Finance

Assessment 2: Business Case Studies 1

General overview

See the Unit Information Guide for this assessment’s weighting, due date, topic coverage and word limit. Overall, the assignment consists of:

a. 6 (six) questions on time value of money and bond valuation (part 1);

b. 3 (three) tasks related to a risk and return analysis (parts 2 and 3).

Instructions:

Do NOT include a coversheet on your assessment document. Your details are known to us because you submit electronically through your login.

In Week 4, find the ASX code for your allocated case company for this assessment in ‘Grades and Feedback’ on the unit's MySCU Learning site. Also at that time, download the spreadsheet (referred to in the requirements below) in the Assessment 2 folder of the Assessment Tasks and Submission section of the unit’s MySCU site.

Use S&P Capital IQ (see the Web Links section of this unit’s MySCU site) to collect all missing inputs for calculations in Part 2a. This database will also be useful for more general background research on your allocated company.

Required:

1. TVM and bond valuation questions (1 mark each, give answers to 2 decimal places):

a. Your case company has an issue of $1,000 par value semi-annual coupon bonds with 7 years remaining until maturity. The annual coupon rate and yield to maturity for these bonds are given in the spreadsheet. What is the price of the bonds?

b. Your case company is considering a contract in which its customer will make end-of-month payments of the amount shown in the data spreadsheet (see instructions above) for 3 years. Your company’s discount rate is also shown in the spreadsheet. What is the value of the contract to your case company at its commencement?

c. Your case company needs to invest funds and has several alternatives available to it, A, B and C, all of equal risk. The interest rates for these options are given in the spreadsheet. What is the EAR of the alternative the company should choose if it wishes to maximise value?

d. Your case company has gross profit as shown in the spreadsheet. Assuming the gross profit grows continuously over time at a given rate (see spreadsheet), what will the share price be in 10 years?

e. Your case company is buying land for the amount given in the spreadsheet. The transaction will be financed by an amortised loan at 4.2% APR, quarterly compounding, with 20 years of end-of-quarter payments. What is the amount of the quarterly payment?

1

Assessment 2 Finance f. Your case company has an issue of $100 par value annual coupon bonds with 5 years remaining until maturity. The annual coupon rate is given in the spreadsheet, along with the current price of the bonds. What is the YTM 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 1.40. To do this, use the yield to maturity of a 10-year Australian Government bond on 29 March 2021 as a proxy for the risk-free rate, assume the market risk premium is 5% and use your case company’s current 5-year beta.

b. Using the data from part 2a, estimate portfolio expected return and beta, assuming a portfolio with 20% invested in your case company and the remainder invested in the hypothetical

company.

3. Risk and return analysis (15 marks):

a. Interpret and discuss your risk and return measures from parts 2a and 2b.

Marking Criteria:

Part 1

The answer to each TVM and bond valuation question in part 1 will be marked as correct (1 mark) or incorrect (0 marks).

List the question numbers with your final answers (no workings) on the first page of your assignment submission document with each answer on a separate line.

Give all answers in two decimal places, rounding to the nearest hundredth or cent. No part marks will be provided. It is therefore important that you round decimals correctly. If you are not sure about this, see the relevant link in the Web Links section of the unit site.

Parts 2 and 3

These will be marked using the rubric that follows.

2

Assessment 2 Finance

Marking criteria for risk and return estimates (Part 2)

MARKING CRITERIA Excellent Very Good Good Satisfactory Poor

Accurate calculation of expected returns for companies and portfolio and accurate calculation of portfolio

beta (4 marks) Correct input data used. Technique and all final calculated figures are correct

(4 marks) Mostly correct input data. Correct techniques and calculations. (3.5 marks) Correct input data. Mostly correct techniques and calculations. (2.5 marks). Mostly correct input data. Mostly correct techniques and calculations. (2 marks). Mostly incorrect data and techniques. (0 to 1.5 marks)

Marking criteria for written risk and return analysis and its presentation (Part 3)

MARKING CRITERIA Excellent Very Good Good Satisfactory Poor

Insightful and relevant discussion of risk and return (10 marks) Accurately and comprehensively interprets all calculated risk and return

measures. Correctly compares appropriate measures and explains differences, drawing on relevant theory. Accurately weaves relevant context (e.g. company industry, market conditions) into explanations. Uses tables or graphs effectively to enhance the discussion. Uses and explains relevant technical terms. (9 to 10 marks) Accurately interprets nearly all calculated risk and return

measures. Correctly compares appropriate measures and explains differences, drawing on relevant theory. Weaves relevant context into explanations. Uses tables or graphs effectively to enhance the discussion. Uses and explains most relevant technical terms. (8 marks) Accurately interprets most calculated risk and return measures. Correctly compares appropriate measures and explains some differences, drawing on relevant theory. Incorporates some relevant context. Uses tables or graphs but may not be effective or explained. Uses and explains some technical terms. (7 marks) Accurately interprets most calculated risk and return measures. Correctly compares some appropriate measures and explains some differences. Tables or graphs, if used, may not be effective or explained. Uses and explains some technical terms. Context and theory are limited or incorrect (5 to

6 marks) While an explanation of technical terms may have been attempted, there is little or no accurate interpretation or comparison of risk and return measures. Context, theory and explanations are limited, incorrect or absent. (0 to 4 marks)

Presentation, sources and written expression

(5 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) 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) 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) 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) Overall presentation is generally unprofessional. Not all necessary data sources are provided or most are not in appropriate positions, format and detail. Use of language often makes meaning unclear. There may be many grammar, syntax and spelling errors. (0 to 2 marks)

3

Assessment 2: Business Case Studies 1

General overview

See the Unit Information Guide for this assessment’s weighting, due date, topic coverage and word limit. Overall, the assignment consists of:

a. 6 (six) questions on time value of money and bond valuation (part 1);

b. 3 (three) tasks related to a risk and return analysis (parts 2 and 3).

