FIN200 Corporate Financial Management

FIN200 S1 2022

Assignment: (30 marks)

Due for online submission (using Moodle) by 5 pm, Friday 13^th May 2022.

WARNING: ANY CHEATING OR SHARING OF ANSWERS WILL RESULT IN A ZERO MARK FOR BOTH INDIVIDUALS. DO THE ASSIGNMENT BY YOURSELF.

(Q1-4): Find a retail company that is listed on the Australian Stock Exchange (ASX). It can be any retail company, but it must be listed and trading on the ASX. Give the code that it trades under for reference.

Imagine that you are the new CEO of this business. Answer the following questions to show your understanding of how firms function and the issues that shareholders and managers encounter.

1. Name the business and give a description/overview of your understanding of how the business functions. E.g. how does it generates revenue, is it profitable?. (1 mark)
2. Explain one (1) specific major financial decision that you may need to make as the manager of this business. (1 mark)
3. Describe the Company structure of the business and contrast the positives and negatives of this structure with alternative typical business structures in Australia. (2 marks)
4. What are Agency issues and how can you negotiate with the Board to ensure them that Agency issues won’t be a problem with your role as CEO . (2 marks)
5. The board have approached you with the opportunity to expand by taking over a rival start-up company. Describe three (3) factors that you must take into consideration when deciding whether to purchase this company. Explain why each is important. (3 marks)

6. The owners of the rival business agrees to sell to you. They will take payment either of two different ways.

1. Using the information below, calculate which payment option would make more financial sense to you and state which you should choose. Use formulas not tables, and show working. Make a definite statement as to which option should be chosen. (4 marks). Hint: You need to use your skills calculating the PV of future cash flows.

Option 1:  An upfront Payment of $10,000,000 and a single fixed payment in 1 year of $5,000,000.

Option 2: An upfront Payment of $5,000,000, followed by further payments of $5,000,000 at the end of six months and $6,000,000 at the end of 2 years.

Interest rates are as follows. 6 months is 5% p.a.  1 year is 7% p.a. and 2 years is 8% p.a. Assume that you can use simple interest for periods of 1 year or less, but yearly compounding interest for the 2 year.

1. Would it be better to just payout the NPV of the cheaper option now? Explain your answer. (1 Mark)

7. Think about the chosen option in question 6. Explain the risks that are faced by the Seller of the business when accepting deferred payments for their business. How important are Ethical behaviours in business and how might they apply here. (2 marks)
8. You just sold your car for $6,500. You have deposited it into your bank account. You are keen to invest the funds for one year as you are concentrating on your studies for the moment. Which of the following options for depositing the funds will earn you more interest over the coming year. Show your calculations including formula. (2 marks)
9. Fixed Interest rate of 3% paid at maturity.
10. 9% Interest rate compounded and reinvested on a monthly basis.
11. 8% Interest rate compounded and reinvested on a daily basis.
12. What is the benefit to an investor of seeking a compound interest rate versus simple interest rate for the return from an investment. (1 mark)
13. Name and describe an example of an annuity other than a Lease or Rental agreement, that that is commonly encountered by businesses in the Australian economy. (1 Mark)
14. Calculate the Present Value of the following Annuity Payment.

$25,000 paid in arrears for 7 years. Assume that the current yield curve shows a 7-year bond rate of 4.5% p.a. (1 Mark)

Tip: Look at Topic 3. Seminar 3 notes explain this and then use the spreadsheet called NPV to check your calculations.

11. It is common in Australian Finance for Annual Percentage Rates (APR’s) to be quoted when discussing the level of interest.
12. Why would it be better for interest rates to be quoted as Effective Annual Rates (EAR) instead? (1 Mark)
13. Calculate the EAR in the following situation: APR 5 %, Interest Calculated/Paid Monthly. (1 Mark)
14. What are the two components of Holding Period Return?

Calculate the HPR of the following share investment in VRV. Assume that the Share was held for exactly 6 months and one dividend was received with any attributable franking credit included in the total of the Dividend received. Purchase Price $4.75 Dividends received $0.05. Sale Price $4.92.

Show the total profit amount, and the HPR as a percentage gain on the investment. (2 Marks)

13. Calculate the Expected returns on the following investment.

In one year, the probabilities of the following outcomes are as follows. A return of $20,000 is 40 % likely. A return of $50,000 is 30 % likely. A return of $100,000 is 10% likely. A return of $10,000 is 20% likely. (1 mark)

14. As an accountant you have a client who wants to take a lot of risk with their investments. They have some money to invest, and they ask you to give them your thoughts on which asset classes are the least risky through to those that are most risky. They are ONLY considering investments in Property, Shares or Bonds.
15. From what you know about the relative historical risks of these investments and their returns. Which asset class should they put their money into given their risk preference. (1 mark).
16. From you understanding of the investment markets, what general rule of investment could they later use to reduce the risk of their portfolio, if their situation changes (1 mark).
17. The CAPM model divides the risks that investors encounter into two categories. Identify these. Explain the term Beta. (2 marks)