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### FIN700 Financial Management

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Trimester 2, 2019

FIN700 Financial Management

ASSESSMENT 2 – GROUP ASSIGNMENT

Due date: Submit to your Tutor by the start of your Tutorial on

Week 9 (LA Monday 9 September 2019, and LB Tuesday 10 September 2019)

Keep a soft copy in case of misadventure.

Penalties for late lodgement, as per the Subject Outline, will be strictly applied.

This Assessment consists of six problems, each involving calculations, and in some cases recommendations. Please note you must solve each problem using the appropriate formula/e, which must be shown, and show ALL calculations.

You are required to complete this Assignment in Groups of 2 or 3 or 4 people.

All members of the Group should come from the same Tutorial class. You may consult and discuss the Assignment topic with others, but you must write up your answers yourselves. Penalties for copying and plagiarism are severe.

Presentation:

·        Answers to be typed. Handwritten, hand drawn parts will not be accepted and will not be marked.

·        Arial or Times  New Roman  font  (at minimum , 12 pitch), 1.5 line spacing; and

·        Left and right margins to be at least 2.5 cm from the edge of the page.

Research, Referencing and Submission

You should quote any references used at the end of the assignment.

Use Harvard referencing! See http://en.wikipedia.org/wiki/Harvard_referencing

As the questions are calculations problems, there is no need to submit via TURNITIN.

Do not submit this page. Ensure that you submit page 2 onwards, with a KOI Group Assignment Cover Page in front and the Marking Rubric at the end of the assignment.

Marking Guide

The Assignment will be scored out of 100%, in line with the rubric in the Subject Outline. This mark will be converted to a score out of 30%.

1.    Ms Ruhina Karim

2.    Mr Nishith Panthi

3.    Ms Farzenah Ortacand

This Assessment consists of six questions (some with multiple parts). All questions must be answered. Please note you must solve each problem using the appropriate formula/e (which must be shown) and show ALL calculations.

QUESTION 1   (5 marks)

In August 2019 Coral Ltd reported net profits after tax of \$600,000 for its financial year 2018 -– 19 and announced its net profits after tax expectation for the next financial year, 2019 – 20, to be 25% higher than this year’s figure. The company operates with a dividend payout ratio of 70%, which it plans to continue. It will pay the annual dividend for 2018 – 19 in 1 October, 2019, and the dividend for 2019 – 20 in 1 October, 2020.

Dan Brown owns 12% of the ordinary share capital of Coral Ltd. In October, 2020, Dan believes he will need \$30,000 for consumption and he also wishes to pay off his home loan of \$70,000.  If the dividend from Coral limited is his sole income, how much can he consume in October 2019? The capital market offers an interest rate of 9% pa.

QUESTION 2   (7 marks)

Vivien is considering buying an investment property for \$550,000. ANZ Bank requires 10% deposit and offers her a 30-year loan for the balance of the purchase price. She can choose to repay the loan either by equal weekly instalments consisting of interest and principal repayment components at an interest rate of 4.55% p.a., compounded weekly, or by equal fortnightly instalments at 4.75% p.a., compounded fortnightly.

a.    Explain with calculations which payment option Vivien should choose. (2 + 1 = 3 marks)

b.    If Vivien wants to pay \$1,000 a week, using the payment option you identified in part a, how long will it take her to pay off the loan? (4 marks)

QUESTION 3     (15 marks)

Katherine and Robert had a baby son, Archie, on 31 May, 2019. They want to open a "Bump" savings account with Westpac for their baby and save up to \$200,000 by the time he is 18 years old. Westpac’s savings rate is currently at 2.5% p.a., compounded monthly. Katherine and Robert want to pay a monthly fixed payment at the end of each month for 18 years, starting on 30 June, 2019.

