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HC2091 Final As sess mentT 2 2021

Student Number: (enter on the line below)

Student Name: (enter on the line below)

…

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HC2091 Final As sess mentT2 2021

Student Number: (enter on the line below)

Student Name: (enter on the line below)

HC2091

BUSINESS FINANCE

FINAL ASSESSMENTTRIMESTER2, 2021

Assessment Weight: 50 total marks

Instructions:

All questionsmust be answered by using the answer boxes provided in this paper.

Completed answers must be submitted to Blackboard by the published due date

and time.

Submission instructions are at the end of this paper.

Purpose:

This assessment consists of six (6) questions and is designed to assess your level of

knowledge of the key topics covered in this unit

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HC2091 Final As sess mentT2 2021

Note: References are not required for this assessment

QUESTION1 (7 marks)

Jenny decided to do the f ollowing thi ngs after completion of her finance degree at

Holmes Institute:

(i) Putting an exact amount of money in to Smart Investment Fund at the beginning of

each year to have a saving of $800,000 for her retire me nt in 25 years from now. The

average rate of return provided by this investment fund is 11% per year.

(ii) Having solar panels installed on her house roof for saving monthly electricity

expense.

(iii) Saving extra monthly income in to a bank account that allows flexibility when she

needs cash and at the same time provides interest income for any existing balance.

Required:

a. How much money shouldJe nny put into he r investmentf und account at the

begining of each year to reach her saving target in 25 years from now?(3 marks)

b. The solar panel provider offers her a payment package of $100/month at the end

of each month for 3 years. Given the interest rate is 3.5%, calculate the present

value of the payment package? (2 marks)

c. Jenny is considering offers from two banks for her saving account. Bank A offers

the interest rate of 2.54% per year, compounding semi-annualy. Bank B offers the

interest rate of 2.53% per year, compounding daily. Help Jenny choose the better

Bank by calculating Effective Annual Interest Rate (EAR).(2 marks)

ANSWER: ** Answer box will enlarge as you type

a) Let the amount of money put in investment fund account at the beginning of each

year be $X

The future value of the annuity due formula is shown as follows.

FV of annuity due = PMT*[((1+r)n -1)/r]*(1+r)

Here, r = 11% p.a., n = 25 years, FV = $800,000

$800,000 = X*[(1.1125 -1)/0.11]*1.11

Solving the above, X = $6,299.27

b) The present value of an ordinary annuity nee ds to be computed. The relevant f ormula

is stated as follows.

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HC2091 Final As sess mentT2 2021

PV of ordinary annuity = PMT*(1- (1+r)-n)/r

Here, PMT = $100, n = 3 years or 36 months, r = (3.5%/12) = 0.2917%

PV of ordinary annuity = 100*(1-(1+0.002917)-36)/0.002917

Solving the above, we get present value of package = $3,412.73

c) The first step is to determine the EAR for both the loans.

EAR for Bank A = (1+(2.54%/2))2 -1 = 2.556%

EAR for Bank B = (1+(2.53%/365))365 -1 = 2.562%

Jenny should choose Bank B since it is offering a higher EAR as compared to Bank A.

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HC2091 Final As sess mentT2 2021

QUESTION 2 (11marks)

Five years ago Peter had started his saving for his childrens higher education by putting a lump

sum of $25,000 into an investment instrument on the securities market. The investment has

been paying a rate of returns of 12.3% per year, compounding monthly.

Required:

a. Calculate how much money hasPeter accumulated from his investment now?(3 marks)

b. If Peters initial investment was $30,000 and he had obtained the same investment outcome

after five years, how much should have been the actual rate of return, assuming

compounding annually for his investment ? (4 marks)

c. If Peter would like to have totally $60,000 for his childrens higher education and moves all

the saving accumulated from current investment after five year to another instrument that

pays the interest rate of 13.5% per year, compounding annually. How long will it take for

Peter to reach his target of $60,000 ?(4 marks)

ANSWER: ** Answer box will enlarge as you type

a) Amount of money deposited = $ 25,000

Interest rate = 12.5% p.a. compounded monthly

Total time period = 5 years or 60 months

Amount of money Pe ter accumulated f rom his investment = $ 25,000*(1+(12.5 %/12))60 =

$46,555.40

b) The relevant formula is as follows.

r = (FV/PV)1/n 1

Here, FV = $46,555.40, PV = $30,000, n= 5

Hence, r = (46555.40/30000)1/5 -1 = (1.5518)1/5 -1 = 9.19% p.a.

c) The relevant formula is as follows.

FV = PV*(1+r)n

Here, 60,000 = 46,555.40*(1+13.5%)n

Hence, (60,000/46,555.40) = (1.135)n

Thus, 1.5518 = (1.135)n

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HC2091 Final As sess mentT2 2021

Hence, solving we get n = 2

Thus, it would take Peter 2 years to reach his target of $60,000.

