Reference no: EM132801560

HC2091 Business Finance - Holmes Institute

Learning Outcome 1: Explain financial markets and different types of securities and the processes related to their investment;
Learning Outcome 2: Interpret the impact of future developments in the financial markets on business structure and performance;
Learning Outcome 3: Understand the concept of the time value of money and apply it in investment and portfolio evaluation and management;
Learning Outcome 4: Critically understand and practice valuation of financial instruments, including ordinary shares, preferred shares and bonds;
Learning Outcome 5: Critically analyze finance alternatives to manage short- and long-term debts;
Learning Outcome 6: Evaluate the firm capital structure policy, dividend payout policy, and alternative funding policies and instruments available to businesses.

Question 1

1. Your manager asked you to evaluate an investment opportunity. Select and explain two (2) investment criteria you will use to make a decision as to whether to accept or reject the opportunity.

2. You are the CFO of Midas Mining Ltd and the company is looking to expand its mining operations. Your staff have narrowed it down to two (2) projects, with the cash flows presented in the table below. However, given the substantial cash outlay, your company can only choose one of the projects (A or B).

Information	Project A	Project B
Cost	$5 550 000	$6 640 000
Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5	1 230 000 2 210 000 1 200 600 1 150 000 1 120 000	2 830 000 1 300 000 1 750 000 1 180 000 1 150 000

Required:

a) Perform a project evaluation, using the Net Present Value (NPV) method. The prevailing discount rate is 12%.

b) Identify which project (if any) should be accepted by Midas Mining Ltd.

Question 2

Alice has $5 000 now. She wants to save $25 000 to buy her first car. She decides to put that $5 000 in an investment fund that pays an interest rate of 10% per annum (per year), compounding annually.

Required:

a) How long does Alice need to wait until she has saved $25 000?

b) If Alice wishes to have that $25 000 in five (5) years, how much does she need to put into the investment now with the same interest rate of 10%?

c) Assume that Alice was offered an alternative investment, which requires an initial investment of $6 000 for seven (7) years. Calculate the amount of money that Alice would accumulate after seven (7) years, if the rate of return is 12%, compounding quarterly.

d) Assume that Alice 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 semi- annually.
ii. Option B pays an interest rate of 9.87%, compounding monthly. Which option (A or B) should Alice choose?
e) Assume that Alice has achieved her goal of $25 000 as a deposit and now she wants to purchase a car which costs $45 000. Her plan is to pay $25 000 in cash and finance the balance over three (3) years at an interest rate of 3.5%. What will be her monthly payment?

f) At the end of this year, Alice will receive a fixed income of $10,000 each year forever. If the required rate of return is 14%, what is the present value of this income flow?

Question 3

MLC Fund Management is considering the following three (3) options for their new investment portfolio:

Option 1 - A non-callable corporate bond that pays a coupon rate of 8% annually. The bond will mature in 30 years. The yield-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 $6.00 with a constant dividend growth rate of 5% each year. The current market price of this share is $85.
Option 3 - A $100 par value preference-share which pays a fixed dividend of 6%. The required rate of return for the preference shares with the same risk is 8%.

Required:
a) How much should MLC pay for the corporate bond that pays the coupon annually? If the coupon is paid quarterly, what is the new bond value?
b) Calculate the market required rate of return for the ordinary share.
c) Compute the value of the preference share.

d) Explain why a preference share is considered a hybrid between an equity and a debt instrument.

Question 4

Marcus has an investment portfolio that paid the rate of return of 24.75%, -11%, - 30%, 19%, 15.5%, 12% and 20% over the last seven (7) years.
Required:
a) Calculate the arithmetic average return and the geometric average return of this portfolio.
b) Discuss the difference between arithmetic average return and the geometric average return. When should Marcus use a specific average return?
c) If the following information is available for Marcus'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.

State of economy	Probability of the economic state	Rate of Return
Boom	0.55	25%
Normal	0.30	17%
Recession	0.15	-8%

Question 5
(This question is from the Week 10 Tutorial)
Osborne Construction currently has the following capital structure:
Debt: $20,500,000 paying 9.5% coupon bonds outstanding with 15 years to maturity, an annual before-tax yield to maturity of 8% on a new issue. The bonds currently sell for
$1,125 per $1,000 face value.
Ordinary Shares: 100,000 shares outstanding currently selling for $45 per share. The company just paid a $3.50 dividend per share and is experiencing a 5% 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.
b) Calculate the capital structure of the company.
c) Calculate the weighted average cost of capital (WACC) for the firm.
d) Discuss the significance of calculating WACC for this company.

Question 6
(This question is from the Week 11 Tutorial)
The following data is available for Quick Serve Trading Ltd.

Account	Beginning balance	Ending Balance
Accounts payable	120,300	124,400
Inventory	160,600	167,200
Long term debts	327,500	325,800
Common stock	400,400	415,900
Accounts receivable	123,400	122,300
Total revenue		737,000
Total cost of sales		265,000

Required:
a) Calculate the operating cycle and the cash cycle
b) Interpret and explain the outcomes.

Attachment:- Business Finance.rar