Instructions:

Do NOT include a coversheet on your assessment document. Your details are known to us because you submit electronically through your login.

In Week 4, find the ASX code for your allocated case company for this assessment in ‘Grades and Feedback’ on the unit's MySCU Learning site. Also at that time, download the spreadsheet (referred to in the requirements below) in the Assessment 2 folder of the Assessment Tasks and Submission section of the unit’s MySCU site.

Use S&P Capital IQ (see the Web Links section of this unit’s MySCU site) to collect all missing inputs for calculations in Part 2a. This database will also be useful for more general background research on your allocated company.

Required:

1. TVM and bond valuation questions (1 mark each, give answers to 2 decimal places):

a. Your case company has an issue of $1,000 par value semi-annual coupon bonds with 7 years remaining until maturity. The annual coupon rate and yield to maturity for these bonds are given in the spreadsheet. What is the price of the bonds?

b. Your case company is considering a contract in which its customer will make end-of-month payments of the amount shown in the data spreadsheet (see instructions above) for 3 years. Your company’s discount rate is also shown in the spreadsheet. What is the value of the contract to your case company at its commencement?

c. Your case company needs to invest funds and has several alternatives available to it, A, B and C, all of equal risk. The interest rates for these options are given in the spreadsheet. What is the EAR of the alternative the company should choose if it wishes to maximise value?

d. Your case company has gross profit as shown in the spreadsheet. Assuming the gross profit grows continuously over time at a given rate (see spreadsheet), what will the share price be in 10 years?

e. Your case company is buying land for the amount given in the spreadsheet. The transaction will be financed by an amortised loan at 4.2% APR, quarterly compounding, with 20 years of end-of-quarter payments. What is the amount of the quarterly payment?

1

Assessment 2 Finance f. Your case company has an issue of $100 par value annual coupon bonds with 5 years remaining until maturity. The annual coupon rate is given in the spreadsheet, along with the current price of the bonds. What is the YTM 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 1.40. To do this, use the yield to maturity of a 10-year Australian Government bond on 29 March 2021 as a proxy for the risk-free rate, assume the market risk premium is 5% and use your case company’s current 5-year beta.

b. Using the data from part 2a, estimate portfolio expected return and beta, assuming a portfolio with 20% invested in your case company and the remainder invested in the hypothetical

company.

3. Risk and return analysis (15 marks):

a. Interpret and discuss your risk and return measures from parts 2a and 2b.

Marking Criteria:

Part 1

The answer to each TVM and bond valuation question in part 1 will be marked as correct (1 mark) or incorrect (0 marks).

List the question numbers with your final answers (no workings) on the first page of your assignment submission document with each answer on a separate line.

Give all answers in two decimal places, rounding to the nearest hundredth or cent. No part marks will be provided. It is therefore important that you round decimals correctly. If you are not sure about this, see the relevant link in the Web Links section of the unit site.

Parts 2 and 3

These will be marked using the rubric that follows.

2

Assessment 2 Finance

Marking criteria for risk and return estimates (Part 2)

MARKING CRITERIA Excellent Very Good Good Satisfactory Poor

Accurate calculation of expected returns for companies and portfolio and accurate calculation of portfolio

beta (4 marks) Correct input data used. Technique and all final calculated figures are correct

(4 marks) Mostly correct input data. Correct techniques and calculations. (3.5 marks) Correct input data. Mostly correct techniques and calculations. (2.5 marks). Mostly correct input data. Mostly correct techniques and calculations. (2 marks). Mostly incorrect data and techniques. (0 to 1.5 marks)

Marking criteria for written risk and return analysis and its presentation (Part 3)

MARKING CRITERIA Excellent Very Good Good Satisfactory Poor

Insightful and relevant discussion of risk and return (10 marks) Accurately and comprehensively interprets all calculated risk and return

measures. Correctly compares appropriate measures and explains differences, drawing on relevant theory. Accurately weaves relevant context (e.g. company industry, market conditions) into explanations. Uses tables or graphs effectively to enhance the discussion. Uses and explains relevant technical terms. (9 to 10 marks) Accurately interprets nearly all calculated risk and return

measures. Correctly compares appropriate measures and explains differences, drawing on relevant theory. Weaves relevant context into explanations. Uses tables or graphs effectively to enhance the discussion. Uses and explains most relevant technical terms. (8 marks) Accurately interprets most calculated risk and return measures. Correctly compares appropriate measures and explains some differences, drawing on relevant theory. Incorporates some relevant context. Uses tables or graphs but may not be effective or explained. Uses and explains some technical terms. (7 marks) Accurately interprets most calculated risk and return measures. Correctly compares some appropriate measures and explains some differences. Tables or graphs, if used, may not be effective or explained. Uses and explains some technical terms. Context and theory are limited or incorrect (5 to

6 marks) While an explanation of technical terms may have been attempted, there is little or no accurate interpretation or comparison of risk and return measures. Context, theory and explanations are limited, incorrect or absent. (0 to 4 marks)

Presentation, sources and written expression

(5 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) 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) 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) 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) Overall presentation is generally unprofessional. Not all necessary data sources are provided or most are not in appropriate positions, format and detail. Use of language often makes meaning unclear. There may be many grammar, syntax and spelling errors. (0 to 2 marks)

3

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