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JNB518 Finance for Decision Making Tasmania

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JNB518 / Finance for Decision-Making

SEMESTER 2, 2021

Instructions to candidates

1.         This examination commences from Monday, 18 October 2021.

  • The answer script is to be uploaded into the exam Dropbox on the unit MyLO site by no later than 23:59 hours (Australian Eastern Daylight Time) on Monday, 1 November 2021.
  • Late examination scripts will not be accepted. Failure to upload your answer script into the unit Dropbox before the cut-off time will result  in a Fail grade.
  • Candidates must attempt ALL FIVE (5) questions.
  • Marks are as indicated.
  • The examination represents 40 of the 100 marks allocated to this unit.
  • For calculation questions the working process should be shown, otherwise no mark will be allocated. For discussion questions the word limit is as instructed. You are required to include your word count on the title page.
  • Answers must be typed.
  • The examination submission is one document. Question numbers must be clearly shown beside each answer. References MUST be provided in-text and in a reference list as per the UTAS Harvard style of referencing. Please also include a Table of Contents. However, there is NO requirement to include an abstract, introduction or conclusion with your examination.
  • Plagiarism, including copying the work of other students or any form of collusion is a punishable offence and may result in failure of the unit and/or exclusion from the AMC. (Refer to the section on Plagiarism in the Unit Outline booklet).
  • This examination consists of 6 pages.
  • If you have any questions regarding this examination please contact your Unit Coordinator. They will respond to your query as appropriate.

Attempt ALL FIVE (5) questions.

Question 1

Below table contains the share prices of QUBE Holdings Limited (Ports and Logistics sector) and Australia and New Zealand Banking Group Limited for the 13 months from 1 September 2020 to 1 September 2021 (Price data were downloaded from Yahoo Finance).

DateQUBEANZ
Price ($)Price ($)
1/09/20202.5117.22
1/10/20202.6518.81
1/11/20202.8622.64
1/12/20202.9422.70
1/01/20212.8523.71
1/02/20213.0726.17
1/03/20212.9928.18
1/04/20213.0128.74
1/05/20213.0128.71
1/06/20213.1728.15
1/07/20212.9227.71
1/08/20213.1627.85
1/09/20213.3127.59
  1. Calculate the monthly holding-period returns for QUBE and ANZ (there will be 12 monthly returns for each share).
  • Calculate the average monthly holding-period returns and the standard deviations of these returns for QUBE and ANZ.
  • Assume you have decided to invest 60% of your money in QUBE and 40% in ANZ. Calculate the expected monthly holding-period return and the standard deviation of the return for the two-share portfolio.
  • Discuss whether you have gained benefits through the creation of the portfolio of 60% in AUBE and 40% in ANZ.

Note: You can use Excel spreadsheet to work on part a, b and c. However, the answers, working process explanation including formula used, and discussion should be in Word document. The spreadsheets are submitted as an appendix.

[2+2+2+2=8 marks]

Continued …

Question 2

  1. Explain why shareholders would care if a firm accumulated a very large amount of cash and discuss options available for a firm to manage cash if it believes there is too much cash. (Word limit: 150)
  • Explain the impact of the following actions related to working capital management on a business’s operating cycle. (Word limit: 150)
    • Payments to suppliers are speeded up.
    • Account receivables turnover goes from 6 times to 8 times.
    • Inventory turnover goes from 8 times to 6 times.
    • Credit sales discontinued.

[2+2 =4 marks]

Question 3

A large and well-known listed company wants to raise $1 million next month for  its 12-month period project. Identify and explain four different financing options available to it. (Word limit: 300)

[4 marks]

Question 4

  1. ‘When the inflation rate in Australia is relatively higher than the inflation rate in the USA, the value of the Australian dollar will increase relative to the US dollar.’ Comment on the above statement using the theory that explains the adjustment of foreign exchange rates. (Word limit: 150 words)
  • Discuss the types of exchange rate risks a multinational shipping company may face and explain how the company would manage these risks. Use examples to support your discussion. (Word limit: 250)
  • An Australian airline company has just entered a contract to purchase a new fleet of airplanes for 2 billion US dollars (USD) and the current exchange rate is AUD/USD0.74. The company must pay for the fleet in six months’ time. The airline company considers hedging its exposure to foreign exchange risk by using an option. The company has the following information on the two types of option.
    • Currently a call option on USD that expires in 6 months has an exercise price of AUD/USD0.70 and a premium of AUD0.01.
    • Currently a put option on USD that expires in 6 months has an exercise price of AUD/USD.72 and a premium of AUD0.01.
  1. Which type of option should the company use? Why?
  1. If the actual exchange rate in six months’ time is AUD/USD0.67, explain how the hedge has protected the company from its exposure to exchange rate fluctuation.
  1. If the actual exchange rate in six months’ time is AUD/USD0.76, explain how the hedge has protected the company from its exposure to exchange rate fluctuation.

[2+3+(1+2+2) =10 marks]

Continued …

Question 5

ABC Shipping is considering replacing an existing ship with a newer and more efficient one for a 5-year contract of affreightment. The existing ship is five years old; it cost $36 million and is being depreciated under the prime cost method at a rate of 10%. The existing vessel has a remaining useable life of five years. The new ship costs $45 million to purchase and $5 million to outfit for service. It will be depreciated under the prime cost method at a rate of 10%.

The existing ship can currently be sold for $10 million and will not incur any removal or clean-up costs. At the end of five years, the existing ship can be sold for net $1 million before taxes. The new ship can be sold for net $20 million before tax at the end of the five-year period. The company is subject to a 30% tax rate on both ordinary income and capital gains.

The projected profits before depreciation and taxes for the new ship and the existing ship are given in the following table.

YearNew ShipExisting ship
1$30,000,000$23,000,000
230,000,00023,000,000
330,000,00023,000,000
430,000,00023,000,000
530,000,00023,000,000

The required rate of return used for evaluating the two options is the company’s Weighted Average Cost of Capital (WACC), which can be calculated according to the following information on the company’s capital structure.

Debentures ($100 par, 10% coupon-annual)$2,000,000
Ordinary shares ($1 par)$5,000,000
Bank loans$300,000

Additional information:

  • The ordinary shares are currently traded at $3.00 per share.
  • The beta coefficient of ABC Shipping is 1.2.
  • The risk-free rate (a 10-year government bond) in the market is 3%.
  • The average historical market return for the past 10 years is 9%.
  • The debentures are priced at $102.00.
  • The current return (i.e. market yield) on the company’s debentures is 8%.
  • The interest rate of bank loans is 6%.
  • The company tax rate is 30%.
  • The existing capital structure is unlikely to change.
  1. Using a table in Word or an Excel spreadsheet, set up the cash flows for each option, i.e. purchase the new ship and continue using the existing ship.

Continued…

  • Calculate the company’s WACC.
  • Calculate the Net Present Value (NPV) of each option.
  • What option would ABC Shipping choose? Justify your answer.

[8+3+2+1=14 marks]

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