Semester 1-2017

ASSIGNMENT

This assignment is to be completed in groups of three and carries 30 per-cent of the marks in this unit.

Part A. (12 marks)

Information concerning raising new capital

Bonds $1,000 Face value

12% Coupon Rate (Annual Payments)

20 Term (Years)

$30 Discount offered (required) to sell new bonds

$20 Flotation Cost per bond

Preference Shares 11% Required rate to sell new preference shares

$100 Face Value

$4 Flotation cost per share

Ordinary Shares $83.33 Current Market Price

$10.00 Discount on share price to sell new shares

$5.40 Flotation Cost per bond

$5.00 2015 - Proposed Dividend

Dividend History $4.63 2014

$4.29 2103

$3.97 2012

$3.68 2011

$3.40 2010

Current Capital Structure

Extract from Balance Sheet $1,000,000 Long-Term Debt

$800,000 Preference Shares

$2,000,000 Ordinary Shares

Current Market Values $1,000,000 Long-Term Debt

$500,000 Preference Shares

$4,000,000 Ordinary Shares

Tax Rate

40%

a) Calculate the cost associated with each new source of finance. The firm has no retained earnings available.

b) Calculate the WACC given the existing weights

The financial controller does not believe the existing capital structure weights are appropriate to minimise the firm’s cost of capital in the medium term and believes they should be as follows

Long-term debt 40%

Preference Shares 15%

Ordinary Shares 45%

c) What impact do these new weights have on the WACC?

The firm is considering the following investment opportunity. (2015-2022)

Data is as follows

Initial Outlay $1,600,000

Upgrade $750,000 End of Year 4

Upgrade - 400,000 Increased sales units per annum - (Year 5-8)

Working Capital $40,000 Increase required

Estimated Life 8 Years

Salvage Value $50,000

Depreciation Rate 0.125 For tax purposes

The machine is fully depreciated by the end of its useful life

Other Cash Expenses $60,000.00 Per annum (Years 1-4)

Other Cash Expenses $66,000.00 Per annum (Years 5-8)

Production Costs $0.13 Per Unit

Sales price $0.73 Per Unit (Years 1-4)

Sales price $0.98 Per Unit (Years 5-8)

Prior sales estimates

Year Sales

2004 500000

2005 550000

2006 540000

2007 560000

2008 565000

2009 590000

2010 600000

2011 610000

2012 615559

2013 669000

2014 700000

d) Calculate the Net Present Value, Internal Rate of Return and Payback Period

The financial controller is considering the use of the Capital Asset Pricing Model as a surrogate discount factor. The risk-free rate is 5 per cent.

Year Stock Market Share

Index Price

2004 2000 $15.00

2005 2400 $25.00

2006 2900 $33.00

2007 3500 $40.00

2008 4200 $45.00

2009 5000 $55.00

2010 5900 $62.00

2011 6000 $68.00

2012 6100 $74.00

2013 6200 $80.00

2014 6300 $83.33

e) Calculate the CAPM

f) Explain why this figure may differ from that calculated above (i.e. Cost of equity – Ordinary Shares)

Part B. (5 marks)

You have discovered the following figures that you have derived by questionnairing several thousand investors. They were asked to distinguish between a pair of choices for the following two problems.

Problem 1.

Decision 1 – choose between receiving (a) $240 now or having a (b) 25% chance of receiving $1000 now.

Decision 2 – choose between losing (c) $750 now or a (d) 75% chance of losing $1,000 now.

Your results indicate that 84% of respondents chose (a) in Decision 1 whilst 87% chose (d) in Decision 2.

Problem 2.

Decision 1 – Assume you are $300 richer than what you are today. Then choose between either receiving (e) $100 now or having a (f) 50% chance of receiving $200 now.

Decision 2 – Assume you are $500 richer than what you are today. Then choose between either losing (g) $100 now or having a (h) 50% chance of losing $200 now.

Your results indicate that 72% of respondents chose (e) in Decision 1 whilst 64% chose (h) in Decision 2.

What explanation would you give to explain your findings?

Part C. (7 marks)

The homo economicus view of man’s behaviour as applied to the bulk of finance theory portrays decision makers as being both self-interested and rational. This view elicits both a macro and micro view of behaviour that helps construct aggregate models of the economy and financial markets.

Neoclassical economics makes some fundamental assumptions about people. Explain

Part D. (6 marks) “Fast and frugal Heuristics” “Adaptive Toolbox”

Consider the following images and discuss in terms of heuristics and decision making.

ASSIGNMENT

This assignment is to be completed in groups of three and carries 30 per-cent of the marks in this unit.

