Assessment 2: Business Case Studies 1 Due date: 15 April 2020, 11PM General overview This assignment has a 25% weighting in your overall mark for this unit and focuses on content from Topics 3, 4 and 5. It will be marked out of 25. Your assignment submission will consist of a word document that should not exceed 1,500 words (excluding the reference list). Overall, the assignment consists of: a. 6 (six) questions on time value of money and bond valuation (part 1); b. 3 (three) tasks as part of a risk and return analysis (parts 2 and 3). Your case company At the beginning of Week 4, you will be assigned an ASX listed company as the context for this assignment. At that time, you can find your case company's ASX code in 'Grades and Feedback' on the unit's MySCU Learning site. All input data you need to find for calculations in this assignment must be sourced from S&P Capital IQ. The link to the database can be found in the Web Links section of this unit's MySCU site. Attempt each of the following sections in your assignment submission: 1. TVM and bond valuation questions (1 mark each): a. Your case company wants to purchase an asset. To finance this asset, they approached their bank. The bank has offered a fixed rate of 6% APR, compounded monthly, with your case company to make monthly payments of the amount shown in Table 1 (page 4 of this document) at the end of each month for 5 years. What amount is your case company borrowing? b. Your case company has annual revenue as shown in Table 1. Assume this revenue will grow continuously at the annual rate shown in Table 1. Estimate annual revenue in 5 years. C. Your case company needs to borrow funds and has several options available to it, Loans A, B and C. The interest rates (APR) for these options are given in Table 1. What is the EAR of the loan option the company should choose? d. Your case company is buying new property for the amount given in Table 1. To finance this, the company's bank has offered an amortised loan at 4.2% APR, semi-annual compounding, with 20 years of semi-annual payments. What semi-annual payment will the company have to make on this loan? Assume that the entire property cost is financed and that payments are made at the end of each period. e. Your case company has an issue of $1,000 par value annual coupon bonds with 6 years remaining until maturity. The annual coupon rate is given in Table 1, along with the current price of the bonds. What is the yield to maturity on the bonds? Assessment 2: Business Case Studies I 1 ACC00716 S1 2020 f. Your company has an issue of $100 par value bonds that offer a 5% coupon rate paid semi- annually. The bonds have 4 years remaining until maturity. The market's required return on these bonds is given in Table 1. What is the market price of the bonds? 2. Risk and return estimates (4 marks): a. Use CAPM to estimate the expected return for the shares of: i) your case company; and ii) a hypothetical company with a beta of 1.60. To do this, use the yield to maturity of a 10-year Australian Government bond on 1 April 2020 as a proxy for the risk-free rate, assume the market risk premium is 5.50% and use your case company's most recent 5-year beta. b. Using the data from part 2a, estimate portfolio expected return and beta, assuming a portfolio with 70% invested in your case company and the remainder invested in the hypothetical company. 3. Risk and return analysis (15 marks): a. Drawing on expectations from theory and incorporating the overall context of your chosen company, interpret and discuss the risk and return measures from parts 2a and 2b. Marking Criteria: The answer to each TVM and bond valuation question in part 1 will be marked as correct (1 mark) or incorrect (0 marks). List your final answers, with each answer on a separate line. Give all answers to two decimal places. No workings are required and no part marks will be provided but if you want feedback on any errors, provide brief workings (e.g. screenshot of completed spreadsheet template section) as a separate numbered list below the initial list of answers. conditions) into explanations. Uses tables or graphs effectively to enhance the discussion. Uses and explains relevant technical terms. (9 to 10 marks) Overall presentation is well organised and looks professional. All data sources and other references are provided where needed in appropriate format and detail. Use of language makes meaning consistently clear. There are no or very few grammar, syntax and spelling errors. (5 marks) explanations. Uses tables or graphs effectively to enhance the discussion. Uses and explains most relevant technical terms. (8 marks) Overall presentation is mostly well-organised and professional. All necessary data sources and other references are provided, mostly in appropriate positions, format and detail. Use of language makes meaning consistently clear. There are very few grammar, syntax and spelling errors. (4 marks) tables or graphs but may not be effective or explained. Uses and explains some technical terms. (7 marks) Overall presentation is mostly well-organised and neat. All necessary data sources and other references are provided, mostly in appropriate positions, format and detail. Use of language mostly makes meaning clear. There may be several grammar, syntax and spelling errors. (3.5 marks) explains some technical terms. Context and theory are limited or incorrect (5 to 6 marks) Overall presentation is fairly neat and organised. Not all necessary data sources are provided or most are not in appropriate positions, format and detail. Use of language mostly makes meaning clear. There are several grammar, syntax and spelling errors. (2.5 marks) explanatio incorrect marks) Overall pr generally all necess are provid in approp format an language meaning be many and spelli marks) Assessment 2: Business Case Studies I Table 1: Case company data (hypothetical except where noted) Breville (BRG) Adairs (ADH) Harvey Norman (HVN) $4,359.00 $2,050.00 $15,897.00 $536.00 ACC00716 S1 2020 Beacon Super Nick Scali Lighting Retail (NCK) (BLX) (SUL) $891.00 $11,500.00 Payment per month Annual total revenue $760.00 $344.40 $2,234.10 $268.00 $247.70 $2,711.40 ($millions) Annual growth in total 10.70% 15.50% 8.10% 12.40% 9.90% 5.30% revenue Loan A (APR, 3.02%, 3.93%, 2.48%, compounding semi- 4.26%, semi- 6.00%, 5.45%, semi- monthly quarterly monthly frequency) annually annually annually Loan B 4.00%, 5.50%, (APR, 2.85%, 2.45%, 4.25%, 5.95%, semi- semi- compounding monthly daily quarterly monthly annually annually frequency) Loan C (APR, 2.52%, 3.91%, 2.95%, 4.24%, 5.40%, 5.97%, compounding daily quarterly frequency) semi- annually daily daily quarterly Property cost $1,540,000 $2,910,000 $9,950,000 $760,000 $1,650,000 $840,000 6 year bond annual coupon rate 5.15% 4.35% 3.95% 4.90% 5.85% 4.55% 6 year bond $1,111.50 $956.60 $1050.50 $980.95 $922.00 $1,077.00 current price 4 year bond required rate of 3.40% 4.90% 4.80% 4.10% 5.80% 3.90% return 1 Data from S&P Capital IQ for the company's most recent financial year. 2 Most recent 5 year historical CAGR from S&P Capital IQ 3 Assume a 365-day year ||| > 4