University of South Australia Business Finance (BANK 2010), SP3 2024 Assignment (Part B) Topics 1-7 To be completed and submitted individually Due Date: 20 May Monday 12 noon (Adelaide time) Week 8 Assessment Description: Your answers for this assignment are submitted as 1) a short report in a new Microsoft word document and 2) a Microsoft Excel document as evidence of work performed only for investment scenarios. For the report, please include your name and Student ID on the first page of the MS word document. You can read the Report information file for a better understanding of how to structure a report. The UniSA guide on reports introduces the sections of a long report. However, for this assignment you are expected to write a short report by including the following sections: e Introduction (200 words): Comprising a discussion on the purpose and context of the report. e Discussion / Analysis: Provide the full description of the theoretical aspects identified and the discussion about the process employed for the investment scenarios. Please include the context and full explanation of the working from the investment questions in the MS Word document. e Conclusion (200 words): Summarise the discussion and possible investments and provide guidance and recommendations to the queries provided by your Manager. * References Note: There is no need to provide an abstract, table of contents, executive summary, or appendices. You can use tables to present the calculations. However, screenshots are not recommended General report formatting requirements of any good report will be expected. For discussion questions, please explain in detail. You are expected to research beyond the textbook. For analysis questions, you must include how you arrived at your answer, particularly detailing the process employed, the Excel functions, and the inputs used for your calculations. It is beneficial to draw a timeline to identify the amount and timing of cash flows. Therefore, if you just provide an answer that is wrong and there are no supporting details in the MS document that 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 errors with your calculations) then you have the opportunity to get some marks for the question. 1|Page Instructions: 1) First download the assignment Part B booklet in PDF format for general information and discussion questions. 2) For investment scenarios, please download the Excel file named "Assignment Part B BANK2010 SP3 2024" to be able to see your unique set of questions: investment scenario 1, investment scenario 2 and investment scenario 3 3) Once you download the Excel file, please enter your 9-digit Student ID number on the green highlighted cells on the first spreadsheet of the Excel file. Full Name StudentONumber | | | [ | | | | | Once you enter your 9-digit ID, your unique set of questions will automatically be populated on three spreadsheets of the Excel file. Your assignment will not be marked if you omit the Student ID number or enter incorrect digits. 4) Please perform a detailed analysis of the investment questions and save a copy of the Excel file with your full name. Marks will not be given for any calculation type of questions without showing full calculations in the provided Excel file. 5) Include a summary of the analysis and recommendations in MS Word format and complete the report. 6) Submit both documents a report in MS Word format and an Excel file via the submission link Advice and Resources: The 1200-word limit for the report is for indicative purposes. The tables, calculations, headings, sub-headings, and reference list will be excluded from the word count. The quality of the assignment will be assessed against the marking criteria. 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. Late submission penalty of 5% reduction in marks per day up to a maximum of 5 working days applies. Any part submitted after that will not be marked. Please consult Academic Literacy Modules for academic writing, planning and structuring assignment, academic referencing, etc. 2|Page Brief: You have been employed to provide a comprehensive discussion and analysis of several investment scenarios provided by your manager. As your manager has little knowledge of finance it is your responsibility to provide the explanation and mathematical calculations for the investment(s) they provide and the theoretical questions they pose. Background: You are working as a financial advisor for a company for whom you are writing the report. Your manager's knowledge of financial theory and financial mathematics is now at an intermediate level. As such, he is relying upon you for advice and is looking for investments in projects. He has completed some research and has found some investments that he wishes to have assessed to the extent that they may be viable investment options. Lastly, you are not aware of the capital constraints i.e. how many of these projects the business 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. Requirements: Note: The presentation of the report should be using a report style. The marks have been allocated for the components: introduction, conclusion, discussion questions, investment scenarios, quality of presentation and references. The excel answer file will be marked for demonstrating the correct formulae, input values and logical conclusion. 