year 8 % loan? 2. A zero-coupon bond has a $100 face value, matures in 10 years, and currently sells for $78.12. a. What is the market’s required return on this bond? b. Suppose you hold this bond for 1 year and sell it. At the time you sell the bond, market rates have increased to 3.5%. What return did you earn on this bond? c. Suppose that rather than buying the 10-year zero-coupon bond described at the start of this problem, you instead purchased a 10-year 2.5% coupon bond (assume annual payments). Because the bond’s coupon rate equalled the market’s required return at the time of purchase, you paid par value ($1,000) to acquire the bond. Again assume that you held the bond for one year, received one coupon payment, and then sold the bond, but at the time of sale the market’s required return was 3.5%. What was your return for the year? Compare your answer here to your answer in part (b). 3. McDonald’s Corporation announced an increase of their quarterly dividend to $3.28 from $3.12 per share in 2013. This continued a long string of dividend increases. The company has paid a cash dividend to shareholders every year since 1976, and has increased its dividend payments for 38 consecutive years, including through the 2007–2010 global financial crisis. Suppose you want to use the dividend growth model to value McDonald’s shares. You believe the dividend will grow at 5% per year indefinitely, and you think the market’s required return on this share is 11%. Let’s assume that McDonald’s pays dividends annually and that the next annual dividend is expected to be $US3.70 per share. The dividend will arrive in exactly one year. What would you pay for McDonald’s shares right now? Suppose you buy the shares today, hold them just long enough to receive the next dividend, and then sell them. What rate of return will you earn on that investment?   4. Classify each of the following events as a source of systematic or unsystematic risk. a. Janet Yellen retires as Chairman of the Federal Reserve and Arnold Schwarzenegger is appointed to take her place. b. Martha Stewart is convicted of insider trading and is sentenced to prison. c. An OPEC embargo raises the world market price of oil. d. A major consumer products firm loses a product liability case. e. The US Supreme Court rules that no employer can lay off an employee without first giving 30 days’ notice. 5. Reynolds Enterprises is attempting to evaluate the feasibility of investing $85,000, in a machine having a 5-year life. The company has estimated the cash inflows associated with the proposal as shown below. The company has a 12% cost of capital. Year Cash Flows 1 $18,000 2 $22,500 3 $27,000 4 $31,500 5 $36,000 a. Calculate the payback period for the proposed investment. b. Calculate the NPV for the proposed investment. c. Calculate the IRR for the proposed investment. d. Evaluate the acceptability of the proposed investment using NPV and IRR. What recommendation would you make relative to implementation of the project? Why? 6. Contract Manufacturing Ltd is considering two alternative investment proposals. The first proposal calls for a major renovation of the company’s manufacturing facility. The second involves replacing just a few obsolete pieces of equipment in the facility. The company will choose one project or the other this year, but it will not do both. The cash flows associated with each project appear below, and the company discounts project cash flows at 15%. Year Renovate Replace 0 −$9,000,000 −$1,000,000 1 3,500,000 600,000 2 3,000,000 500,000 3 3,000,000 400,000 4 2,800,000 300,000 5 2,500,000 200,000 a. Rank these investments based on their NPVs. b. Rank these investments based on their IRRs. c. Why do these rankings yield mixed signals?   7. Using a 15% cost of capital, calculate the NPV for each of the projects shown in the following table and indicate whether or not each is acceptable. Project A Project B Project C Project D Project E Year Cash Flows 0 –$20,000 –$600,000 –$150,000 –$760,000 –$100,000 1 $3,000 $120,000 $18,000 $185,000 $ 0 2 3,000 145,000 17,000 185,000 0 3 3,000 170,000 16,000 185,000 0 4 3,000 190,000 15,000 185,000 25,000 5 3,000 220,000 15,000 185,000 36,000 6 3,000 240,000 14,000 185,000 0 7 3,000 13,000 185,000 60,000 8 3,000 12,000 185,000 72,000 9 3,000 11,000 84,000 10 3,000 10,000 8. The cash flows associated with three different projects are as follows: Cash Flows Alpha ($ in millions) Beta ($ in millions) Gamma ($ in millions) Initial Outflow – 1.5 – 0.4 – 7.5 Year 1 0.3 0.1 2.0 Year 2 0.5 0.2 3.0 Year 3 0.5 0.2 2.0 Year 4 0.4 0.1 1.5 Year 5 0.3 – 0.2 5.5 a. Calculate the payback period of each investment. b. Which investments does the company accept if the cut-off payback period is three years? Four years? c. If the company invests by choosing projects with the shortest payback period, which project would it invest in? d. If the company uses discounted payback with a 15% discount rate and a 4-year cut-off period, which projects will it accept? e. One of these almost certainly should be rejected, but might be accepted if the company uses payback analysis. Which one? f. One of these projects almost certainly should be accepted (unless the company’s opportunity cost of capital is very high), but might be rejected if the company uses payback analysis. Which one?   9. Fully explain the kinds of information the following financial ratios provide about a firm. Quick ratio Cash ratio Capital intensity ratio Total asset turnover Equity multiplier Long-term debt ration Times interest earned ratio Profit margin Return on assets Return on equity Price earnings ratio 10. CURRENT PORTFOLIO Name of Company $m invested Beta Fire $2 0.85 Water $3 1.25 Air $5 1.6 TOTAL $10 Risk-free rate = 4% Market rate of return = 12% a) Calculate required rate of return for each of the above stocks. b) Calculate required rate of return for the above portfolio. c) Calculate beta for the above portfolio and then calculate the portfolio’s expected rate of return using the weighted average beta and the CAPM formula. d) Assume now that the investor decides to sell all of his shares in Fire Company and invest a further $1m into each of the other 2 Stocks. Calculate the new required rate of return for the new portfolio – using both of the above m
ethods. e) Describe what the above change in the investor’s portfolio reflects about his new attitude to risk.

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