FIN516 - Corporate Finance
Session 1 2016
Faculty of Business
School of Accounting and Finance Internal Mode
Subject Overview
This subject explores the key financial decisions faced by businesses in a modern economy. These decisions relate to funding business operations, evaluating investment proposals and the distribution of profits to providers of funds. It provides the basic concepts and theory for further studies in finance.
Learning outcomes
On successful completion of this subject, you should
be able to assess critically the scope of the finance function and its role in corporate management;
be able to synthesise relevant finance theories that will assist in the evaluation of investment, financing and dividend policies of firms through critical analysis and evaluation; be able to apply acquired skills in the evaluation of financial data to enable informed decision making; be able to communicate and analyse financial data at an appropriate level for post-graduate finance students.
Lecturer Details
Subject Coordinator Sajjad Khan Email sakhan@csu.edu.au Phone To be advised.
Contact phone number 03 99357927
Campus Other
Building/Room number To be advised.
About your lecturer
To be advised.
Learning, Teaching and Support Strategies
Class times and location
Please refer to the most updated timetable for the class times and location.
You would have received your timetable by email. You can also obtain a copy from the timetable stand outside the academic office or via the noticeboard. You can also obtain a current copy from the link below: https://csutimetable.au.studygroup.com/Melbourne
Important: It is essential that you keep checking the timetable for the latest class information. The timetable may change until the second week of the teaching session, and it is important to monitor the timetable regularly on the noticeboard.
The weekly instruction in this subject will consist of a combined lecture /tutorial lasting up to 3 hours which will occur every week. This will cover the main points from each topic.
Attendance is required at all scheduled lectures and tutorials.
How to contact your lecturer
Email is the best way to contact your lecturer. Please send a brief message regarding the issue and include the subject name and code in your email ?it really helps to know which class you belong to, before lecturer responds to your query. If you prefer to phone your lecturer that is fine, but please leave a message if lecturer is not there at the time ? lecturer will give you a call back as soon as he/she can.
How you are expected to engage with the subject
Your subject materials are available on the Interact site under the Topics link in the left hand side menu. You also need your textbook. The Topics (in Interact2 Topics) for this subject have been written specifically to guide you through the sections (and questions) of the prescribed textbook relevant to each topic.
I suggest that for each topic you read the learning objectives carefully, read the overview and have a quick skim of the relevant chapters in the text and lecture Power Points (they will be available in Interact2 Resources). This will make it easier to understand concepts that I’ll discuss in class and you will be able to have meaningful engagement in class.
After class read the material and watch the videos in Topics in interact2. Once you have got a feel for what the topic is about you should try to make a good set of notes under each of the topic review questions in that topic. You can do this by going through lecture PPTs, your own notes taken during class, re-reading the material and re-watching the videos in interact2 and consulting the text again in a more considered way. These topic review questions have been designed to give you focus in the topic, so it really helps to prepare a useful set of answers to them.
Once you feel ready you can test yourself by taking the online quiz in the topic – there are no marks recorded and you can do each quiz as many times as you like.
In this subject there are also lots of opportunities for you to engage with your peers and your lecturer. To ensure that you are engaged with the subject from the start of the session, I will be making sure that you are actively engaged in accessing the learning materials in the first couple of topics. You also have an early Assessment 1. If you don’t access the materials, do not complete Assessment 1 or do not attend classes regularly I may contact you by email to find out if there are any issue that I can help you with.
You should check the Interact2 Site at least weekly for postings, announcements, lecture information and other resources that will assist your studies or additional information and resources vital to your success in the subject.
Studying at university does not mean studying alone. Take advantage of collective wisdom and post your questions to the subject Discussion Board.
Information on effective time management is available on the CSU Learning Support website via the following link: http://student.csu.edu.au/
Visit the Learning Support website for advice about assignment preparation, academic reading and note taking, referencing and effective time management at: student.csu.edu.au
You can also contact an adviser through Student Central on the following number:
1800 275 278 (or +61 2 6933 7507 ( http://interact.csu.edu.au/sakai-msi-tool/content/templates/edit.htm from outside Australia).
Queries regarding the content of this subject should be directed to your Subject Coordinator.
Library Services
The CSU Library website provides access to online material and print, using Primo Search to find online journal articles, eBooks, hardcopy books from CSU Library (see Library Manager for Interlibrary Loan Requests), company & government reports, eJournals, dissertations, theses, newspapers including Business & Financial newspapers in Factiva (See Business & IT Journal
Databases), and other reference resources (eg. Australian Bureau of Statistics, Australian standards, online encyclopaedias & dictionaries to be read on the computer). You will also find library guides, Subject Reserve for any readings eg. ITC100, ACC100, etc., and online assistance to help you use the Library's resources such as Ask a Librarian – Live Chat and Ask a Librarian - Web Form.
You can find Library Services on both the SGA library online catalogue: http://primo.unilinc.edu.au/primo_library/libweb/action/search.do?vid=SGA
The SGA library online catalogue allows students to Sign In, My Account shows student’s current library record including all books on loan, Renew your borrowed books online before the due date, also Search and Request all books in the SGA library, even if unavailable due to high demand from students. Students can Request books when all books are on loan to other students. When the requested book is returned to the SGA library, the student who requested the book receives an email immediately to pick up the book from the SGA library. View your library record online 24/7 at the above web link for SGA library.
And also CSU Library online: http://student.csu.edu.au/library - CSU Library Services including Primo Search & Subject Reserve online with 24/7 access, online and video tutorials in research skills, finding journal articles for assignments, topic analysis, download Endnote referencing program and many other online library services to help you successfully complete your assignments for all CSU courses.
http://trove.nla.gov.au/ - Powerful search engine from National Library of Australia to access many different online resources on any subject from one search.
Contact Details for renewing loans, locating books and other information:
SGA Melbourne Library:
Marian Lees - Director, Library Services
Ph: (03) 9935 7921
Email: MLees@studygroup.com
Library Help
http://student.csu.edu.au/library/help-contacts Friendly and quick assistance is available. Ask for help finding information and navigating the library's extensive eResources.
Online Tutorials http://student.csu.edu.au/library/study-research/training-tutorials-videos
Learn how to:
• use Primo Search to find eReserve material and journal articles
• search journal databases and web resources for information for your assessments
• identify appropriate sources of information and peer reviewed material, and evaluate resources.
Bookmark your Subject Library Resource Guide
Subject Library Guides are a great way to get started with research. Each online guide is tailored to a specific area of study, including Accounting, Business & Information Technology outlining how to research in your area and where to look for information. http://libguides.csu.edu.au/
Academic Learning Support Assistance
Visit the learning support website for advice about assignment preparation, academic reading and note-taking, referencing, and preparing for exams at: http://student.csu.edu.au/study
You may also contact:
Name: Monique Moloney
Email: MMoloney@studygroup.com Phone: (03) 9935 7919
For appointments, please see Reception.
Queries regarding the content of this subject should be directed to your subject lecturer.