Part A. (12 marks)

Information concerning raising new capital

Bonds $1,000 Face value

12% Coupon Rate (Annual Payments)

20 Term (Years)

$30 Discount offered (required) to sell new bonds

$20 Flotation Cost per bond

Preference Shares 11% Required rate to sell new preference shares

$100 Face Value

$4 Flotation cost per share

Ordinary Shares $83.33 Current Market Price

$10.00 Discount on share price to sell new shares

$5.40 Flotation Cost per bond

$5.00 2015 - Proposed Dividend

Dividend History $4.63 2014

$4.29 2103

$3.97 2012

$3.68 2011

$3.40 2010

Current Capital Structure

Extract from Balance Sheet $1,000,000 Long-Term Debt

$800,000 Preference Shares

$2,000,000 Ordinary Shares

Current Market Values $1,000,000 Long-Term Debt

$500,000 Preference Shares

$4,000,000 Ordinary Shares

Tax Rate

40%

a) Calculate the cost associated with each new source of finance. The firm has no retained earnings available.

b) Calculate the WACC given the existing weights

The financial controller does not believe the existing capital structure weights are appropriate to minimise the firm’s cost of capital in the medium term and believes they should be as follows

Long-term debt 40%

Preference Shares 15%

Ordinary Shares 45%

c) What impact do these new weights have on the WACC?

The firm is considering the following investment opportunity. (2015-2022)

Data is as follows

Initial Outlay $1,600,000

Upgrade $750,000 End of Year 4

Upgrade - 400,000 Increased sales units per annum - (Year 5-8)

Working Capital $40,000 Increase required

Estimated Life 8 Years

Salvage Value $50,000

Depreciation Rate 0.125 For tax purposes

The machine is fully depreciated by the end of its useful life

Other Cash Expenses $60,000.00 Per annum (Years 1-4)

Other Cash Expenses $66,000.00 Per annum (Years 5-8)

Production Costs $0.13 Per Unit

Sales price $0.73 Per Unit (Years 1-4)

Sales price $0.98 Per Unit (Years 5-8)

Prior sales estimates

Year Sales

2004 500000

2005 550000

2006 540000

2007 560000

2008 565000

2009 590000

2010 600000

2011 610000

2012 615559

2013 669000

2014 700000

d) Calculate the Net Present Value, Internal Rate of Return and Payback Period

The financial controller is considering the use of the Capital Asset Pricing Model as a surrogate discount factor. The risk-free rate is 5 per cent.

Year Stock Market Share

Index Price

2004 2000 $15.00

2005 2400 $25.00

2006 2900 $33.00

2007 3500 $40.00

2008 4200 $45.00

2009 5000 $55.00

2010 5900 $62.00

2011 6000 $68.00

2012 6100 $74.00

2013 6200 $80.00

2014 6300 $83.33

e) Calculate the CAPM

f) Explain why this figure may differ from that calculated above (i.e. Cost of equity – Ordinary Shares)

Part B. (5 marks)

You have discovered the following figures that you have derived by questionnairing several thousand investors. They were asked to distinguish between a pair of choices for the following two problems.

Problem 1.

Decision 1 – choose between receiving (a) $240 now or having a (b) 25% chance of receiving $1000 now.

Decision 2 – choose between losing (c) $750 now or a (d) 75% chance of losing $1,000 now.

Your results indicate that 84% of respondents chose (a) in Decision 1 whilst 87% chose (d) in Decision 2.

Problem 2.

Decision 1 – Assume you are $300 richer than what you are today. Then choose between either receiving (e) $100 now or having a (f) 50% chance of receiving $200 now.

Decision 2 – Assume you are $500 richer than what you are today. Then choose between either losing (g) $100 now or having a (h) 50% chance of losing $200 now.

Your results indicate that 72% of respondents chose (e) in Decision 1 whilst 64% chose (h) in Decision 2.

What explanation would you give to explain your findings?

Part C. (7 marks)

The homo economicus view of man’s behaviour as applied to the bulk of finance theory portrays decision makers as being both self-interested and rational. This view elicits both a macro and micro view of behaviour that helps construct aggregate models of the economy and financial markets.

Neoclassical economics makes some fundamental assumptions about people. Explain

Part D. (6 marks) “Fast and frugal Heuristics” “Adaptive Toolbox”

Consider the following images and discuss in terms of heuristics and decision making.

Student NameStudent NumberCourse and Code SIT40516 CERTIFICATE 4 COMMERCIAL COOKERYUnit(s) of Competency and Code(s) SITXFIN004Prepare and monitor budgetsStream/ClusterTrainer/AssessorAssessment for this...supply chain management in Singapore Research questions 1. Singapore has about 15% delivery failure rate, what can be done to lower this number thereby satisfying customers and protecting the business...Monitor administrative systemSubmission detailsCandidate’s name Phone no.Assessor’s name Phone no.Assessment siteAssessment date/s Time/sThe assessment task is due on the date specified by your assessor....Plan and implement administrative systemSubmission detailsCandidate’s name Phone no.Assessor’s name Phone no.Assessment siteAssessment date/s Time/sThe assessment task is due on the date specified by your...AssignmentAssessment Tasks and InstructionsStudent Name Putu Nenny WidhianiStudent Number S2138Course and CodeUnit(s) of Competency and Code(s) SITHKOP002 Plan and cost basic menusStream/ClusterTrainer/AssessorAssessment...Assessment Event Cover SheetThis Cover Sheet must be completed and returned with your assessment event.Please submit your assessment and completed cover sheet via the Google Classroom ‘Turn in’ function.Course...**Show All Questions**