Finance and Capital Budgeting Assignment
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KOITrimester 2, 2017FIN700 – Financial Management ASSIGNMENT– GROUP Due date: Submit to your Tutor by the start of your Tutorial on Monday, 11 September, 2017 or on Tuesday, 12 September, 2017.Keep a soft copy in case of misadventure.Penalties for late lodgment, as per the Subject Outline, will be strictly applied.This Assignment consists of 4 problems, each involvingcalculations, and in some cases recommendations.You are required to complete this Assignment in Groups of 2 or 3 or 4 people. Groups of 1 or more than 4 persons will incur a penalty of 5 marks out of 30%. All members of the Group should come from the same Tutorial class. You may consult and discuss the Assignment topic with others, but you must write up youranswers yourselves. Penalties for copying and plagiarism are severe.You should follow the following typing conventions:Answers to be typed, in the space provided after each questionIf additional pages are required, use the blank pages at the end.Times New Roman font (at minimum , 12 pitch), 1.5 line spacing; andLeft and right margins to be at least 2.5 cm from the edge of the page.Research, Referencing and SubmissionYou should quote any references used at the end of each question.Use Harvard referencing! See http://en.wikipedia.org/wiki/Harvard_referencingAs this is a calculations problem, there is no need to submit via TURNITIN.Do not submit this page. Submit page 2 onwards, with KOI Group Assignment Cover Page.Marking GuideThe Assignment will be scored out of 100%, in line with the rubric in the Subject Outline. This mark will be converted to a score out of 30%.Dr Mervyn Fiedler, Subject Co-ordinator, FIN 700. 11 August, 2017.1
______________________________________________________________________***NOTE:When submitting Assignment, please submit from this page onwards,with a KOI Group Assignment cover page in front.***Trimester T217FIN700GROUP ASSIGNMENTStudents: Please complete the following before submitting for marking.Group members Student No. Student NamePercentage Contribution to AssignmentSignature1.............................................................................................................2.............................................................................................................3.............................................................................................................4.............................................................................................................Tutor: Please circle one name: Dr Mervyn Fiedler; Ms Ruhina Karim; Mr Masoud Ahmadi-Pirshahid; Mr Nishith Panthi.Tutorial Day .........................................................and Time ............................This Assignment consists of four questions. All questions must be answered. Please answer all questions in the spaces provided after each question.Two extra pages are included at the end of the Assignment. If more pages are required, please copy (or extend) page 14.2
QUESTION `1. [6 + 8 = 14 Marks.]a)This is a two period certainty model problem. Assume that William Brown has a sole income from Bobcat Ltd in which he owns12% of the ordinary share capital. In its financial year 2016-17 just ended, Bobcat Ltd reported net profits after tax of $600,000, and announced its net profits after tax expectation for the next financial year, 2017-18, to be 25% higher than this year’s figure. The company operates with a dividend payout ratio of 70%, which it plans to continue, and will pay the annual dividend for 2016-17 in mid-August, 2017, and the dividend for 2017-18 in mid-August, 2018.In mid-August, 2018, Jack wishes to spend $100,000, which will include the cost of a new car.. How much can he consume in mid-August, 2017 if the capital market offers an interest rate of 9% per year?Amount ($)ParticularsWorkings2016-172017-18Total Income600,000750,000Dividend Payout Ratio70%70%Dividend Paid (70% of total income)420,000525,000William Brown ownership in the Company12%12%Dividend Received by him (12% of dividend)50,40063,000Total Amount required in Mid 2018100,000Less: Amount utilised out of dividend pay out of 2017-1863,000Balance37,000Amount to be invested in Mid 2017 at 9% pa(37000/1.09)33,945Amount that can be consumed (50400-16455)16,4553
QUESTION 1 continued.b)This question relates to the valuation of shares.Big Ideas Ltd has just paid a dividend of $1.20 a share. Investors require a 12% per annum return on investments such as Big Ideas. What would a share in Big Ideas Ltd be expected to sell for today (August, 2017) if the dividend is expected to increase by 20% in August, 2018, 15% in August, 2019, 10% in August, 2020 and thereafter by 5 per cent a year forever, from August, 2021 onwards? ParticularsWorkingsAmt (in $)Expected Dividend in 2020(1.2*1.2*1.15*1.1)1.82Expeced Price in 2020(1.911/(0.12-0.05))27.30Using the formula : D1/(Re - g)Where, D1 = Expected Dividend = 1.82*1.05 = 1.911Re= 12% = .12g= growth = 5% = .05Expected Price in 2017 (present value of Dividend for 2018, 2019, 2020 and price of shares in 2020)((1.2*1.2)/1.12)+ ((1.2*1.2*1.15)/(1.12^2)) + ((1.2*1.2*1.15*1.1)/ (1.12^3)) + 23.334
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