Your workload in this subject
CSU Academic Senate policy states that a standard 8 point subject should require you to spend a total of 140-160 hours engaged in the learning and teaching activities. This subject complies with this policy. Each week you should spend around 9 - 11 hours studying this subject – obviously some weeks may require more time than other depending on how you work – but the following is a guide for your information.

learning style and study habits. Students learn in different ways and possess varied learning histories that influence the time required to engage with the learning and assessment activities associated with a subject. Therefore, the time you are required to devote to this subject may be different fromt what is suggested here. It is also expected that this workload is evenly distributed throughout the session.
Text and Learning Materials
Prescribed text(s)
You must have access to a copy of the prescribed textbook:
Ross, S. A., M. J., Westerfield, R. W., & Jaffe, J. (2013). Corporate Finance (10th ed.). USA: McGraw-Hill.
This text book is supported by a web-site. Information about this web site can be found in the text book. You should note that not all optional resources come free with the text and the -Connect- resources are not used in this subject.
There are many texts on financial management, managerial finance, corporate finance and business finance that are useful references for this subject as well as many internet sites. While exercises and assignment work are geared to the prescribed text, you should not feel constrained to use it as your sole reference. Below are a selection of additional texts:
Brealey, R. A. Myers, S. C., & Allen, F. (2014). Principles of Corporate Finance (10th ed.).
Sydney: McGraw-Hill.
Parrino, R., Kidwell, D.S., Au Yong, H.H., Morkel-Kingsbury, N., Dempsey, M., & Murray, J. (2013). Fundamentals of Corporate Finance Australasian 2nd Edition: Wiley.
Titman, S., Martin, J. D., Keown, A. J., Martin, T., (2015). Financial Management Principles and Applications (7th ed.). Pearson Education: Australia.
The following newspapers, magazines and journals are a good source of information:
Australian Financial Review www.afr.com.au
Business Review Weekly www.brw.com.au
Wall Street Journal www.wsj.com
Business Week www.businessweek.com
CNN Financial Network www.cnnfn.com
Journal of Finance www.cob.ohio-state.edu/~fin/journal/jof.htm
In addition, you will find the following websites useful:
Australian Securities Exchange: www.asx.com.au
New York Stock Exchange: www.nyse.com
Chicago Board of Trade: www.cbot.com
Chicago Mercantile Exchange: www.cme.com Yahoo! Finance: au.finance.yahoo.com
CALCULATORS:
You will need at least a 'high school' calculator, which will be sufficient for this subject. Make sure the calculator has a 'log' key, an 'e x' key, and a multiple roots key (usually 'x y ', 'y x ' or '^'). If you already use a financial calculator, you will find this useful, especially for application after this subject.
When submitting work for assessment, you are marked on your understanding of the problem. If you have simply submitted the result as given by the financial calculator, without showing the structure of the solution, you are merely demonstrating competency with the calculator and no knowledge or understanding of the problem, and will be assessed accordingly. Therefore, use a financial calculator as a checking device, but make sure you really understand the problem and solution.
Schedule
In each week you are required to complete the following activities for study of a topic:
Study the learning objectives, overview and the material on the Interact2 site,
Read the required chapter/s from the text and any other required readings listed at the start of the topic,
Prepare a set of topic notes by answering the review questions, Test your knowledge on the topic by taking the online quiz.
You can also discuss various aspects of the topic with your peers in the discussion board.
Session Week Topic Learning activities / Textbook
Week Commencing Chapter/s
1 29 Feb 2016 1. Introduction to Corporate Finance Read Chapters 1, 2 & 3
2 7 Mar 2016 2. The time value of money & valuing of Read Chapters 4, 8 & 9 shares and bonds
3 14 Mar 2016 3. Investment evaluation methods Read Chapter 5, prepare for A1
Assignment 1 due Tuesday 15 Mar 2016
4 21 Mar 2016 4. NPV & capital budgeting Read Chapter 6, work on A2
5 28 Mar 2016 5. Capital investment decisions & risk Read Chapter 7, work on A2
analysis
6 4 Apr 2016 6. Risk and Return Read Chapter 11, work on A2
7 11 Apr 2016 Mid-session Break Work on A2 8 18 Apr 2016 Mid-session Break Work on A2
9 25 Apr 2016 7. Cost of capital Read Chapter 13, Finalise A2
Assignment 2 due Tuesday 26 Apr 2016
10 2 May 2016 8. Capital structure policy Read Chapters 16 & 17
11 9 May 2016 9. Long term debt & leasing Read Chapter 21 12 16 May 2016 10. Short term finance Read Chapter 26 13 23 May 2016 11. Equity finance Read Chapter 20
14 30 May 2016 12. Dividend policy Read Chapter 19, prepare for A3

This study schedule has been devised to assist in your planning during the session, and is intended as a guide only.
Assessment Information
Introduction to assessment
To protect the academic integrity of the subject, you may be asked to complete an additional test ( which may be verbal) if I or another member of the teaching staff have doubts that the work that you have submitted for an assessment item is your own. This test would be held within 4 weeks of the submission of the assessment.
Detailed information regarding:
Sample exam (for subjects with a formal exam)
Pass requirements
Grades
Presentation
Submissions
Extensions
Penalties for late submission
Assignment return
Resubmission Plagiarism
are included in Appendix 1.

