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Question 1:

Assume you have been invited to a webinar on importance of understanding corporate finance concepts in day today life. You are going to deliver this webinar after a successful completion of FIN2100 unit.

You are required to prepare a script for the webinar based on how useful the concepts learned in FIN2100. Your script should cover at least 2 concepts covered in FIN2100 and be supported with practical examples.

Tina is a fresh graduate from a college in Australia. She has saved $5,000 and wanted to invest this amount for a 10-year period.

Calculate how much Tina can accumulate at the end of 10 years if her investment has a 4.5% annual interest rate.

If Tina needs to accumulate $15,000 at the end of the 10-year period with the $5,000 she currently has, what should be the return rate on her investment?

Assume you will be receiving $55,000 after 20 years from now and current market interest rate is 5%. Calculate the present value of the $55,000.

Question 2:

Kathy Ltd’s ordinary shares have paid a $2.5 dividend for so long that investors are now convinced that the shares will continue to pay that annual dividend forever. If the next dividend is due in one year and investors require an 8% return on the shares.

What is its current market price?

What will the price be immediately after the next dividend payment?

Assume you have been newly recruited as a manger finance at Opex Ltd and your duty is to decide the best machinery for the new plant, based on the information given below.

Machinery X Machinery Y

Cost $450,000 $520,000

Future Cash Flows 

Year 1 120,000 130,000

Year 2 135,000 190,000

Year 3 160,000 220,000

Year 4 140,000 190,000

Year 5 110,000 280,000

You are required to:

Calculate the Net Present Value (NPV) for each project if the discount rate is 10% and decide which machinery Opex should purchase.

If the company payback period is 2.2 years, decide the machinery to be selected based on the payback period calculation.

Question 3:

Distinguish Systematic risk from unsystematic risk with relevant examples

Anita wants to maintain an investment Portfolio and found following information on expected return on 4 securities.

Share Expected Rate of Return

W 11%

X 9%

Y 6%

Z 15%

If Anita decided to invest $5,000 in X, $6,000 in Y, $10,000 in Y, and $4,000 in Z. What is the expected return on Anita’s portfolio?

A company has a capital structure containing 55?bt and 45% ordinary shares. Its outstanding bonds offer investors a 6.5% yield to maturity. The risk-free rate currently equals 4%, and the expected risk premium on the market portfolio equals 6%. The company’s ordinary equity beta is 1.20.

What is the company’s required return on equity?

Ignoring taxes, use your finding in part (i) to calculate the company’s WACC.

Assuming a 30% tax rate, recalculate the company’s WACC found in part (ii).

Compare and contrast the values for the company’s WACC found in parts (ii) and (iii).

Question 4:

Discuss the advantages and disadvantages associated with becoming a publicly traded company.

As Chief Financial Officer of Eco Minerals Company (EMC), you are considering a recapitalisation plan that would convert EMC from its current all-equity capital structure to one including substantial financial leverage.

DIC now has 1,000,000 ordinary shares outstanding, which are selling for $20 each, and you expect the company’s EBIT to be $3,800,000 per year for the foreseeable future.

The recapitalisation proposal is to issue $10,000,000 worth of long-term debt at an interest rate of 8% and use the proceeds to repurchase 500,000 ordinary shares worth $10,000,000.

Assuming there are no market frictions such as corporate or personal income taxes, calculate the expected return on equity for EMC shareholders under both the current all-equity capital structure and under the recapitalisation plan.

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