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HC2091 Final As sess mentT2 2021

QUESTION 3 (7marks)

Big Data Ltd currently has the following capital structure:

Debt: $3,500,000 paying 9.5% coupon bonds outstanding with an annual before-tax yield

to maturity of 9% on a new issue. The bonds currently sell for $107 per $100 face value.

Ordinary shares: 75,000 shares outstanding currently selling for $80 per share. The firm

expects to pay a $9.50 dividend pe r share one year from now and is experiencing a 5%

growth rate in dividends, which it expects to continue indefinitely. The firm’s marginal tax

rate is 30%. Required:

a) Calculate the current total market value of the firm.(2 marks)

b) Calculate the capital structure and weighted average cost of capital (WACC) for the

firm. (5 marks)

ANSWER: ** Answer box will enlarge as you type

a) Current market value of debt = $3,500,000*(107/100) = $3,745,000

Current market value of ordinary shares =75,000 shares * $80 per share = $6,000,000

Current total market value of the firm = $3,745,000 + $6,000,000 = $9,745,000

b) Weightage of debt = (3,745,000/9,745,000) = 0.3843

Weightage of equity = (6,000,000/9,745,000) = 0.6157

Thus, the capital structure of the firm comprises of 38.43% debt and 61.57% equity.

In order to determine the WACC, the respective cost of the debt and ordinary share need to be

computed.

After tax cost ofdebt = 9%*(1-0.3) = 6.3%

Required return on equity (based on Gordon dividend method) = ($9.5/$80) + 5% = 16.88%

WACC for the firm = 0.3843*6.3% + 0.6157*16.88% = 12.81% p.a.

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HC2091 Final As sess mentT2 2021

QUESTION 4 (7 marks)

Capital Venture Fund has set up a portfolio tha t comprises ABC shares and XYZ shares.

The following information relates to these shares.

ABC XYZ

Expected return 10% 25%

Standard Deviation of return 15% 35%

Correlation of coefficient 0.4

Required:

a) Determine the expecte d return of the portfolio if 75% of ABC shares and 25% of XYZ

shares are combined to form the portfolio.(1 mark)

b) Determine the risk of the portfolio by calculating portfolio standard deviation given

the same portfolio combination.(4 marks)

c)Using CAPM, calculate beta coefficient of ABC shares, given the risk premium of 7.5 %

and risk free rate of 3.5%.(1 mark)

d) For 4 previous consecutive years, the portfolio has the rate of returns of 12 %, -4%, 13%

and 14%, calculate the geometric average rate of return of this portfolio for the

period.(1 mark)

ANSWER: ** Answer box will enlarge as you type

a) Expected return of the portfolio = 0.75*10% + 0.25*25% = 13.75% p.a.

b) Standard deviation of the portfolio = (0.752*0.152 + 0.252*0.352 + 2*0.75*0.25*0.4*0.15

*0.35)0.5 = 16.79%

c) As per CAPM, expected return on share = Risk free rate + Beta*Risk premium

Expected return on ABC share = 10%

Hence, 10% = 3.5% + Beta*7.5%

Solving the above, we get beta of ABC share = 0.87

d) Geometric average rate of return = [(1+12%)*(1-4%)*(1+13%)*(1+14%)](1/4) -1 = 8.48% p.a.

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HC2091 Final As sess mentT2 2021

QUESTION 5 (11 marks)

MillenniumChe mist Ltd. issued a bond that has 14% coupon rate, paid semi-annually.

The bond has a face value of $1,000 and will mature 10 years from now.

The company has just paid a dividend of $6.50 per its ordinary share. The company is

forecasted to maintain a steady growth of 10% in dividends over the foreseeable future.

The companys management is considering the two following projects with the same

initial investment:

Year Project 1 Project 2

0 $78,500 $78,500

1 $43,000 $21,000

2 $29,000 $28,000

3 $23,000 $34,000

4 $21,000 $41,000

Required:

a) Compute the value of MillenniumChemists bond if the re quire d rate of return in bond

market is 12%. (4 marks)

b) How much wouldinvestors pay for the companys ordina ry shares if the required rate

of return for shares of this type is 15%?(3 marks)

c) Which project shouldthe company choose, using NPV method if the re quire d rate of

return is 11%?(4 marks)

ANSWER: ** Answer box will enlarge as you type

a) Face value of bond = $1,000

Coupon rate = 14% paid semi-annually

Coupon paid = (14%/2)*$1,000 = $70 every six months

Maturity period = 10 years or 20 half years

Required return = 12% p.a. or 6% per half year

Hence, price of bond = PV of coupon payments + PV of principal repayment =

[$70*(1-(1+6%)-20)/0.06] + [$1,000/(1.06)20 = $1,114.70

b) As per the Gordon dividend growth model, price of share = (Next year

dividend)/(Expected return – Growth rate of dividend)

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HC2091 Final As sess mentT2 2021

Here, next year dividend = $6.50*1.1 = $7.15

Expected return = 15% p.a.