* due date is the last date for assessment items to be received at the University
** applies only to assessment items submitted by the due date
Assessment item 1
Assessment 1 On-line test
Value: 5 %
Due date: 15- Mar -2016
Return date: -
Submission method options Interact2 Test
Task
Your Assignment 1 is an online test where you must complete 25 multiple choice questions (quantitative and qualitative) using the Test feature in Interact2 site. You have 50 minutes to complete this test. I will discuss test availability details in class and announce in Interact2.
Rationale
The rationale for this assessment is to encourage interaction and engagement in this subject from early weeks.This assignment will be used to identify if the students are engaging with the subject or not.
This assignment covers work studied in Topics 1 and 2, and assesses your progression towards the following learning outcomes:
be able to assess critically the scope of the finance function and its role in corporate management, and be able to apply acquired skills in the evaluation of financial data to enable informed decision making.
Marking criteria
The test will be comprised of 25 qualitative / quantitative multiple choice questions, where each question is worth 0.2 marks (total 0.2 x 25 = total 5 marks). Negative marking does not apply, that is you will not lose marks for an incorrect answer. The following table sets out the marking criteria for the test:

Criteria High Distinction Credit (CR) Pass (PS) Fail (FL)
Distinction (DI) 65% to 74% 50% to 64% 0% to 49%
(HD) 75% to 84%
85% to 100%
The questions will assess your To meet this To meet this To meet this To meet this At this level ability to identify the relevant level you level you will level you will level you will you will only concepts and principles and your will answer answer answer answer answer ability to recognise, recall, list, correctly correctly correctly correctly correctly name, identify, select, calculate 85-100% of the 75-84% of the 65-74% of the 50-64% of the 0-49 % of the to find the correct solution. multiple choice multiple multiple multiple multiple
questions. choice choice choice choice
questions. questions. questions. questions.

Requirements
You must access Interact2 and complete the assignment by the due date Tuesday 15 March 2016. You have 50 minutes to complete this test. You will have only one attempt at this test. You must do the test in one sitting - you cannot log off and log on again. Your Test will be completed when you click on the -Save and submit” button at the end of last question. This test is a timed Test. The timer will start as soon as you begin. If you begin the Test and leave, the timer will keep running while you are gone. When time runs out, the Test will finish automatically with everything that you have completed up to that point.
Assessment item 2
Assessment 2
Value: 30 %
Due date: 26- Apr -2016
Return date: 17- May -2016
Submission method options Alternative submission method
Task
Answer all questions.
Question 1 20 marks
You are a banker working for Commonwealth Bank of Australia (CBA). Your neighbour is retired and has invested some of his superannuation in a share portfolio that includes CBA shares. Although he is not unhappy about the bank’s share performance he believes CBA can do better by its shareholders. In particular he is not sure about the values of socially responsible projects CBA undertakes. As you are to present a brief on an issue of your own choice at the next monthly staff meeting you decide to write the brief on the following topic:
‘Is maximising the value of the firm to its shareholders consistent with the firm exercising considerable social responsibility?’
Incorporate various social obligations undertaken by CBA and specify how CBA maximises shareholder's value to illustrate your argument. (maximum 1000 words)
Question 2 35 marks
Dazzle Pty was founded in 1980 by Dean Adams, an industrial designer with two of his university friends Andrea Larson and Daniel Zhan. Initially they produced and sold various glass products locally, but in the late 1990s, they joined with several other glass producers to form The Opal Glass Company, which then began an aggressive promotion campaign. Today, the company is one of the leading glass producers in Australia.
The management of Opal Glass is currently evaluating a potential new coloured structural glass product. The new product would cost more than their usual commercial exterior glasses and in market research conducted by the company’s research department at a cost of $150,000 it was judged superior to various competing products. Molly Rogers, the Chief Financial Officer, must analyse this project, along with other potential investments, and then present her findings to the company’s executive committee.
The project will require construction of a new building that would have an annual capacity of 100,000 tons and will cost an estimated $25,000,000 to build. The estimated purchase cost of machinery is $14,000,000 but shipping costs would be $500,000 and the estimated installation charge is another $500,000.The land on which the plant will be built has been vacant since it was bought three years ago at a cost of $2,000,000. John Holmes, the chief accountant, believes that this outlay, which has already been paid and expensed for tax purposes, should be charged to the new project. His contention is that if the land had not been bought, the firm would have had to spend the $2,000,000 (or even more) to buy the land for the new project.
The company expects its new plant to produce 60,000 tons of glass per year and the management of Opal Glass anticipates they can sell the product at $510 per ton allowing the company to gain 12% market share in the first year of operation. Fixed costs are expected to average $15,000,000 annually while variable costs are estimated to be around $100 per ton. The plant will be fully depreciated on a straight-line basis over ten years, with an estimated salvage value of $1,000,000 after 10 years at the end of the project. The required rate of return on the project is taken as 15% due to the high degree of systematic risk associated with the new product. The company tax rate is 30%.
Now assume that you are an assistant to Molly and she has asked you to analyse the project and then to present your findings to her. Therefore,
a. Calculate the project’s incremental cash flow for each year and present in a tabular form. 15 marks
b. Using the incremental cash flows calculate the project's:
i. Net Present Value 5 marks ii. Internal Rate of Return using interpolation method 7 marks iii. Payback Period 1.5 marks iv. Discounted Payback Period 1.5 marks
c. Combining all the information, recommend if the project should be undertaken or not and explain your decision to Molly outlining any specific points for consideration. (max 250 words) 5 marks
Please note if you use a spreadsheet you cannot submit a spreadsheet via Turnitin - it will not accept it. Neither can you submit a spreadsheet as an embedded object in a Word document. If you construct your table in Excel then simply copy and paste into Word. You can set up your data in a spreadsheet and use it to check your answer but remember you still have to show how the NPV, etc. was derived. This does not mean giving the Excel algorithm. It does have to show how the solution was derived. So show how you have discounted the cash flows.
Question 3 45 marks
You are considering investing in Australian shares and decide to investigate the shares of two Australian companies: Commonwealth Bank of Australia and Hansen Technologies Limited.
For this question please note:
Use the Yahoo! Finance website at http://au.finance.yahoo.com/ for data.
This question is to be done on a spreadsheet with the results pasted and submitted in a Word document. Turnitin does not support spreadsheets. Make sure that you show all your workings – for example, do not simply put down the covariance but show how it was obtained and this does not mean giving the Excel algorithm. Please do not give cell formulae, cell references, etc, as the reader should be able to follow from a table. Also please note using excel formula such as =COVAR() is not acceptable.
a. Find the monthly opening and closing prices for the period 1 Jan 2015 – 31 Dec 2015 for Commonwealth Bank of Australia (CBA.AX), Hansen Technologies Limited (HSN.AX), and the
Market as proxied by the All Ordinaries index (^AORD). 3 marks
b. Calculate monthly holding period returns (%) for the period 1 Jan 2015 – 31 Dec 2015 for CBA, HSN and Market. The monthly holding period return is the percentage return (%) you would receive if you bought an asset on the first day of the month (opening price) and sold it on the last day of the month (closing price). (Use 'Close' rather than 'Adjusted Close' for the selling price and include any dividends). Show the formula and at least one sample calculation. 3 marks
c. Graph your results on one graph with returns on the y axis and time on the x axis. 5 marks
d. Calculate the average monthly holding period return for CBA, HSN and Market. 3 marks
e. For CBA, HSN and Market, calculate:
i. The annual holding period return; and 1.5 marks ii. The standard deviation of the monthly holding period returns 4.5 marks
f. Calculate the covariance of CBA and HSN over the year. 4 marks
g. You decide to invest in a portfolio of two assets. Calculate the expected portfolio return and risk if:
i. 30% of wealth is invested in CBA and 70% in HSN 5 marks ii. 90% of wealth is invested in CBA and 10% in HSN 5 marks
h. Plot CBA, HSN and Market on a risk / return graph as well as the two portfolios you calculated in part g.
[See Fig 11.2 of text for an example of a graph] 4 marks
i. Incorporating all the analysis explain which asset or combination of assets you would choose to invest as a rational investor. (maximum 250 words) 5 marks
j. Would you change the decision you have made in part i above if you also consider the analysis conducted in Question 1? Explain. (maximum 100 words) 2 marks

