Answer the questions below.
You are the chief executive of a large Australian company that builds residential housing. The details of a potential prestigious development site near the Olympic Village have been analysed and placed before you for a decision. The cost and revenue details of developing the site and selling properties in the development are estimated to be as follows: Sydney Harbour Plot 5 Year 1 Year 2 Year 3 Year 4 (all figures in AUS$ millions) Initial cost of site 30 Raw material cost 3 Labour and contractor costs JNUA Tax due on profits Revenue from selling properties 23 43 All cashflows can be assumed to occur at the end of the year. You are also given the following information about the company and the equity market in Australia: Number of issued equity shares 300 million Market price per share $1.50 Risk-free rate of return 4% Equity risk premium for equity markets 5% Corporation tax rate 30% Beta of company's equity shares 1.2 The company currently has sufficient cash resources to undertake the project.{i} {i} [i} {iv} {V} {Vi} {vii} The company currently has no debt. ICalculate the NP? of the project using the company's WAGE. [3] Give two advantages and two disadvantages of using the WADE for such a calculation. [4] Estimate the project's intemal rate of return. [I] If the company were to alter its capital structure by borrowing $2M ruillion debt at a rate of 4% and using the proceeds to repay existing equity sharesI what would the company's new cost of capital beI and how would this affect the viability of the project? [4] Suggest two sensitivity tests that could be performed on the data that might give useful analytical information. [2] Describe how you might go about conducting an \"opportunity cost" analysis and a\"shareholder value" analysis. [4] An article you read recently suggested that constructing a stochastic model of a project can bring valuable information. List an advantage and a disadvantage of constructing such a model. [2] [Total 2s] A life insurance company issues 20-year temporary assurance policies to lives aged 45. The stun assured, which is payable irmnediately on death, is 400,000 for the first 10 years, and 100,000 thereafter. Level annual premiums are payable in advance for 20 years, or until earlier death. The premium basis is: Mortality: AMQE Ultimate Interest: 4% per annurn Expenses: nil. {i} Show that the premium payable is approximately 810.25 per annum. [4] {ii} Find the net premium reserve ten years after the commencement of the policy, irrnnediately before the payment of the eleventh premium, assuming the reserving basis is the same as the premium basis. [4] {iii} Give an explanation of your numerical answer to part (ii). Describe the disadvantages to the insurance company of issuing this policy. [3] {iv} How could the terms of the policy be altered, so as to remove the disadvantages described in part [iii}'.l [2] [Total 13]
