HI5002 - Finance for Business Assignment

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Faculty of Higher Education
Assignment Cover Sheet
Unit Code HI5002
Unit Name Finance for Business
Assignment Tutorial Question Assignment
Due Date 26/02/2021
Declaration
Complete this and attach as a front cover sheet to your Blackboard submission, I certify that:
1. This assignment is my own work. I have not used any assistance in its preparation.
2. The formulas and templates of calculations and presentation of answers in this
assignment comply strictly with the instructions and learning resources provided in this
subject
3. This assignment was prepared specifically for this unit only.
Student name and ID Campus and Interactive
Tutorial Group Number
Lecturer Number of questions
submitted
Gurlabh Singh
Dhaliwal / IVA2046
Sydney Campus
Group 2
Phuong Duong 6 (All Questions)
HI5002 Tutorial Questions Assignment – T3 2020

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Answer 1A
a) Primary Market is where firms issue new financial instruments (securities) to raise funds
from public investors for the first time.
Secondary Market is where owners of outstanding securities can sell or resell them to
other investors. They can be stock exchanges or over-the-counter (OTC) markets. It
allows investors to buy and sell previously owned or existing securities.
An Initial Public Offerings (IPO) is undertaken on primary market.
b) Investment Bank is wholesale securities dealer that help public companies to issue
shares or bonds to public through their underwriting service.
c) In stock exchange transactions are conducted through electronic trading system same
like in auction market where public investors buy and sell securities through services of
securities brokers.
d) Five basic principles of finance are:
1. Money has a time value.
2. There is risk-return trade-off.
3. Cash flows are the source of value.
4. Market prices reflect information.
5. Individuals respond to incentives.
Answer 1B
Income Statement Items Provided:
Net profit margin: 0.35; Sales: $5,000,000; Total assets: $4,500,000;
a) What was New Age IT Solutions’ return on equity in 2020?
Net Income = Net Sales* Net profit Margin
= 5,000,000* 0.35 = $1,750,000
Finding Equity:
Total Asset = Total Liabilities + Equity = 4,500,000
Debt/Equity = 0.45
Debt = 0.45 Equity
0.45 Equity + Equity = 4,500,000
1.45 Equity = 4,500,000
Equity = 3,103,448.276
Return on Equity = Net Income/Equity = 1,750,000/3,103,448.276 = 0.56388
ROE = 56.39%
b) What was ROA of the company in 2020?
Return on Asset = Net Income/ Total Assets
ROA = 1,750,000/4,500,000 = 0.38888889
ROA = 38.89% (rounded off)
HI5002 Tutorial Questions Assignment – T3 2020

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c) Calculate EPS and PE of the company if it has total shares outstanding of $50,000 with a market
price of $85 per share?
EPS = Net Income/Total outstanding shares
= 1,750,000/50,000 = 35
PE = Share Price/ Earnings per share
= 85/35 = 2.428 times
Answer 2.
a) PV = $50,000
FV = $150,000
Rate of return = 7.6%
PV = FV
(1+r )t
t=
ln ( FV
PV )
ln (1+ r)
t=
ln ( 150000
50000 )
ln (1+0.076)
t= 1.09861
0.07325
t = 15 years
b) T = 10 years
PV =?
PV = FV
(1+r )t
PV = 150000
(1+0.076)10
PV = $72,105.52
c) Rate of return =?
T = 12 years
HI5002 Tutorial Questions Assignment – T3 2020

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FV = $500,000
PV = FV
(1+r )t
r =¿
r =¿
r = 0.1055 = 10.55%
d) Formula for EAR is:
EAR= ( 1+ Quoted interest rate
m )
m
−1
For ANZ bank
Given Data
m = 2 (semi-annually)
quoted rate = 4.85%
EAR= (1+ 0.0485
2 )2
−1
EAR = 4.908% per year
For Commonwealth Bank
Given Data
m = 12
Quoted rate = 4.83%
EAR= (1+ 0.0483
12 )12
−1
EAR = 4.938% per year
Lisa should choose ANZ bank as the interest rate offered for the mortgage is cheaper.
e) Borrowing amount = $350,000
Lending rate = 4.83%, Period = 30 years
HI5002 Tutorial Questions Assignment – T3 2020