Rationale
This assignment covers Topics 1 - 7.
It will assess your competency towards all four learning outcomes of this subject.
The feedback will assist you to determine where you may need to revise your work.
Marking criteria

Please read the section ' Presentation' below after the marking guidelines.

Remember, you must reference accurately and failure to do so will attract a penalty of up to 10% of available marks of the assignment. Also please note, Assessment items should be typed as handwritten, hand drawn assignments will not be accepted.

Assignments should show all workings and students will be penalised for failing to do this. Please adhere to a convention of 4 decimal places for the answer and approximations without rounding for calculations prior to the answer. Where necessary, state any assumptions you have made.

You will be assessed on:
your understanding of the problem; your choice of method for solving the problem; your application of techniques; the accuracy of your answer; written communication skills; critical thinking and analysis.
Please see below the marking guidelines incorporating various types of questions and criteria.
In all questions (and parts of questions) pay careful attention to what type of question it is and the marks allocated to each question (and parts of each question). This table below is a guide to the performance standard expected at each level.

Performance standards
Criteria High Distinction(HD) Distinction (DI) Credit (CR) Pass (PS) Fail (FL)
85% to 100% 75% to 84% 65% to 74% 50% to 64% 0% to 49%
1. Applies correct Applies correct Applies correct Applies basic Frequent errors Quantitative principles and principles and principles and understanding of and mistakes questions calculations, calculations, calculations, relevant indicative of a
substantiated with substantiated substantiated principles, shows lack of workings or diagrams with workings or with workings or workings but understanding of in order to arrive at the diagrams in order diagrams in order contains some core principle(s). right answer. There to arrive at the to arrive at the major errors. Failed to show are negligible right answer, right answer, ALL workings. errors/no errors in shows workings shows workings Only showed calculations. but contains few but contains excel formula or minor errors. some errors. calculator key
stokes.
2. Conceptual Principles are applied Discussion Discussion Discussion Discussion
Questions in the appropriate reflects excellent reflects good reflects basic reflects lack of manner to arrive at the understanding of understanding of understanding, but basic
correct answer. The relevant relevant not deep understanding of use of relevant principles. principles. understanding of relevant principles shows Mainly focuses Focuses on key relevant principles. creativity and on key issues. issues, but spends principles. Focuses on imagination. Focuses Quantitative and some time on Focuses on key tangential rather on key issues and qualitative some tangential issues but spends than key issues. avoids or dismisses analysis is issues. too much time on Quantitative and tangential issues. strong. Quantitative and some tangential qualitative Quantitative and Conclusions and qualitative issues. analysis too
qualitative analysis recommendations analysis is good. Quantitative and simplistic or persuasively supports are convincing Conclusions and qualitative convoluted. the convincing and related to the recommendations analysis is Conclusions and recommendations and overall issues. are convincing, adequate to make recommendations conclusions, which are reasonably well reasonable and are wrong or strongly related to the related to the believable implausible.
overall issues. overall issues. conclusions
and/or
recommendations.
3. Uses terms correctly. Makes negligible Makes a few Makes some Frequently
CommunicateClearly and accurately errors in using minor errors in minor errors in misuses terms, financial interprets findings and terms, using terms, using terms, misinterprets analysis communicates interpreting interpreting interpreting findings, and/or methods. Contains no findings, and/or findings, and/or findings, and/or miscommunicates grammar and spelling communicating communicating communicating methods.
errors. methods. methods. methods. Contains Grammar and
Contains few or Contains few a number of spelling errors are no grammar grammar and grammar and commonplace. and/or spelling spelling errors. spelling errors.
errors.
4. Financial Has developed and Research is Research is Research is Incorrect research research justified own ideas presented with presented with presented or no evidence of based on a wide range good criticisms, some criticisms, uncritically, in a research or
of sources which have in a descriptive in a descriptive descriptive way irrelevant been thoroughly way and way and indicates and indicates research analysed, applied and indicates good few limitations of some limitations discussed. understanding. understanding. of understanding.