Growth rate of dividend = 10% p.a

Hence, price of share = $7.15/(15%-10%) = $143

c) In order to dete rmine which project would be c hosen, the NPV of both the projects

needs to be computed as shown below.

NPV (Project 1) = -$78,00 0 + ($43,000/1.11) + ($29,000/1.112) + ($23,000/1.113) +

($21,000/1.114) = -$78,000 + $38,738.74 + $23,966.94 + $17,280.24 + $13,833.35 =

$15,819.27

NPV (Project 2) = -$78,50 0 + ($21,000/1.11) + ($28,000/1.112) + ($34,000/1.113) +

($41,000/1.114) = -$78,500 + $18,9 18.92 + $23,14 0.5 + $24,860. 51 + $27,007. 97 =

$16,112.09

Based on the above c omputation, it is apparent that Project 2 is selected since it has the

higher NPV.

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HC2091 Final As sess mentT2 2021

QUESTION 6 ( 7 marks)

The following data available for UFO Deli Ltd.

Account Beginning balance Ending Balance Use/source of cash

Accounts payable 27,400 25,500

Inventory 62,600 67,700

Long term debts 125,500 95,600

Common stock 220,400 245,500

Other information:

– The company just placed an order for 700 kg of c hicken drumsticks at a unit price

of $3/kg. The supplier offers credit terms of 2/15, net 45.

– Beginning balance of accounts receivable is $27,500. Ending balance of accounts

receivable of $26,800

– Total revenue (all sales are on credit) is $287,500

– Total cost of goods sold is $195,000

Required:

a. What is the discount being offered by the supplier to UFO Deli Ltd. ? How quickly

must the company pay to get the discount? If the company ta kes the discount, how

much should they pay?(1 mark)

b. Calculate and identify the source of cash or the use of cash for each account by filling

into the column next to the ending balance (2 marks)

c. Calculate the operating cycle and interpret the outcome (4 marks)

ANSWER: ** Answer box will enlarge as you type

a) 2% discount on the invoice of ($3*700= $2,100) is being offered. A discount of $42

would be offered if the payment is made within two days from the generation of

incoice. If discount is taken, then $2,100 – $42 = $2,058 shoudl be paid.

b) Accounts payable Use of cash ($27,400 – $25,500 = $1,900)

Inventory – Use of cash ($67,700 – $62,600) = $5,100

Long term debt = Use of cash ($125,500 – $95,600) = $29,900

Common stock = Source of cash ($245,500 – $220,400) = $5,100

c) Operating cycle = Inventory days + Receivables days Payables days

Inventory days = [[(62600+67700)/2]/195,000] *365 =121.95

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HC2091 Final As sess mentT2 2021

Receivables days = [[(27,500 + 26,800)/2]/287,500]*365 = 34.47

Payables days = [(27,400 + 25,500)/2]/195,000] *365 = 49.51

Operating cycle = Inventory days + Receivables days Payables days = 121.95 + 34.47

49.51 = 106.91 days

The operating cycle is quite long and clearly reflects inefificencies particularly with

regards to the management of inventory as inventory days is more than four months

which is quite large.

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HC2091 Final As sess mentT2 2021

END OF FINAL ASSESSMENT

Submission instructions:

Save submission with your STUDENT ID NUMBER and UNIT CODE e.g. EMV54897 HC2091

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Upload your submissionto the appropriate link on Blackboardusing a laptop or PC (not

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Only one submission is accepted. Please ensure your submissionis the correct

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HC2091 Final As sess mentT2 2021

Adapted Harvard Referencing

Holmes has now implemented a revised Harvard approach to referencing where references are

necessary:

1. Reference sources in assignments are limited to sources which provide full text access to

the sources content for lecturers and markers.

2. The Reference list should be located on a separate page at the end of the essay and

titled: References.

3. It should include the details of all the in-text citations, arranged alphabetically A-Z by

author surname. In addition, it MUSTinclude a hyperlink to the full text of the cited

reference source.

For example;

P Hawking, B McCarthy, A Stein (2004), Second Wave ERP Education, Journal of

Information Systems Education, Fall, http://jise.org/Volume15/n3/JISEv15n3p327.pdf

4. All assignments will require additional in-text reference details which will consist of the

surname of the author/authors or name of the authoring body, year of publication, page

number of content, paragraph where the content can be found.

For example;

The company decided to implement an enterprise wide data warehouse business

intelligence strategies (Hawking et al, 2004, p3(4)).

Non – Adherence to Referencing Guidelines

Where students do not follow the above guidelines:

1. Students who submit assignments which do not comply with the guidelines may be

required to resubmit their assignments or incur penalties for inadequate referencing.

2. Late penalties will apply per day after a student or group has been notified of a

resubmission requirements.

Students whose citations are identified as fictitious will be reported for academic

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