Reference no: EM132801938

HI5002 Finance for Business - Holmes Institute

Learning Outcome 1: Identify business financial decisions, and critically analyze their impacts on value, and the nature of the broader financial and regulatory environment in which these decisions are made;

Learning Outcome 2: Critically evaluate the role of finance in business and appraise the way corporate managers use financial theory to solve practical problems;

Learning Outcome 3: Apply underlying finance theories, concepts, assumptions, limitations and arguments to make corporate finance decisions within real-world constraints.

QUESTION 1

Question 1A Please answer the following questions:
a. What is primary and secondary market? An IPO is undertaken on primary or secondary market?
b. What is the essential job of an investment banker?
c. Why a stock exchange is called an auction market?
d. What are the five basis principles of finance?

QUESTION 1B New Age IT Solutions had net profit margin of 0.35 on sales of $5 000 000 during 2020. In addition, the firm's total assets were $4 500 000, and its debt ratio is 0.45. Required:
a. What was New Age IT Solutions' return on equity (ROE) in 2020?
b. What was return on assets (ROA) of the company in 2020?
c. Calculate earnings per share (EPS) and price earnings ratio (PE) of the company if it has total shares outstanding of 50,000 with a market price of $85 per share?

QUESTION 2
Long time ago Lisa had put an amount of $50,000 into an investment in the securities market. Now she has $150,000 in her investment account. Required:
a) If the average rate of return Lisa earned for the investment is 7.6% per year, how many years she has maintained the investment so far?
b) If the Lisa would have wished to obtain the target of $150,000 within 10 years only, how much money should she put into the initial investment given the same rate of return is applied?
c) Assume that Lisa would like to put the amount of $150,000 into another investment and aims for a new saving target of $500,000 to buy a new house in 12 years. How much is the rate of return should Lisa aim for to get her $500,000 after 12 year?
d) Lisa has another option for her plan to buy a new house: Using $150,000 as a deposit and get a mortgage from a bank to buy the new house. ANZ bank offered Lisa the lending interest rate of 4.85% per year, compounding semi-annually. Commonwealth Bank offered her the lending rate of 4.83% per year, compounding monthly. By calculating EAR, identify which bank should Lisa choose?
e) Lisa decided to borrow 350 000 from Commonwealth Bank to buy her new home. The bank offers Lisa the lending rate of 4.83% per year (compounding monthly) and she is expected to make an equal mortgage payment each month for 30 years. Calculate monthly payment Lisa need to make for the mortgage?
f) Lisa would like to buy some furniture for the new home. Good Home Furniture offered her the maximum payment credit for the furniture she can buy of $50 a week for one year. The annual interest rate of that commercial loan is 8.5%, assuming compounding weekly. How much furniture can Lisa afford to purchase using the credit offered by the store?

QUESTION 3
Leon has in his investment a portfolio that paid him the rate of returns of 14 %, -13%, 15.6%, 17% and 19.5% over the past five years. Required:
a) Calculate the arithmetic average return (AAR) and geometric average return (GAR) of the portfolio? If someone asks you what is the actual compounding rate of return of Leon's portfolio over the past five year, which one (AAR or GAR) will be a better answer?

b) Following is forecast for economic situation and Leon's portfolio returns next year, calculate the expected return, variance and standard deviation of the portfolio.

 

State of economy	Probability	Rate of returns
Mild Recession	0.25	-2.5%
Normal	0.45	13.5%
Growth	0.30	20%

c) Assume that expected return of the stock A in Leon's portfolio is 13.2%. Beta of this stock is 1.2, risk free rate is 3.5%. Calculate market portfolio rate of return, which is used to compute the expected return of this stock by Capital Asset Pricing Model (CAPM)? (1 marks)

QUESTION 4

QUESTION 4A Black Gold Ltd. currently has the following capital structure:

Debt funding: A callable bond that pays annually 10.5% coupon rate with an annual before-tax yield to maturity of 9.7%. The bond issue has face value of $1,000 and will mature in 16 years.

Ordinary equity funding: An ordinary share that just paid a $6.50 dividend per share in the current financial year. The firm is maintaining 4.5% annual growth rate in dividend, which is expected to continue indefinitely.

Hybrid - funding: A preferred share with face value of $100, paying fixed dividend rate of 15%.

Required:

a) Calculate the current price of the corporate bond?
b) Calculate the current price of the ordinary share if the average return of the shares in the same industry is 11.5%?
c) Calculate the current value of the preferred share if the average return of the preferred shares in the same industry is 12.5%?

QUESTION 4B Magnum Ltd has the following capital structure:
Ordinary Equity: 68 000 ordinary shares outstanding at a market price of $35 per share. The shares have just paid a $1.85 annual dividend and have a dividend growth rate of 2.5%.
Preference Equity: There are 15 000 preference shares with an 8% dividend rate, outstanding at a market price of $75 a share. The preference shares have a par value of $100.

Debts: The outstanding bonds mature in 20 years, have a total face value of $850 000, a face value per bond of $1000 and a market price of $1196.4 each. The bonds have before tax YTM 8%.
The marginal tax rate of the firm is 35%. Required:
a) Calculate the current market value (rounded off to the nearest whole number).
b) Calculate the capital structure of the company. Identify the total weights of equity funding (rounded off to two decimal places)
c) Compute the weighted average cost of capital (WACC) under the traditional tax system for the company, using dividend constant growth model for calculation the cost of ordinary equity.

QUESTION 5

Your company is considering to choose one of the two projects: Project Gold and Project Diamond. Each project will last 5 years and have no salvage value at the end. The company's required rate of return for all investment projects is 9%. The cash flows of two projects are provided below.

 

	Gold	Diamond
Cost	$485 000	$520 000
Future Cash Flows
Year 1	105 850	117 050
Year 2	153 250	162 400
Year 3	225 650	275 500
Year 4	245 000	255 000
Year 5	250 350	260 000

Required:

a. Identify which project should your company accept based on Net Present Value method?

b. Identify which project should your company accept based on Discounted Payback Period method if the payback criterion is maximum 2.5 years?

QUESTION 6

Net profit of Harper Holding Ltd in the current year is $3,546,000. The company is planning to launch a project that will requires an investment of $1,045,000 next year. Today the company's stock has market value of $72/share. Harper Holding Ltd has the current capital structure of 65% in equity and 35% in debt.

Required:

a. How much dividend can Harper Holding Ltd pay its shareholders this year and what is dividend payout ratio of the company. Assume the Residual Dividend Payout Policy applies.

b. The company is paying a cash dividend of $5.50/share plus an extra-cash dividend of $2.5/share. Tomorrow the stock will go ex-dividend. Calculate the ex-dividend price tomorrow morning. Assuming the tax on dividend is 15%?

c. M&T Ltd. is a daughter company of the Harper Holding and currently under a liquidation plan due to severe business contraction. The company plans to pay total dividend of $8.5 million now and $ 12.5 million one year from now as a liquidating dividend. The required rate of return for shareholders is 12%. Calculate the current value of the firm's equity in total and per share if the firm has 1.5 million shares outstanding?

Attachment:- Finance for Business.rar