Presentation
Assessment Presentation
The following points are a general guide for presenting assessment items.
Assessment items should be typed. Handwritten assignments will not be accepted.
Use 1.5 spacing.
Use a wide left margin. Markers need space to be able to include their comments.
Use a standard 12pt font such as Times New Roman, Calibri or Arial.
Include a separate title page with your name, student number, subject code and assessment number.
Number your pages (except the cover page).
Use a header or footer with your name and student number on each page.
Always keep a copy of your assessments. Both a hard copy and an electronic copy. Most importantly, always use your spelling and grammar checker, but remember that this does not pick up all errors. You must still manually and carefully edit your work.
Requirements
Assignment 2 must be submitted through Turnitin and you have to provide a hard copy in class in addition to Turnitin submission.
As per the CSU Referencing Policy, assessment should be fully referenced and you must reference accurately as failure to do so will attract a penalty of up to 10% of available marks of the assignment.
The Faculty of Business requires that students apply APA (American Psychological Association) referencing. If you are unsure of this style, please go to CSU Referencing website at http://student.csu.edu.au/study/referencing-at-csu

Assessment item 3
Assessment 3 On-line test
Value: 5 %
Due date: 31- May -2016
Return date: -
Submission method options Interact2 Test
Task
Your Assignment 3 is an online test where you must complete 25 multiple choice questions (quantitative and qualitative) within 50 minutes using the Test feature in Interact2 site. I will discuss test availability details in class and announce in Interact2.
Rationale
The rationale for this assessment is to assess your competency towards all four learning outcomes and assist you with your subject revision.
This assignment covers work studied in Topics 3 – 11.
Marking criteria

The test will be comprised of 25 qualitative/quantitative multiple choice questions, where each question is worth 0.20 marks (total 0.2 x 25 = total 5 marks). Negative marking does not apply, that is you will not lose marks for an incorrect answer. The following is the marking criteria for the test:

Criteria High Distinction Credit (CR) Pass (PS) Fail (FL)
Distinction (DI) 65% to 74% 50% to 64% 0 % to 49%
(HD) 75 % to 84%
85 % to 100%
The questions will assess your To meet this To meet this To meet this To meet this At this level ability to identify the relevant level you level you will level you will level you will you will
concepts and principles and your will answer answer answer answer only answer ability to recognise, recall, list, correctly correctly correctly correctly correctly name, identify, select and 85-100% of 70-84% of the 65-74% of the 50-64% of the 0-49 % of the calculate to find the correct the multiple multiple multiple multiple multiple
solution. choice choice choice choice choice
questions. questions. questions. questions. questions.

Requirements
You must access Interact2 and complete the assignment by the due date Tuesday 31 May 2016. You have 50 minutes to complete this test. You will have only one attempt at this test. You must do the test in one sitting - you cannot log off and log on again. Your Test will be completed when you click on the -Save and submit” button at the end of last question. This test is a timed Test. The timer will start as soon as you begin. If you begin the Test and leave, the timer will keep running while you are gone. When time runs out, the Test will finish automatically with everything that you have completed up to that point.
Assessment item 4
Final Exam
Value: 60 %
Date: To be advised
Duration: 3 hours
Submission method options
N/A - submission not required/applicable
Rationale
The final examination will cover all topics in this subject, using a mixture of multiple choice questions, short answer questions and quantitative problems. The final exam assesses your capability in meeting all four learning outcomes of this subject.
Requirements
You are required to sit and pass the final exam in this subject to be eligible for a passing grade.
The final exam is worth 60% of the marks in this subject and it will have the same structure as the sample exam. You are required to answer 40 multiple choice questions in Part A and 8 qualitative/quantitative questions in Part B.
Marking criteria
Where necessary, state any assumptions you have made. All workings must be shown and students will be penalised for failing to do this.
You will be assessed on:
- your understanding of the problem;
- your choice of method for solving the problem;
- your application of techniques;
- the accuracy of your answer;
- written communication skills; - critical thinking and analysis.

Performance standards
Criteria

High Distinction (DI) Credit (CR) Pass (PS) Fail (FL)
Distinction(HD) 75% to 84% 65% to 74% 50% to 64% 0 % to 49% 85 % to 100%
Multiple Choice To meet this level To meet this To meet this level To meet this At this level Questions: The you will answer level you will you will answer level you will you will only questions will assess correctly answer correctly correctly 65-74% answer correctly answer your ability to 85-100% of the 70-84% of the of the multiple 50-64% of the correctly identify the relevant multiple choice multiple choice choice questions. multiple choice 0-49 % of the
concepts and questions. questions. questions. multiple choice principles and your questions. ability to recognise, recall, list, name, identify, select and calculate to find the correct solution.
Written work, Information is The information The information There may be Includes little including calculations entirely accurate is accurate. No may contain some some errors in information
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Material provided by the University
General purpose answer sheet
Material required by the student
Writing implements, including a 2B pencil and an eraser.
Any calculator allowed, including programmable calculators (hand held, no printer).
Phones, tablets and personal computers are not accepted as calculators.
It is a closed book exam and therefore, no materials (books, notes etc,) are allowed.
Appendix 1 Assessment Information
Sample exam
Please note:
1. See Marking guideline including rubric under Assessment item 4 Final exam above.
2. There are formula sheet and Tables (FV Annuity & PV Annuity) attached to the exam, however, they are provided in the Resources Sample exam folder as this site does not support necessary formatting .
3. See at the end of Part A for answers to Part A MCQs.
4. For qualitative questions please note that only outlines of answers are provided, not complete answers. Higher marks are given to answers that demonstrated clear understanding of the concerned issue, used appropriate practical examples, used logical arguments in clear language and of adequate length.
Faculty of Business
School of Accounting and Finance
Sample Exam
FIN516 Corporate Finance
EXAM CONDITIONS:
This is a closed book exam
Any calculator is permitted, including programmable
Notes are NOT permitted in the Exam
Bilingual Dictionary permitted (printed copy only, unmarked and unannotated) The student may NOT retain the question paper

WRITING TIME: 3 hours plus 10 minutes reading time
Writing is permitted during reading time
MATERIALS SUPPLIED BY UNIVERSITY: 1 x General purpose answer sheet (GPAS)
MATERIALS PERMITTED IN EXAMINATION: No materials permitted as listed in Exam Conditions
(No electronic aids are permitted e.g. laptops , phones)
NUMBER OF QUESTIONS: Part A: 40 multiple choice questions
Part B: 8 Qualitative/Quantitative Questions
VALUE: 60 %
TO CANDIDATES:
1. Enter your name and student number and sign in the space provided at the bottom of this page.
2. This is a closed book examination; therefore no written material, reference books or notes will be permitted into the examination room.
3. Answers to Part A multiple-choice questions are to be recorded on the General Purpose Answer Sheet provided using a 2B pencil.
4. Answers to Part B questions are to be completed on this Examination Paper. Additional pages are provided at the back of the Examination paper if extra space is required. Students may still receive marks for incorrect answers based on the quality of the workings provided.
5. Formula Sheet and Annuity Tables are attached.
STUDENT NAME:……………………………………………...
STUDENT NUMBER: …………………..............................
STUDENT SIGNATURE: ……………………………………...