a.    If Katherine and Robert contribute 30% and 70% respectively to the savings, what is Katherine’s monthly payment? (4 marks)

b.    When Archie is 18 years old, Katherine and Robert will withdraw \$100,000 to pay for his higher education. The rest of the savings will be kept in Archie’s account at a deposit rate of 4% pa, compounded monthly, for another 10 years. Archie will be allowed to withdraw \$1,000 at the end of each month for three years starting one month after he turns 18. The rest of the money will be kept in the bank account until he turns 28 and will be used as a gift for the purchase of his own house. Calculate the value of this gift. (8 marks)

c.    Assume Archie wants to buy a house for \$800,000 when he is 28 years old and uses the gift as a deposit for the house. If the loan term is 30 years with equal monthly repayments at a nominal rate of 4.5% pa, compounded monthly, what will be his monthly repayment amount? (3 marks)

QUESTION 4     (10 marks)

On 1 June, 2019, immediately after payment of the interest due that day, Tim Shaw bought two bonds each with a face value of \$100,000 and a coupon rate of 8% p.a., paid half-yearly. The first bond will mature on 1 December 2021 and the second bond will mature on 1 December 2025. At the date of purchase, both bonds were selling at par.

Since then, yields on bonds have risen by 2% pa, compounded half-yearly. Tim now intends to sell the bonds and put a deposit on a house.

a.      Calculate the price he will receive from each bond if he sells on 1 September, 2019 at the new yield. (Hint: There are 92 days from 1 June, 2019 to 1 September, 2019, and 183 days from 1 June, 2019 to 1 December, 2019 – in both cases, ignoring the first day and including the last day of the period.) (6 marks)

b.      Explain the relative price movements in the two bonds, as evidenced in your answer to part a above. (4 marks)

QUESTION 5     (6 marks)

It is September 2019 and Sapphire Ltd has just paid a dividend of \$1.20 a share. Investors require a 12% pa return on Sapphire Ltd shares. What would a share in Sapphire Ltd be expected to sell for today (September, 2019) if the dividend is expected to increase by 20% in September, 2020, 15% in September, 2021, 10% in September, 2022 and thereafter by 5% a year forever from September, 2023 onwards?

QUESTION 6   (47 marks)

Bright Lighting Ltd is considering a new range of product based on a specific type of intelligent stage lighting after an extensive market research costing \$60,000, which was paid yesterday.

Bright expects that this range will increase the firm’s revenues by \$1,565,000 in the first year of operations. Thereafter, the revenues will increase by 9.5% p.a. each year. The additional material will cost \$850,000 p.a., additional labour cost is expected to be \$350,000 p.a. and other miscellaneous costs are estimated to be \$52,000 p.a. After the first year, Bright expect these costs will increase by 5.5% p.a. each year. [Assume that all revenues are received and that all costs are paid at the end of each year.]

The initial outlay of \$2,125,000 will be depreciated on a straight-line basis to zero salvage value over the 8 year productive life of the project. It is estimated the various components of equipment can be sold for \$100,000 at the completion of the project.

The firm requires a 12.5% p.a. required rate of return and the tax rate is 30%. Tax is paid in the year in which net earnings are received.

a.    Calculate the incremental cash flows for each year (Y0 to Y8 inclusive). (10 marks)

b.    Calculate the payback period of the project. (2 marks)

c.    Calculate the net present value, that is, the net benefit or net loss in present value terms of the project. (4 marks)

d.    Calculate the present value index of the project. (2 marks)

e.    Calculate the discounted payback period of the project. (2 marks)

f.     Calculate the internal rate of return of the project. (4 marks)

g.    Now assume Bright expects a worst-case scenario where the revenues will only increase by 6% p.a. each year but costs (other than depreciation) will increase by 10% p.a. each year.

1.    Calculate the incremental cash flows for each year (Y0 to Y8 inclusive) under this scenario. (5 marks)

2.    Calculate the net present value, that is, the net benefit or net loss in present value terms of the project, under this scenario. (4 marks)

h.    Now assume Bright expects a best-case scenario where the revenues will increase by 15% p.a. each year but costs (other than depreciation) will only increase by 2.5% p.a. each year.

1.    Calculate the incremental cash flows for each year (Y0 to Y8 inclusive) under this scenario. (5 marks)

2.    Calculate the net present value, that is, the net benefit or net loss in present value terms of the project, under this scenario. (4 marks)

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