4|Page Manager's Theoretical Questions: 1) If both dividends and capital gains/losses form part of the return a shareholder receives from investing in shares, why are only the dividends taken into account when pricing the share using a constant dividend model or constant dividend growth model? (5 marks) 2) Your manager has approached you for advice on the mechanism within the financial market. With reference to efficient markets, provide a short description regarding how prices are determined and how this information is incorporated into prices. What is implication for mangers in their decision-making process? (9 marks) 3) From a theoretical perspective, you manager is struggling to understand net present value (NPV) as a decision-making tool. Please provide a discussion on NPV with a specific directive to highlight some issues with projects with long lives. (8 marks) 4) Describe the relationship between the value of a bond and the yield to maturity. Why does the market value of a bond differ from its face value? (8 marks) 5|Page Manager's Investment Questions: Please download the MS Excel file named *Assignment Part B BANK2010 SP3 2024' and enter your student ID number (9-digits) on the green highlighted cells on the first spreadsheet. Y our unique set of questions will be populated in the following spreadsheets: 1) Investment scenario 1 (15 marks) 2} Investment scenario 2 (21 marks) 3) Investment scenario 3 (14 marks) Note: For each investment scenario, please provide the context, detailed discussion of the process employed, calculation results, and the relevant conclusion for your manager in the MS Word document. The marks achieved in the investment questions will be reduced to 50% if omitted in the report. G|Page Investment Scenario 1: Your Manager has estimated the potential returns that may be achieved from a project, together with thelikelihood of such returns occurring, The data for the probability method has been provided below. Probability of Occurrence Additional Information: For CAPM, the project has an estimated risk, measured with Beta, of 1.8 which has been externally verified. The market portfolio, measured as the ASX 200, has returned an average on per annum basis 6.75% over the past 10 years. The current risk-free rateis 3%. Themarket standard deviation is B.2% Required: a) Calculate the expected return and standard deviation for this company. b} Comment on this return compared to the market required rate of return from the CAPM model. c} Identify whether it is a good idea, for your manager, to invest in this company. Explain the reasons for your decision. (15 marks) Solution: Context: Process: A B C D E F G Investment Scenario 2 Your manager is investigating a technology company's project specialising in artificial intelligent tools. The company balance sheet excerpt is provided below. w N Long-term debt $ 4 Bonds: Par $100, coupon rate 7% p.a., 8 years to maturity 7,000,000 5 Equity 6 Preference shares 8,000,000 Ordinary shares 18,000,000 8 9 Note: Please see the information about each source of capital below: 10 11 1) Bonds: 12 The company's bank has advised that the interest rate on any new debt finance of similar risk and with same time to maturity provided for the projects would be per annum 6.00%% 13 14 2) Preference shares: 15 16 Number of preference shares on issue 8,000,000 17 Current dividend per share (preference shares) $6.80 18 The preference shares currently sell for $11.38 each 19 20 3) Ordinary shares: 21 Number of ordinary shares on issue 9,000,000 22 The ordinary shares currently sell for $5.06 leach 23 The company has recently paid dividend $0.45 24 Historically, dividends have increased at annual rate of 10.00% and expected to continue to do so in the future. 25 The company's tax rate is 30 26 Your manager states that their required rate of return for investment in a company with similar characteristics to this particular company would be 18 p.a. 27 Your task is to advise the manager on whether you believe this to be a good or bad investment and the rationale for investing (or not investing). 28 29 Required: 30 You should proceed as follows: 31 a) Determine the market value proportions of debt, preference shares and ordinary equity comprising the company's capital structure. 32 b) Calculate the after-tax costs of capital for each source of finance. 33 c) Determine the after-tax weighted average cost of capital for the company. 34 d) Indicate based on all applicable information, whether you would recommend this technology company to your manager (or not). 35 (21 marks) 36 37 Solution: 38 Context: 39 40 41 42 Process: 43 44A C D E F G Investment Scenario 3: Your manager is considering two submarine projects that will operate in South Australia. W N However, your manager is not confident which one to invest, and has sent the relevant details to you to advise upon. The characteristics of those projects are given below: Project 1 Project 2 Initial Outlay (10) $114,000 $164,000 Annual Cash Flows (CF) $175,000 $30,000 9 Life span in years 14 10 11 A discount rate of 15%% p.a is estimated as the risk in those two projects. 12 Assume that the annual cash flows are after tax and depreciation. 13 14 Required: 15 Your manager has asked you to provide detailed calculations indicating which project you believe to be the best. 16 The manager will then decide to invest in one of the projects (14 marks) 17 18 Solution: 20 Context: 21 22 23 Process: 24 25