Calculator Used (if any):……………………………………
PART A: (40 marks)
This part consists of forty (40) multiple choice questions worth 1 mark each. Answer all questions on the general purpose answer sheet. Choose the one alternative that best completes the statement or answers the question.
1 . The goal of the firm that emphasises the efficient use of capital resources is :
A) debtholder wealth maximisation.
B) social responsibility.
C) profit maximisation.
D) shareholder wealth maximisation.
2 . The field of finance has grown from a descriptive discipline to a more encompassing discipline that now deals with:
A) all aspects of acquiring and efficiently utilising capital funds.
B) all aspects of just mergers and acquisitions.
C) only the capital budgeting issue.
D) all aspects of a firm's ability to raise capital funds.
3 . For these types of organisation, no distinction is made between business and personal assets.
A) Sole proprietorship.
B) Partnership.
C) Company.
D) A and B.
4 . An institution that assists the transfer of savings from economic units with excess savings to those with a shortage of savings is known as a:
A) non-financial institution
B) financial intermediary.
C) financial market.
D) primary market.
5 . Long-term financing mechanisms such as term loans and financial leases are often referred to as :
A) intermediated finance.
B) disintermediated finance.
C) primary market transactions.
D) secondary market transactions.
6 . What is the present value of an annuity of $50 received at the end of each year for 3 years? Assume a discount rate of 11% per annum and round to nearest $1.
A) $136
B) $68
C) $122 D) $110
7 . If you put $900 in a savings account that yields 10% per annum, compounded continuously, how much money will you have in the account in three years (round to nearest dollar)?
A) $1 227
B) $1 215
C) $1 198 D) $1 170
8 . You want to travel to Europe to visit relatives when you graduate three years from now. The trip is expected to cost a total of $10 000 at that time. Your parents have deposited
$5 000 for you in an account paying 6% interest annually, maturing three years from now. Aunt Hilda has agreed to finance the balance. If you are going to put Aunt Hilda's gift in an investment earning 10 % over the next three years, how much must she deposit now, so you can visit your relatives at the end of three years?
A) $3 039
B) $5 801
C) $3 757 D) $3 345
9 . Two firms are identical in all respects except that Firm 2 has $10 000 invested in long term securities at a 9 percent rate of return. In this case Firm 1 will have a ____ current ratio and a ____ return on total assets.
A) higher, lower
B) lower, lower
C) lower, higher
D) higher, higher
10 . The firm's permanent investment in assets is financed by the use of :
A) permanent or spontaneous sources of finance.
B) temporary or spontaneous sources of finance.
C) permanent or temporary sources of finance.
D) spontaneous sources of finance only.
11 . Compare the risk of a 90-day unsecured promissory note issued by Qantas Airlines to a 10-year Government Treasury bond.
A) The Treasury Bond has a lower interest rate risk, but higher financial risk.
B) The Treasury Bond has a higher interest rate risk, and a higher financial risk.
C) The Treasury Bond has a lower financial risk and a lower interest rate risk.
D) The Treasury Bond has a lower financial risk, but a higher interest rate risk.
12 . By diversifying across international boundaries, investors would potentially :
A) reduce risk below the level that would be obtained if the investment portfolio was confined to the home market.
B) increase risk yet decrease returns below those achieved through domestic investment.
C) reduce only the unsystematic risk portion of the investment portfolio.
D) get no more benefits offshore than those achieved through purely domestic investment.
13 . You are considering investing in Telstra Ltd shares. Which of the following are examples of diversifiable risk?
I. Risk resulting from possibility of a stock market crash.
II. Risk resulting from uncertainty regarding a possible strike against Telstra Ltd.
III. Risk resulting from an expensive recall of a Telstra product. IV. Risk resulting from interest rates decreasing.
A) I only
B) II, III
C) I, II, III, IV
D) I and IV
14 . All of the following affect the value of an ordinary share except :
A) the risk-free rate.
B) the future growth in dividends.
C) the book value of the share.
D) the future dividends.
15 . All of the following affect the value of a bond except :
A) the coupon rate of interest.
B) the maturity date of the bond.
C) the recorded value of the firm's assets.
D) the investor's required rate of return.
16 . What is the payback period for a $20 000 project that is expected to return $6 000 for the first two years and $3 000 per year for years three through five?
A) 4.5 years
B) 4.6667 years
C) 5 years
D) 3.5 years
17 . If the net present value (NPV) of a project is positive, the projects internal rate of return (IRR) the required rate of return.
A) must be less than
B) could be greater or less than
C) must be greater than
D) cannot be determined without actual cash flows.
18 . A past cash outflow or cost that is not incremental to a particular project is called :
A) a differential cash flow.
B) an historic cost.
C) an incidental cost.
D) a sunk cost.
19 . You are in charge of one division of Megahuge Conglomerate Ltd. Your division is subject to capital rationing. Your division has 4 indivisible projects available, detailed as follows:
Project Initial Outlay IRR NPV
1 $2 000 000 18% $2 500 000
2 $1 000 000 15% $950 000
3 $1 000 000 10% $600 000
4 $3 000 000 9% $ 2 000 000
If you must select projects subject to a budget constraint of $5 million, which set of projects should be accepted so as to maximise firm value?
A) Projects 2, 3 and 4
B) Project 1 only
C) Projects 1 and 4
D) Projects 1, 2 and 3
20 . A firm's business risk
A) is determined by the firm's investment policies.
B) varies over time.
C) aids in determining the firm's cost of capital.
D) all of the above.
21 . If the firm earned exactly its cost of capital on an investment project, it would be expected that the price of its ordinary shares would:
A) remain unchanged following the acceptance of the project.
B) increase only if the project was not accepted.
C) increase following the acceptance of the project.
D) decrease following the acceptance of the project.
22 . Financing a portion of a firm's assets from securities bearing a fixed rate of return refers to :
A) operating leverage.
B) business risk.
C) financial risk.
D) all of the above.
23 . The cost of capital provides a direct link between the formulation of the firm's asset structure and its:
A) financial structure.
B) financial leverage.
C) internal rate of return.
D) business risk.
24 . The inclusion of bankruptcy risk in firm valuation :
A) acknowledges that a firm has an upper limit to debt financing.
B) is ignored in BOTH the net-operating-income and net-income of cost of capital.
C) provides a rationale for a saucer-shaped cost of capital curve.
D) all of the above.