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PVAn=PMT [ [ 1− ( 1+ i )−n ]
i ]
PMT = PVAn
[ [ 1− ( 1+i )−n ]
i ]
PMT = 350000
[ [ 1− ( 1+0.0483/12 )−30∗12 ]
( 0.0483
12 ) ]
PMT= $1842.68
f) Annual Interest rate = 8.5%
PVAn=PMT [ 1− ( 1+i ) −n
i ]
PVAn=50
[ 1− ( 1+0.085 /52 )−52
( 0.085
52 ) ]
= $2490.61
Answer 3
a) Formula for Arithmetic average return (AAR) is
AAR=¿ r 1+r 2+r 3 … … rn
n
AAR=(14−13+15.6+17+19.5)
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AAR = 10.62%
Geometric average return (GAR)
GAR= [(1+ r1) x (1+ r2) x (1+r3) ……….x (1+ rn)] 1/n -1
GAR=(1.14 ×0.87 ×1.156 × 1.17× 1.195)1 /5 −1
GAR = 9.89%
Geometric average return (GAR) is actual return and it is a better option.
b) Calculating expected return, variance and standard deviation
HI5002 Tutorial Questions Assignment – T3 2020

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Formula for expected return is


n
i
ii rprE 1
)(
Or
E(r) = R1 P(R1) + R2 P(R2) + … + Rn P(Rn)
E(r) = 0.25*(-2.5%)+0.45*13.5%+0.30*20%
E(r) = 35.825%
Variance and Standard deviation of the portfolio
Variance = σ2 = ∑ pr.* (Ri - E(R))2
Variance = [(-0.025-0.3582)20.25] + [(0.135-0.3582)20.45] + [(0.2-0.3582)20.30]
Variance = σ2 = 0.06663694
Standard deviation formula
VarSD 
SD=√ 0.06663694
SD = 0.2581413179 = 25.81%
The variance and Standard deviation tell us about the risk of asset or portfolio.
c) Calculating market portfolio rate of return
Data information given
E(Ri) = 13.2%
Rf = 3.5%
βi = 1.2
[E(Rm)-Rf] = Market risk premium
E(Ri) = Rf + βi [E(Rm) – Rf]
[E(Rm)-Rf] = (E(Ri)-Rf)/ βi
= (13.2-3.5)/1.2
Market Risk premium = 8.08333%
[E(Rm)-Rf] = 8.08333
E(Rm) = 8.08333+3.5
Market portfolio rate of return = E(Rm) = 11.58333
HI5002 Tutorial Questions Assignment – T3 2020

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Answer 4A:
a) For calculating the current price of the corporate bond we will use the following
formula:
Where: BV = Bond Value
C = Coupon Payment
F = Face Value
r = YTM = required rate of return of non-callable bond
Data info:
F = $1000
C = 10.5% = 1000*0.105 = $105
r = 9.7%
t = 16 years
BV=?
BV =105 [ 1− ( 1+0.097 )−16
0.097 ]+ 1000
¿ ¿
BV = 1063.72
b) Calculating the current price of the ordinary share using the following formula
P = D0*(1 + g)/(re – g)
Where:
D0 = Dividend just paid/shareholders just received
Data info:
D0 = $6.50
g = 4.5% = 0.045
re = 11.5% = 0.115
P = 6.50*(1+0.045)/(0.115-0.045)
P = $97.035
c) Calculating the current value of preferred share
V ps= D
r ps
Data info:
D = Fixed dividend payment = 100*0.15 = $15
rps = 0.125
V ps= 15
0.125
V ps=$ 120
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Answer 4B
a) Calculating the current market value using the following formula
Total Market Value (VF) = D+E
Number of bonds = $850,000/1000 = 850
MV of debt = 850*1196.4 = $1,016,940
MV of ordinary equity = 68,000*35 = $2,380,000
MV of preference equity = 15000*75 = $1,125,000
Total Market Value (VF) = $1,016,940+$2,380,000+$1125000
= $4,521,940
b) Calculate the capital structure of the company by calculating the total weights of equity
funding.
Capital Structure:
Weight of debts
WD = 1016940/4521940 = 22.49%(rounded off)
Weight of ordinary equity
WE = 2380000/4521940 = 52.63% (rounded off)
Weight of preference equity
Wp = 1125000/4521940 = 24.88 (rounded off)
c) Cost of bond is the rate of returns the lenders in market demand when they lend money
to the firm and estimated by yield to maturity, hence = 8% before tax.
Cost of ordinary equity using constant dividend growth model:
K E= D1
PE
+ g
Data info:
D1 = $1.85
PE = $35
g = 4% = 0.04
K E= 1.85
35 +0.04
K E=0.0928=9.3 %
Cost of preference share is
K p = Dp
Pp
K p =100 ×0.08
75
K p =0.1066=10.66 %
Compute the weighted average cost of capital (WACC)
WACC = WD x KD (1-Tc) + WE x KE + Wp x Kp
HI5002 Tutorial Questions Assignment – T3 2020

