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BUACC5936 Financial Management

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BUACC5936 Financial Management

  • Attempt all questions and show all workings

–   Questions 1 & 2 of this assignment MUST be completed on an Excel Spreadsheet.

A young newly married couple wish to purchase a unit house in a remote area priced at

$190,000. They want to borrow the entire amount and repay this amount in full plus interest over the next 20 years. You can offer them a mortgage for the full amount at an interest rate of 17% (sounds like extortion to me) and calls for equal annual instalment payments at the end of each of the 20 years.

Required: (a) Calculate the amount of the annual payment? (b) Create and complete the amortization

ABC Corporation is experiencing rapid growth. Dividends are expected to grow at 25% per year for the next three years and then grow at 5% per year for ever. If the required return on the share is 10% and the share currently sells for $30.

What is required of you:

Calculate the projected dividend for the coming year? (Hint: calculate D0 before attempting to determine D1)

Consider a bond with face value of $1000, a coupon rate of 8% (paid annually), and ten years to maturity.

What is required of you:

  1. What is the price of this bond if the required rate of return (r) is 18 percent?
  2. What is the price if r increases to 20 percent? By what percentage did the price of the bond change?
  3. What is the price if r is five percent? If r increases to seven percent, what is the percentage change in price?
  4. From your answers in a to c, what can you say about relative price volatility of a bond in high compared to low interest rate environments.

SYPETCO Ltd is a leading company in Australia and you the below details relating to the capital structure of the company.

Information concerning raising new capital
Bonds$1,000Face value
 13%Coupon Rate (Annual Payments)
 20Term (Years)
 $25Discount offered (required) to sell new bonds
 $10Flotation Cost per bond
Preference Shares11%Required rate to sell new preference shares
 $100Face Value
 $3Flotation cost per share
Ordinary Shares$83.33Current Market Price
 $4.00Discount on share price to sell new shares
 $5.40Flotation Cost per bond
 $5.002021 – Proposed Dividend
Dividend History$4.632020
 $4.292019
 $3.972018
 $3.682017
 $3.402016
Current Capital Structure  
Extract from Balance Sheet  $1,000,000  Long-Term Debt
 $800,000Preference Shares
 $2,000,000Ordinary Shares
Current Market Values$2,000,000Long-Term Debt
 $750,000Preference Shares
 $4,000,000Ordinary Shares
Tax Rate33% 
Risk Free Rate5% 
  1. Calculate the cost associated with each new source of finance. The firm has no retained earnings available.
    1. Calculate the WACC given the existing weights

The financial controller does not believe the existing capital structure weights are appropriate to minimise the firm’s cost of capital in the medium term and believes they should be as follows

Long-term debt40%
Preference Shares15%
Ordinary Shares45%

c)       What impact do these new weights have on the WACC?

The firm is now (in 2021) considering the following investment opportunity for the period 2022-2029.

Data is as follows

Initial Outlay$1,600,000 
Upgrade$700,000Required at the end of Year 4
Incremental Sales350,000Increased sales units per annum – (Year 5-8)
Working Capital$45,000Increase required
Estimated Life8Years
Salvage Value$60,000 
Depreciation Rate0.125For tax purposes
The machine is fully depreciated by the end of its useful life
Other Cash Expenses  $60,000.00  Per annum (Years 1-4)
Other Cash Expenses  $76,000.00  Per annum (Years 5-8)
  Production Costs  $0.15Per Unit
Sales price$0.75Per Unit (Years 1-4)
Sales price$1.02Per Unit (Years 5-8)

Sales estimates for next 8 years starting from 2022

  YearSales (Units)
2022679651
2023694903
2024710155
2025725406
2026740658
2027755909
2028771161
2029786413

d)      Calculate the Net Present Value, Internal Rate of Return and Payback Period

The financial controller is considering the use of the Capital Asset Pricing Model as a surrogate discount factor. The risk-free rate is 5 percent. The information in the table below has been used by company management in calculating the stock beta value which is 1.151 and the expected return on the stock which is 12.5%.

  YearStock Market  Share
IndexPrice
 
20112000$15.00
20122400$25.00
20132900$33.00
20143500$40.00
20154200$45.00
20165000$55.00
20175900$62.00
20186000$68.00
20196100$74.00
20206200$80.00
20216300$83.33

e)       Calculate the CAPM

  • Explain why this figure may differ from that calculated above (i.e. Cost of equity.

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