25. The Keat Co. has a paid up capital of 6 million ordinary shares selling at $5 each.
$5.25m is to be raised in a rights issue with a subscription price of $3.50 per share. The number of new shares to be issued is:
A) 1 250 000
B) 1 500 000
C) 1 050 000
D) 1 000 000
26 . The instrument that ensures the borrower will not have to pay more than some specified interest rate is known as a:
A) warrant.
B) floor.
C) collar.
D) cap.
27 . If you were given current assets and current liabilities, what ratio could you compute?
A) Current ratio.
B) Net profit margin.
C) Current debt margin.
D) Accounts receivable turnover ratio.
28 . A bill of exchange is also known as :
A) commercial paper.
B) one-name paper.
C) a commercial bill.
D) a promissory note.
29 . The initial step in any effective cash management program is :
A) investment of idle cash balances.
B) an analysis of past cash receipts and disbursements.
C) cash-flow forecasting.
D) slowing down of the firm's cash payments.
30 . The average annual return on ordinary shares must compensate investors for all of the following except:
A) risk.
B) the risk free rate.
C) inflation.
D) forgoing the current use of money.
31 . What is the value of a bond that matures in 40 years, pays an annual coupon of $50, and has a par value of $1 000? Assume a required rate of return of 12%.
A) $416.73
B) $422.93
C) $755.06
D) $834.91
32 . The internal rate of return is;
A) the discount rate that makes the NPV positive.
B) the discount rate that makes NPV negative and the PI greater than one.
C) the discount rate that equates the present value of the cash inflows with the present value of the cash outflows.
D) the rate of return that makes the NPV positive.
33 . In perfect capital markets there
A) are no issue costs.
B) are no taxes.
C) is no informational content assigned to a particular dividend policy.
D) all of the above.
34 . All of the following are reasons why Australian non-financial companies rely heavily on loan funds from financial intermediaries except:
A) they prefer to raise funds locally due to the difficulty of arranging fixed rate loans from overseas.
B) they do not like to operate under the constraints of trust deeds.
C) they lack the financial 'muscle' necessary to issue corporate bonds locally or to raise funds overseas.
D) they are relatively small by international standards.
35 . Which of the following best describes the goal of the firm?
A) Profit maximisation.
B) The maximisation of the total market value of the firm's ordinary shares.
C) Risk minimisation.
D) None of the above.
36 . Amax Ltd. deposited $15 000 in a bank account that pays 10% interest annually. What will be the dollar amount of the bank account at the end of 5 years if interest is compounded semi-annually?
A) $24 435
B) $22 500
C) $19 140
D) $24 160
37 . Which of the following is a coverage ratio?
A) Total asset turnover ratio.
B) Current ratio.
C) Times-interest-earned ratio.
D) Debt ratio.
38 . To be accepted as a form of collateral when applying for a secured loan, an asset must possess all of the following characteristics except: A) the asset must be easily identified.
B) it must have a value at least equal to the amount of the loan.
C) the asset must be relatively easy for the bank to take possession of.
D) the value of the asset must be known with certainty.
39 . Opportunity cost is defined as :
A) the cost associated with the acquisition of investments.
B) the future value of the purchase price.
C) the rate of return available in the financial markets.
D) the rate of return based on historical costs.
40 . Ordinary shareholders are most concerned with :
A) the riskiness of the investment.
B) the spread between the return generated on new investments and the investor's required rate of return.
C) the percentage of profits retained.
D) the size of the firm's beginning earnings per share.
Solutions to Part A
1 D 9 A 17 C 25 B 33 D
2 A 10 A 18 D 26 D 34 A
3 D 11 D 19 C 27 A 35 B
4 B 12 A 20 A 28 C 36 A
5 A 13 B 21 A 29 C 37 C
6 C 14 C 22 C 30 B 38 D
7 B 15 C 23 A 31 B 39 C
8 A 16 B 24 D 32 C 40 B
Part B (60 marks)
Answer ALL questions and show ALL workings as you are being assessed on your understanding of a problem and your method of solving that problem.
Question 1 (5 marks)
Explain the effects of inflation on future cash flows in the relationship between nominal interest rates, real interest rates and inflation. Your discussion should also include a brief overview of risk vs. return.
The impact of inflation is to reduce ‘real’ rates of return to investors as inflation erodes the purchasing power of the ‘nominal’ returns. For a given nominal rate of return it can be seen that the higher the rate of inflation the lower will be the real rate. See text pp.257 - 261 for Inflation and interest rates and Fisher Effect.
Question 2 (5 marks)
Discuss the assumptions upon which the capital- structure theory is based.
The capital-structure theory emphasises the interaction between the company’s cost of capital and the market price of the company’s issued shares. Initially, to assess this relationship, the following simplifying assumptions are made (also see Chapter 16):
1. Company income is not subject to any taxation.
2. Capital structures consist of only shares and bond-type debt.
3. The expected values of all investors’ forecasts of the future levels of net operating income (EBIT) for each company are identical, with EBIT remaining constant over time.
4. Securities are traded in perfect or efficient financial markets.
Question 3 (5 marks)
A firm considers initiating an aggressive dividend re-investment plan (DRP) in which it allows its investors to use dividends to buy shares at a discount of 10% from the current market value. The firm’s financial manager argues that the policy will benefit shareholders by giving them the opportunity to buy additional shares at a deep discount (normally at 2% discount) and will benefit the firm by providing a source of cash. Is the manager correct?
Advantages of dividend re-investment plans for the company is it does not have to payout the cash as dividends. For the shareholders who do not need the income they can increase their equity in the company at a discounted price. So the manager is correct in these aspects. However, the company is also diluting the earnings per share and some shareholders would rather receive the dividend. See text Chapter 19, specially for clientele effect.
Question 4 (5 marks)
What causes agency costs? What do corporations do to reduce these costs?
The increasing separation of management and ownership in modern companies provides greater potential for conflicts of interest to arise between both parties. This is described as agency costs. In a competitive economy such agency costs may be minimised as a competitive labour market enables shareholders to replace underperforming management without difficulty thus ensuring consistency with the shareholder wealth maximisation objective. Also a relatively low share price may attract takeover bids which, if successful, typically results in a replacement of the current management which would not be a favoured option of the existing company management.