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WACC = 0.2249*0.08(1-0.35) + 0.5263*0.093 + 0.2488*0.1066
WACC = 0.08716 = 8.716% or 8.72% (rounded off)
Answer 5:
a) Calculating net present value for both the projects
NPV = -CF0 + CF1/(1+r) +CF2/(1+r)2 +CF3/(1+r)3 +….+CFn/(1+r)n
Net Present Value of Project Gold
NPV = -485000 + 105850/1.09 + 153250/1.092 + 225650/1.093 + 245000/1.094 +
250350/1.095
NPV = -485000 + 97110.09 + 128987.46 + 174243.20 + 173564.17 + 162710.32
NPV = $251,615.24
Net Present Value of Project Diamond
NPV = -520000 + 117050/1.09 + 162400/1.092 + 275500/1.093 + 255000/1.094 +
260000/1.095
NPV = -520000 + 107385.32 + 136688.83 + 212736.55 + 180648.43 + 168982.16
NPV = $286,441.29
Based on Net Present Value company should accept project Diamond as it has higher NPV
than project Gold.
b) Calculating Discounted payback period for both the project Gold and Diamond
The DPP for project Gold
= 2 + [485000-(97110.09+128987.46)]/174243.20
= 3.485868315 years
The DPP for project Diamond
` = 3 + [520000-(107385.32+136688.83+212736.55)]/180648.43
= 3.349791581 years
HI5002 Tutorial Questions Assignment – T3 2020

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Answer 6:
a) Harper Holding will have to save: $1,045,000*0.65= $679,250 for the coming project
with the current capital structure of 65% equity and 35% debt.
Net Income available for dividend payment:
$3,546,000 - $679,250 = $2,866,750
Dividend payout ratio of Harper Holding
$2,866,750: $3,546,000 = 0.8084 = 80.84%
b) Calculating the ex-dividend price tomorrow morning
Ex-dividend price = Price today – Dividend*(1-T)
Data info:
Price today = $72/share
Dividend = ($5.50+$2.50) = $8
Tax = 0.15
Ex-dividend price = 72-(5.50 +2.50) *(1-0.15)
= $65.20
c) Calculating the current value of the firm’s equity in total and per share if the firm has
1.5 million shares outstanding before issuing new shares for two cases
The company does not raise $1.5 million additional fund by issuing new shares.
The value of M&T Ltd. Equity is equal to the present value of the firm’s expected cash
dividends. Because the firm will only distribute a current dividend immediately and
another dividend in one year.
EM&T Ltd. = D0 +D1/(1+ke)
EM&T Ltd. = 8.5 + 12.5/ (1+0.12)
EM&T Ltd. = $19.66 million
Equity value per share: $19.66/ 1.5 = $13.106
END OF FINAL ASSESSMENT
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HI5002 Tutorial Questions Assignment – T3 2020