Assessment item 2
Due date: 18-Apr-2017
Return date: 10-May-2017
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You are the owner and operator of Grains Plus located at Bathurst NSW. The rain during the spring have been the best in a decade and you are expecting a bumper wheat crop. This has prompted you to rethink your current financing sources.
According to your past experience, you believe there is a need for additional $240,000 for the three months’ period ending with the close of the harvest season. After meeting with your business banker, you are bit puzzled over what the additional financing will actually cost. The banker has quoted you an annual interest rate of 1% over Reserve Bank of Australia cash rate (let’s assume it’s currently 3% p.a.) and has also requested that the firm increase its current bank balance of $4,000 up to 20% of the loan.
(a) If interest and principle are all repaid at the end of the three-month loan term, what is the annual percentage rate on the loan offer make by the bank? (3 marks)
(b) If the bank were to offer to lower the rate to the Reserve Bank of Australia cash rate if interest is discounted, should you accept this alternative? (3 marks)
You own a portfolio of the following shares :
SHARE PERCENTAGE OF PORTFOLIO BETA EXPECTED RETURN
HARVEY NORMAN HOLDINGS LIMITED 20% 1.00 16%
NATIONAL AUSTRALIA BANK LTD 30% 0.85 14%
QANTAS AIRWAYS LIMITED 15% 1.20 20%
ORIGIN ENERGY LTD 25% 0.60 12%
BHP BILLITON LIMITED 10% 1.60 24%
The risk-free rate is 7%. Also, the expected return on the market portfolio is 15.5%.
(a) Calculate the expected return on you portfolio. (1 mark)
(b) Calulate the portfolio beta. (1 mark)
(c) Given the information above, plot the security market line and plot the shares from your portfolio on the graph. (1 mark)
(d) From your plot in the part (c), which shares appear to be the winners and which ones appear to be the losers? (1 mark)
(e) Why should you consider your conclusion in part (d) to be less than certain? (1 mark)
An overseas investor has approached your investment advisory firm seeking to invest AUD 120 million in one of the two mining company’s ordinary shares. Your Chief Investment Officer has done some preliminary research on several listed mining companies financial returns and current financial position that has helped her to narrow the choice to two companies.
You have been given the assignment to analyse and prepare a report as to which of the two mining company’s ordinary shares are better value for investment.
Based on your market research (qualitative and quantitative) on NEWCREST MINING LIMITED and ORICA LIMITED, you are required to prepare a recommendation report to the Chief Investment Officer as to the shares of which company provide better value for investment. The overseas investor requires high returns on investment as well as growth in value of shares. The investor is looking to park their funds for long term i.e. 10 years. In your report, include all the calculation and market information on which your recommendation is based.
For this assignment you may use the information provided in the below websites and any other sources you feel will assist you to come up with your recommendation.
Orica Limited http://www.orica.com/
Newcrest Mining Limited http://www.newcrest.com.au/
Australian Stock Exchange http://www.asx.com.au/
Yahoo Finance https://au.finance.yahoo.com/
As a minimum calculate the following to help you come up with a recommendation:
• The required rate of return on ordinary shares of the above two mining companies using Capital Asset Pricing Model.
• Ordinary share valuation – Constant dividend growth model.
• Find the monthly holding period return (%) for the period 01 July 2015 to 30 June 2016 for Newcrest Mining Limited and from 01 October 2015 to 30 September 2016 for Orica Limited. 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). Graph your results on one graph with returns on the y axis and time on the x axis. (Use ‘Close’ rather than ‘Adjusted Close’ for the selling price and ignore any dividends.
• Base your calculation on the most recent financial results i.e. 30/06/2016 for Newcrest Mining and 30/09/2016 for Orica Limited.
• Show all your calculation on the annexure.
• Limit your recommendation report to the Chief Investment Officer between to 300 to 400 words using financials theories and concepts. (9 marks)
This assessment task covers topics 4, 5 and 6 and has been designed to ensure that you are engaging with the subject content on a regular basis.
This case study will provide an opportunity to apply the concepts in an authentic scenario that you may encounter in the workplace and also:
· be able to demonstrate appropriate communication skills in the context of corporate finance.
· be able to demonstrate specific technical competencies and skills in utilizing quantitative techniques in financial analysis.
· be able to critically evaluate mainstream financial theory and concepts.
Where necessary, state any assumptions you have made. Assignments should show all workings and students will be penalized for failing to do this.
Use the following marking criteria as guidance:
Problem types/criteria HD (85% to 100%) DI (75% to 84%) CR (65% to 74%) PS (50% to 64%) FL (0% to 49)
Recommendation applies principles of finance used correctly to quantitative and qualitative analysis of financial and market information. Applies all correct principles and calculations, substantiated with workings or diagrams in order to arrive at the right answer. There are negligible errors in calculations. Applies correct principles and calculations, substantiated with workings or diagrams in order to arrive at the right answer, shows workings but contains minor errors in calculations. Applies most of the correct principles and calculations, substantiated with workings or diagrams in order to arrive at the right answer, shows workings but contains some minor errors. Applies understanding of most relevant principles, shows workings but contains some major errors. Frequent errors or unacceptable mistakes indicative of a lack of understanding of core principle(s).
Recommendation applies principles of finance correctly. Principles are applied in the appropriate manner to arrive at the correct answer. The use of relevant principles shows creativity and imagination. Discussion reflects excellent understanding of relevant principles, as evidenced by explicit use of financial theories and concepts. Discussion reflects on all relevant principles with some level of detail, minor errors in the application. Discussion reflects basic understanding, but not deep understanding of relevant principles. Minor errors in the application. Discussion reflects lack of basic understanding of relevant principles.
Recommendation uses appropriate financial technology such as excel spreadsheet, graphs, diagrams etc to gather information and conduct financial analysis. Spreadsheet, data sources, and/or financial software used masterfully. The correct answers are derived using relevant technology, and the results are presented in a clear and professional manner. Spreadsheet, data sources, and/or financial software used competently. Mostly correct results are derived using relevant technology. Spreadsheet, data sources, and/or financial software used competently. Mostly correct results are derived using relevant technology, but there may be some minor errors. Spreadsheet, data sources, and/or financial software used competently. Mostly correct results are derived using relevant technology, but there may be some major errors. Spreadsheet, data sources, and/or financial software is misused or used inappropriately.
Analyze business situations
Analysis is sufficient to reach reasonable conclusions and recommendations as to which investment option is better value. Quantitative and qualitative analysis persuasively supports the recommendations and conclusions. Quantitative and qualitative analysis is clearly used to make specific and relevant conclusions and/or recommendations Quantitative and qualitative analysis is used to make reasonable conclusions and/or recommendations Quantitative and qualitative analysis is adequate to make reasonable conclusions and/or recommendations Quantitative and qualitative analysis too simplistic or convoluted.
Use of literature/market research /evidence of reading from websites and any other print media. Has developed and justified own ideas based on a wide range of sources which have been thoroughly analysed, applied and discussed. Literature is presented with soundly based criticisms, in a descriptive way and indicates a good understanding of the literature. Literature is presented with some criticisms, in a descriptive way and indicates a few limitations of understanding. Literature is presented uncritically, in a descriptive way and indicates some limitations of understanding. No evidence of literature or irrelevant to the research question
As per the CSU Referencing Policy, each assessment item must indicate the style of referencing required for each task. Students should be directed to a single Guide that supports the required referencing style for each assessment task. For those tasks requiring the use of APA, students should be directed to the CSU Referencing website at http://student.csu.edu.au/study/referencing-at-csu