Reference no: EM133092245

HI5002 Finance For Business

Question 1: You are a graduate student from Holmes institute and started to invest in the securities market. Currently, you decided to move your super contribution to a new superannuation fund manager. The new super manager offered you a choice of balanced portfolio which had the returns of 12.7%, 13.5%, - 6.7% and 15.2% over the past four years, respectively.

Required:
a) Identify the actual rate of return of the portfolio offered by the superfund for the four years by computing the geometric average return.

b) You plan to establish another investment portfolio of two shares with your saving. Would you choose two shares with high or low co-efficient correlation? Please explain why

c) Assume that the expected return of stock A in your new portfolio is 12.5% this year. The risk premium on the stocks of the same industry is 4.9%, the risk-free rate of return of the stock is 5%, calculate the beta coefficient of this stock using Capital Asset Pricing Model (CAPM).

d) Following is a forecast for the economic situation and your portfolio returns next year; calculate the expected return, variance and standard deviation of the portfolio:

State of economy	Probability	Rate of returns
Recession	0.25	- 7%
Normal	0.45	17%
Growth	0.30	28%

Question 2: You are working as a financial adviser. Jackson, one of your clients, approached you for a consultation about his plan to save for his daughter's education in the United States that will cost him $350,000. Jackson has a saving of $120,000 now and is considering two phases of investment:

Phase 1: Investing that $120,000 in an investment that would pay a rate of return of 9.5% annually, compounding monthly for ten years.

Phase 2: Putting $350,000 saved from phase 1 investment into a trusted investment account that will pay his daughter an equal amount of cash at the end of each week for tuition fees and living expenses for five years studying in the United States. The current interest rate the trust offers for the investment is 1.85% annually, compounding weekly.

Required:
a) Compute the effective annual interest rate (EAR) Jackson would get in Phase 1 Investment.

b) Calculate the amount of money Jackson would accumulate in Phase 1 Investment after ten years.

c) In Phase 1, if Jackson wants to have exactly $350,000 to sponsor his daughter's study in the US, what should the annual interest rate be for his investment?
d) Calculate the weekly stipend Jackson's daughter would get from the trust fund in Phase 2 Investment.
e) In Phase 2 investment, if Jackson would like his daughter to receive the stipend of $1,500 at the beginning of each week, how much he will need to put in the trust fund?

Question 3: The following information is available for B&E Construction Ltd.'s capital structure:

Equity Financing: 65% by ordinary shares, of which the company management plans to pay a $7.25 dividend per share in the next financial year. The firm is maintaining a 5.5 % annual growth rate in dividends, which is expected to continue indefinitely.

Debt Financing: 35% by corporate bonds that pay semi-annually 11.5% coupon rate with an annual before-tax yield to maturity of 10.25%. The bond issue has a face value of $1,000 and will mature in 35 years.

The net income of B&E Construction Ltd. in the current financial year is $1,540,760, and the company is considering investing in one of the two following projects to buy new machinery. Each option will last five years and have no salvage value at the end. The company's required rate of return for all investment projects is 9.5 %. The cash flows of the projects are provided below.

	Option 1	Option 2
Cost	$482,000	$535,000
Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5	177 000 173 000 163 000 165 000 155 000	197 000 185 000 176 000 173 000 163 000

Required: Complete the following tasks:

a) Calculate the current market value of the B&E Construction Ltd ordinary share if the average return of the shares in the same industry is 12.3%.

b) Calculate the current price of the company's corporate bonds.

c) Identify which option of machinery should the company accept based on the NPV method.

(Note: Please round up the result of each calculation of PV to 2 decimal places only for simplification)

d) Identify which option of machinery should the company accept based on Discounted Payback Period method if the company requires a payback of maximum of 3 years for all investment projects.

e) Which investment criterion should the company's finance manager recommend for the capital budgeting decision making if the company management would like to know a break-even rate of return of those options?

f) How much dividend B&E Construction Ltd. can pay its shareholders from the current year net profit given the chosen project you decided in question (c) and if the Residual Dividend Payout Policy applies?

Question 4
The following information is available for the capital structure of TestraQ Ltd:

- 75,000 ordinary shares outstanding at a market price of $82 a share. The shares have just paid a $5.85 annual dividend and have a dividend growth rate of 5% annually.
- 62,000 preference shares with an 8% fixed dividend, outstanding at a market price of $78 a share. The preference shares have a par value of $100.
- The outstanding bonds have a total face value of $3,500,000. The bonds have a face value per bond of $1000 and a market price of 102.5% of face. The bond's before tax YTM is 8.5%. The corporate marginal tax rate for the company is 35%.

Required:
a) Calculate the current market value (rounded off to the nearest whole number) and capital structure of the TestraQ Ltd. (rounded off to two decimal places).

b) Calculate the cost of each funding source or TestraQ Ltd. if the company wants to raise new funds, using the dividend constant growth model to calculate the cost of ordinary equity.

c) Compute the weighted average cost of capital (WACC) under the classical tax system for TestraQ Ltd.

Question 5
You are working as the finance manager for Inghams Ltd. The following data is available for the company as of 31 June 2021:

Inventory	$206,250
Interest expense	$5,000
Cash	$180,000
Net sales (all credit)	$1,500,000
Accounts receivable	$225,000
Operating expenses	$325,000
Cost of goods sold	$937,500
Accounts payable	$168,750
Prepaid insurance	$80,000
Long term liabilities	$125,000
Accrued wages	$65,000
Income taxes	35%
Fixed Assets	$340,000

Required:
a) Build an income statement for the company?

b) Calculate the total equity and ROE of the company?

c) Calculate the total asset turnover of the company

d) Calculate inventory turnover of the company, given beginning and ending inventory is the same?

Question 6
Agilex Bio-Imports will pay an annual dividend of $2.5 per share and an extra dividend of $0.35 per share at the end of this month. The company's stock is currently listed and actively traded on ASX.

Medi Equipment. Ltd is a subsidiary of Agilex Bio-Imports. It has 275,000 outstanding common shares, a P/E ratio of 7.5 and $485,000 net income available for common shareholders. The board of directors has just voted a 3-2 share split. You currently own 1,000 shares of this company.

Required:
a) If tomorrow is the record date of cash dividend payment by Agilex Bio-Imports, when is the ex-dividend date for this share, given the standard process of settlement in ASX is T+2? Calculate the ex-dividend price if the corporation's closing price the day before the ex-dividend date was $49.3, assuming the dividend flat tax rate is 20%.

b) Agilex Bio-Imports needs to pay Euro 875,000 to a partner in Europe. If the direct quote of Euro in Sydney is 1.575, how much in AUD should the corporation record in their accounting book for this transaction?

c) Agilex Bio-Imports has extra cash of A$625,000. The AUD/CAD exchange rate in Toronto is 0.9254. The CAD/AUD rate in Sydney is 1.0912. Is there any arbitrage profit possible? Set up an arbitrage scheme with the extra cash. What is the potential gain in AUD dollar, disregarding bid-ask spread?

d) If the market price of the Medi Equipment. Ltd's share a month after splitting bounced back to the level before splitting, calculate the increase in the total market capitalization of the firm and the total value of your investment.

Attachment:- Finance For Business.rar