SCHOOL OF ECONOMICS, FINANCE AND MARKETING BAFI1008 – BUSINESS FINANCE SEMESTER 2 2020 Take-Home Final Assessment
You have a choice between receiving $500 now or $530 in six months' time. Current interest rates are 10% p.a. (simple interest).
(1 + 1 = 2 points)
How much would you be prepared to pay for a share in two years' time when it begins to pay a 15c dividend each year and is currently priced at $2? Assume the required rate of return is 7.5% p.a.
(2 point)
If management imposes a limit of $500,000 on capital investments, which of the following project combinations should it accept?
Project |
Initial Cash Outlay ($) |
Net Present Value ($) |
Internal Rate of Return (%) |
A |
100,000 |
12,000 |
12 |
B |
150,000 |
14,000 |
13.5 |
C |
200,000 |
25,000 |
11.1 |
D |
200,000 |
26,000 |
12.2 |
E |
300,000 |
35,000 |
12.7 |
F |
300,000 |
38,000 |
12.5 |
(2 points)
A portfolio consists of 60% of Security A (expected return of 0.10 and standard deviation of 0.03) and 40% of Security B (expected return of 0.20 and standard deviation of 0.05) and the correlation coefficient between A and B is 0.0012.
(1 points)
Assume that BHF Ltd has a current growth rate of 10% p.a. that is expected to be maintained for only another three years and then fall to 5% p.a., where it is expected to remain indefinitely. Given that the required return on BHF's shares is 12% and that the last dividend of 50 cents has just been paid, the price of BHF's shares will be:
(4 points)
Karen has to make rental payments of $1000 at the start of every month, throughout the four-year duration of her university course. Her university fees are $4000 to be paid at the start of each year. She earns $1500 per month (paid at the end of each month) from a parttime job. Assume an interest rate of 8% p.a. and that she keeps the part-time job for the next four years. How much money, in present value terms, can she withdraw each month for the next four years?
(3 points)
If you don’t repay a loan, and a lot of time passes, the debt can grow to unmanageable proportions, as happened to an unfortunate borrower in Melbourne.
A grandmother has been forced to put her house up for sale after she ended up owing a massive $83 000 —on a $15 000 loan. Andrea lane, 57, borrowed the money in 2002 to pay for her father’s funeral and to buy a new oven for her Clayton home.
But she could not meet the cost of the loan and 18 years later, the amount she owed had grown to $83 000 … Andrea said: ‘I borrowed the money when I was grieving for my father. I just signed the papers.’
Andrea can afford to pay $600 per month into the loan, and she has been able to negotiate a new interest rate of 8% p.a.
(1 + 2 + 2 = 5 points)
A firm may choose a project with a rapid payback period rather than one with a larger net present value. Discuss the validity of this statement.
(2 points)
The internal rate of return represents the rate of interest that recovers the initial investment outlay. Discuss the validity of this statement.
(3 points)
In the face of the global financial crisis, Kevin Rudd introduced government guarantees on deposits. Discuss covering at least the following two parts:
(2 + 2 = 4 points)
The market value of a company is calculated as the sum of the net assets and owners equity on the company's balance sheet. Discuss the validity of this statement.
(3 points)
As debtholders rank ahead of shareholders, it is expected that the required rate of return on debt will be higher than the required rate of return on shares. Discuss the validity of this statement.
(2 points)
The capital asset pricing model (CAPM) assumes that all securities are priced according to their unsystematic risk. Discuss the validity of this statement.
(2 points)
Consider the following information:
Extract of balance sheet for LOMO Ltd. as at 30 JUNE 2020:
Issued And Paid-Up Capital
21m 60c ordinary shares 12,600
13.7m $1 1.8% preference shares 13,700
Reserves and Retained Profits
Retained profits 8,000
Share premium reserve 7,300
General reserve 4,000
45,600
Mortgage 2,700
Debentures 3,560
Bank overdraft 10,432
16,692
You also have the following additional information available to you as of today:
11.5%
Required:
Calculate WACC. Display your results in the table below.
(5 points) Show your full working out.
Fill in the table below.
Component |
Market |
Weighting |
Before-Tax |
After-Tax |
Weighted |
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