1. Your answers for this assignment are to be typewritten in a new Microsoft word document.
2. Read the Assignment Instructions that can be accessed from the Subject Outline.
3. Marks will not be given for any calculation type of questions without showing full calculations.
4. Ensure you keep a copy of your assignment. Please include your name, student ID number and page numbers in the footer of your document before saving and submitting this file via Gradebook on the learnonline course website.
5. The report must have 1.5 line spacing with margins of two (2) centimetres. Marks will be deducted for both bad grammar and poor spelling. General report formatting requirements of any good report will be expected. It is important that you document how you arrived at your answer, particularly detailing calculator key strokes used for your calculations. For some problems, it is beneficial to draw a time line to identify the amount and timing of cash flows.
6. Most of the marks for each question will be given for the process used to arrive at your answer. Therefore, if you just provide an answer that is wrong and there are no supporting details as to how you arrived at that answer, you won’t get any marks. But if you have detailed your process (which may have been correct but you made some error with your calculations) then you have the opportunity to get some marks for the question. If you provided a correct formula but the workings are wrong, you won’t get marks for just providing a correct formula.
7. Ignore inflation in your answers and where possible interest rates should be calculated as percentages to 4 decimal places (e.g. 1.2678%).
Please refresh yourself with what is meant by Academic Integrity and Misconduct.
a. Ensure that you have properly acknowledged the work of others that enabled you to complete your assignment. A finance assignment that mostly comprises calculations is no different from a written (e.g. essay) assignment.
b. You must acknowledge by including a reference list and/or bibliography of all texts and sources that provided you with the formulae etc. to do your calculations. This includes directly copying material, closely paraphrasing, submitting another students work in whole or in part or using another person’s ideas, work or research without acknowledgement. The final assignment marks will be deducted if no references or inadequate references have been provided.
Following on from your prior report to your client relating to their possible investments, your client has a number of follow-on questions and investment possibilities. While your client’s knowledge of financial mathematics and theory is increasing, they still need additional help with theories and identifying plausible investment opportunities. Therefore, similar to the prior report, it is your responsibility to provide financial theory discussions and all mathematical calculations for any investment(s).
Your client’s knowledge of financial theory and financial mathematics is now better than what it was because of your previous report. Similar to the prior report, your client has completed some research and has found a number of investments that need to be assessed to identify whether they may be viable investment options. Your client has specific investment criteria with the suggested investments being based on this criterion. The client therefore does not expect you to identify additional investment options.
As your client wishes to invest into securities for retirement, only the viability of the investment(s) should be considered in this report.
Lastly, while you expect that your client has a good base salary you have little knowledge of their assets or liabilities or overall financial position, hence it is impossible to know how many of these investments your client can purchase / invest. Therefore, you are expected to provide advice on each investment in isolation from the other investments, i.e. not as a portfolio of investments.
The report should contain the following information:
• Introduction (100 words)
Comprising a discussion on the purpose and context of the report.
• Discussion / Workings
Providing the full description of the mathematical workings for all projects and discussion on the theoretical aspects identified by the manager.
• Conclusion (100 words)
Summarising the discussion and possible investments and providing guidance and recommendations to the queries provided by your client.
• References
The presentation of the report should be using a report style (see the link within the Assessment section of the ACG 23 learnonline website) which follows the formatting requirements stated on the first page of the assignment (above).
• What is the Capital Asset Pricing Model (CAPM) and how it is used to evaluate whether to invest in a company? Further, your client requires a detailed discussion on how diversification is achieved from a theoretical perspective and would also like an example of how diversification is accomplished from investment in different companies. (12 marks)
• We cannot assume that obtaining finance (of any source) is without external costs, i.e. costs for marketing or to underwriters. Using your knowledge of the cost of finance capital, identify what you expect to happen to the weighted average cost of capital if additional costs such as these are incurred in the securing new equity finance?
(5 marks)
• Why is it useful to calculate the standard deviation of expected returns on a security? What is the main practical reality that limits the usefulness of this calculation?
(8 marks)
1. Your client has estimated the potential returns that may be achieved from a project, together with the likelihood of such returns occurring, detailed in the table below:
The project has an estimated the risk of this project, measured with Beta, of 1.3 which has been externally verified. The market portfolio, measured as the ASX 200, has returned an average of 8.5% per annum over the past 10 years. The current risk-free rate is 2%.
Calculate the standard deviation of this project and comment on this return relative to the market’s standard deviation of 10.2% p.a. Additionally, given the above information, identify whether it is a good idea, for Short Stop, to invest in this company. Explain your reasoning for your decision. (14 marks)
2. Your client is also investigating the characteristics of another company, but does not have historical data for the evaluation process. However, information on the different sources of finance and market prices are available.
Your client wishes for you to evaluate this company’s current structure in an aim to identify the current returns required for the company. This company has the following balance sheet and details (below):
Notes:
The bank has advised that the interest rate on any new debt finance provided for projects would be 4% p.a. if the debt issue is of similar risk, time to maturity and coupon rate.
There are currently 1,000,000 preference shares on issue, which pay a dividend of $0.71 per share. The preference shares currently sell for $4.56.
There are currently existing 20,000,000 ordinary shares which sell for $0.88 each. Last year the company paid a dividend of $0.12 per share. Historically, dividends have increased at an annual rate of 5% p.a. and are expected to continue to do so in the future.
Your client requires you to provide full calculations for the market values for each source of capital, the after-tax costs of each source and the weighted average cost of capital (WACC).
Further, your client requires a rate of return in excess of 10% p.a. before investing money in the company. Identify, for your client, with a plausible rationale, whether the current WACC is sufficient. (16 marks)
3. Finally, your client is investigating electric vehicle charging projects in Melbourne. Your client has access to reliable information regarding the cost for building the project and the annual cash flows. Additionally, the two projects have finite lives and will be demolished/ decommissioned at the end of their lives.
Your client has provided the following information on the two projects (below) and informs you that only one project can be invested.
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