Question 5 (10 marks)
Terra Landscaping, a partnership, must decide whether to replace an old, fully depreciated digger with a new model. The old digger needs continuously increasing maintenance to work reliably. Next year these costs are expected to be $1,500 and will increase by 50% every year thereon. Terra could sell the digger today for $4,000, and its market value will decrease by 50% per year. A new digger would cost $12,000, incur maintenance costs of $900 per year, and last for 5 years. Depreciation would be expensed straight line to zero over 5 years. After 5 years, the digger could be sold for $1,500. If the applicable tax rate is 30% and discount rate is 12%, should the digger be replaced now or in 5 years?
Answer: NPV of keeping the old = - $9093
NPV of selling the old and buying new = - $8280
Conclusion: Sell the old digger now. You will be better off by $813
Question 6 (10 marks)
You are given the following information about the possible returns from an investment – Security A.
Return % Probabilities
12% 0.15
9% 0.60
6% 0.25
i. Calculate the expected return. 8.7 % ii. Calculate the variance of the return. 0.000351 iii. Calculate the standard deviation of the return. 1.8735 % iv. Assuming a risk free rate of 5% and a market premium of 6%, what would be the expected return for Security A with a beta () of 0.75? 9.5 %
v. Draw a graph of the security market line (SML) showing Security A from (iv) above.
vi. If Security A actually returned 8%, would you buy it? Why or why not? If Security A was actually returning 8% it would lie below the SML and therefore by overpriced – so sell.
vii. How does the security market line differ from the capital market line? The security market line ( SML) represents graphically expected return – beta relationship. The slope of the SML is the market risk premium. The y-intercept is the risk free rate. The capital market line represents graphically expected return – standard deviation relationship. See text Chapter 11 pp. 352, 358 & 361
Question 7 (10 marks)
Ross Renovations is operated by a sole proprietor and needs to purchase a new machine. The firm is presently financed by a mix of 80% owner's equity and 20% debt, the after tax cost of capital being 15 %. Given the relevant details below explain if Ross Renovations buy or lease the machine.
Acquisition price of machine $40,000.
Useful life 6 years
Salvage value after six years (estimated) $4,000
Depreciation method, straight line to zero book value Annual operating cash savings from the machine,
before tax and depreciation $6,000
Rate of interest on a 6 year loan 10% Marginal tax rate 45% Annual finance lease rentals (six years) payable at the beginning of each year $ 6,000
Residual value $7,000
Annual operating expenses paid by the lessor $1,000
Answer: NAL = $7577 so lease as Ross Renovations will be better off by $7,577.
Question 8 (10 marks)
The management of Heavy Clay Ltd wants to know the cost of capital associated with expanding its business. You have been told that funds will be raised for this purpose according to a target capital structure reflected in the market value of its securities. Using the information below, calculate the weighted average cost of capital for the company after tax.
Balance sheet extract:
Liabilities: 10% debentures ($100 par) $ 2,500,000
Shareholders' funds: Paid-up capital – ordinary shares ($1 par) $ 3,000,000 7% preference shares ($2 par) $ 1,000,000
Additional information:
• ordinary shares are currently trading at $3.20 per share
• preference shares are currently trading at $1.50 per share
• Commonwealth government bonds trade at 4.5%
• the return on the market portfolio is 16.5%
• the beta of equity is 0.5
• its debentures are priced at $106.50
• current return on debentures is 4% above the government bond rate
• the company tax rate is 30%
• the existing capital structure is unlikely to change.
Answer: WACC after tax = 9.51%
Pass Requirements
You must obtain at least 50% in both the examination and the total mark in order to pass this subject. You must pass the exam to pass the subject.
To be eligible for the grade AA or AE you must have submitted all assessment items in the subject, including the final exam. If you choose not to complete an assessment item or do not sit the final exam then you will not be granted an AA or an AE grade.
For example -if you achieve an overall mark of 60, fail the exam and do not submit all your assessments your final grade will be FL.
Grades
Final grades for this subject are awarded by the Business Faculty Assessment Committee in accordance with the University's Assessment Regulations. (See current Academic Regulations at https://policy.csu.edu.au/view.currect.php?id-00301#s3
(https://policy.csu.edu.au/view.currect.php?id=00301#s3)). University's Assessment Policy: Coursework Subjects (https://policy.csu.edu.au/view.current.php?id=00301).
Your final grade for the subject as a whole will be based on the grading scale outlined in the CSU Assessment Policy: Coursework Subjects https://policy.csu.edu.au/view.current.php?id=00301 ( https:// policy.csu.edu.au/view.current.php?id =00301).
HD High Distinction 85% - 100%
An outstanding level of achievement in relation to the assessment process.
DI Distinction 75% - 84%
A high level of achievement in relation to the assessment process.
CR Credit 65% - 74%
A better than satisfactory level of achievement in relation to the assessment process.
PS Pass 50% - 64%
A satisfactory level of achievement in relation to the assessment process.
FL Fail 0 - 49%
An unsatisfactory level of achievement.
The percentages specified above should be viewed only as guidelines for the award of final grades.
The Faculty has an obligation to ensure that grades are equitable across different cohorts of the same subject offering and will undertake appropriate moderation processes to ensure that grades are awarded consistently in accordance with the University’s Moderation Policy.
For further information please consult the CSU Assessment Policy: Coursework Subjects http://policy.csu.edu.au/view.current.php?id=00301
Presentation
The following points are a general guide for presenting assessment items.
Assessment items should be typed.
Use 1.5 spacing.
Use a wide left margin. Markers need space to be able to include their comments.
Use a standard 12pt font such as Times New Roman, Calibri or Arial.
Left- justify body text.
Include a separate title page with your name, student number, subject code, assessment number and assessment question. Include class time and tutor’s name if applicable.
Number your pages (except the cover page).
Use a header or footer with your name and student number on each page.
Always keep a copy of your assessments. Both a hard copy and an electronic copy. Most importantly, always use your spelling and grammar checker, but remember that this does not pick up all errors. You must still manually and carefully edit your work.
Submission
Online Submission
Assessment 1 and 3 are online tests and you must complete them within your sub