#### BUACC5936 Financial Management

Table of Contents

## 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:

- What is the price of this bond if the required rate of return (r) is 18 percent?
- What is the price if r increases to 20 percent? By what percentage did the price of the bond change?
- What is the price if r is five percent? If r increases to seven percent, what is the percentage change in price?
- 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 | $1,000 | Face value |

13% | Coupon Rate (Annual Payments) | |

20 | Term (Years) | |

$25 | Discount offered (required) to sell new bonds | |

$10 | Flotation Cost per bond | |

Preference Shares | 11% | Required rate to sell new preference shares |

$100 | Face Value | |

$3 | Flotation cost per share | |

Ordinary Shares | $83.33 | Current Market Price |

$4.00 | Discount on share price to sell new shares | |

$5.40 | Flotation Cost per bond | |

$5.00 | 2021 – Proposed Dividend | |

Dividend History | $4.63 | 2020 |

$4.29 | 2019 | |

$3.97 | 2018 | |

$3.68 | 2017 | |

$3.40 | 2016 |

Current Capital Structure | ||

Extract from Balance Sheet | $1,000,000 | Long-Term Debt |

$800,000 | Preference Shares | |

$2,000,000 | Ordinary Shares | |

Current Market Values | $2,000,000 | Long-Term Debt |

$750,000 | Preference Shares | |

$4,000,000 | Ordinary Shares | |

Tax Rate | 33% | |

Risk Free Rate | 5% |

**Calculate the cost associated with each new source of finance. The firm has no retained earnings available.****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 debt | 40% |

Preference Shares | 15% |

Ordinary Shares | 45% |

### 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 | $700,000 | Required at the end of Year 4 |

Incremental Sales | 350,000 | Increased sales units per annum – (Year 5-8) |

Working Capital | $45,000 | Increase required |

Estimated Life | 8 | Years |

Salvage Value | $60,000 | |

Depreciation Rate | 0.125 | For 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 | $0.15 | Per Unit |

Sales price | $0.75 | Per Unit (Years 1-4) |

Sales price | $1.02 | Per Unit (Years 5-8) |

Sales estimates for next 8 years starting from 2022

Year | Sales (Units) |

2022 | 679651 |

2023 | 694903 |

2024 | 710155 |

2025 | 725406 |

2026 | 740658 |

2027 | 755909 |

2028 | 771161 |

2029 | 786413 |

### 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%.

Year | Stock Market | Share |

Index | Price | |

2011 | 2000 | $15.00 |

2012 | 2400 | $25.00 |

2013 | 2900 | $33.00 |

2014 | 3500 | $40.00 |

2015 | 4200 | $45.00 |

2016 | 5000 | $55.00 |

2017 | 5900 | $62.00 |

2018 | 6000 | $68.00 |

2019 | 6100 | $74.00 |

2020 | 6200 | $80.00 |

2021 | 6300 | $83.33 |

### e) Calculate the CAPM

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