HC2091 Business Finance: Final Assessment, Trimester 2, Holmes Inst.

This document provides a solved final assessment for the HC2091 Business Finance course, Trimester 2, 2021. It includes solutions to six questions covering topics such as investment analysis, present value calculations, effective annual interest rate (EAR), portfolio risk and return, weighted average cost of capital (WACC), bond valuation, net present value (NPV) analysis, and operating cycle calculation. The assessment requires calculations and interpretations related to financial decision-making, providing a comprehensive review of key concepts in business finance. The student uses formulas and relevant financial principles to arrive at the correct solutions.

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HC2091
BUSINESS FINANCE
FINAL ASSESSMENT TRIMESTER 2, 2021
Assessment Weight: 50 total marks
Instructions:
 All questions must be answered by using the answer boxes provided in this paper.
 Completed answers must be submitted to Blackboard by the published due date
and time.
Submission instructions are at the end of this paper.
Purpose:
This assessment consists of six (6) questions and is designed to assess your level of
knowledge of the key topics covered in this unit
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Note: References are not required for this assessment
QUESTION 1 (7 marks)
Jenny decided to do the following things after completion of her finance degree at
Holmes Institute:
(i) Putting an exact amount of money in to Smart Investment Fund at the beginning of
each year to have a saving of $800,000 for her retirement in 25 years from now. The
average rate of return provided by this investment fund is 11% per year.
(ii) Having solar panels installed on her house roof for saving monthly electricity
expense.
(iii) Saving extra monthly income in to a bank account that allows flexibility when she
needs cash and at the same time provides interest income for any existing balance.
Required:
a. How much money should Jenny put into her investment fund account at the
begining of each year to reach her saving target in 25 years from now? (3 marks)
b. The solar panel provider offers her a payment package of $100/month at the end
of each month for 3 years. Given the interest rate is 3.5%, calculate the present
value of the payment package? (2 marks)
c. Jenny is considering offers from two banks for her saving account. Bank A offers
the interest rate of 2.54% per year, compounding semi-annualy. Bank B offers the
interest rate of 2.53% per year, compounding daily. Help Jenny choose the better
Bank by calculating Effective Annual Interest Rate (EAR). (2 marks)
ANSWER:
a) Average rate of return = 11%
Investment = (8000000/11%) *25 = $7272727.27
b) Present Value of 3 years = (1//1.035)3 = 0.87, present value of payment package =
0.87*100*12*3 = $3132
c) Effective annual Interest Rate (EAR) of Bank A = (1 + i/n)n - 1 =
(1+ 2.54/2)2 - 1 = 5.1529 - 1 = 4.1529%
Effective annual Interest Rate (EAR) of Bank B = (1 + i/n)n - 1
=(1+ 2.53/365)365 - 1 = 12.44 - 1 = 11.44%
Jeeny will choose Bank B as she is getting 11.44% of interest on her savings
which is more than Bank A.
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QUESTION 2 ( 11 marks)
Five years ago Peter had started his saving for his children’s higher education by putting a lump
sum of $25,000 into an investment instrument on the securities market. The investment has
been paying a rate of returns of 12.3% per year, compounding monthly.
Required:
a. Calculate how much money has Peter accumulated from his investment now? (3 marks)
b. If Peter’s initial investment was $30,000 and he had obtained the same investment outcome
after five years, how much should have been the actual rate of return, assuming
compounding annually for his investment ? (4 marks)
c. If Peter would like to have totally $60,000 for his children’s higher education and moves all
the saving accumulated from current investment after five year to another instrument that
pays the interest rate of 13.5% per year, compounding annually. How long will it take for
Peter to reach his target of $60,000 ? (4 marks)
ANSWER:
a. Principal = $25000, r = 12.3%, t = 5 years, n = 12
Amount = P*{(1 + r/n)}t = 25000* {(1 + 0.123/12)}12*5
= 25000* (0.01025)60= $46096.88
b. Rate of Return = n* [(A/P)1/nt - 1] = 1 * [ 46096.88/ 30000]1/1*5 = 0.0897 Rate
of Return = 8.871%
c. P = $46096.88, R = 13.5% per year, A = $60000
Time (t) = 2.082 years, which is approximately 2 years 1 month.
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QUESTION 3 (7 marks)
Big Data Ltd currently has the following capital structure:
Debt: $3,500,000 paying 9.5% coupon bonds outstanding with an annual before-tax yield
to maturity of 9% on a new issue. The bonds currently sell for $107 per $100 face value.
Ordinary shares: 75,000 shares outstanding currently selling for $80 per share. The firm
expects to pay a $9.50 dividend per share one year from now and is experiencing a 5%
growth rate in dividends, which it expects to continue indefinitely. The firm's marginal tax
rate is 30%. Required:
a) Calculate the current total market value of the firm. (2 marks)
b) Calculate the capital structure and weighted average cost of capital (WACC) for the
firm. (5 marks)
ANSWER:
a) Market value of ordinary shares = Outstanding shares* Current market price =
75000* 80 = $6,000,000
Market Value of firm = Debt + Equity = 6,000,000 + 3,500,000 = $9,500,000
b) Cost of ordinary shares (Ke) = (Dividend/ current Price) + growth rate =
(9.5/80) + 5% =16.875% Cost
of debt (Kd) = Coupon rate on bonds * (1 - tax rate) =
9.5% * ( 1- 0.30) = 9.5% * 0.7 = 6.65%
Weighted Average Cost of Capital (WACC) = Ke* 0.63 + Kd * 0.37 = 16.875%*0.63
+ 6.65%*0.37 = 0.106 + 0.025 = 0.131 = 1.31%
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QUESTION 4 (7 marks)
Capital Venture Fund has set up a portfolio that comprises ABC shares and XYZ shares.
The following information relates to these shares.
ABC XYZ
Expected return 10% 25%
Standard Deviation of return 15% 35%
Correlation of coefficient 0.4
Required:
a) Determine the expected return of the portfolio if 75% of ABC shares and 25% of XYZ
shares are combined to form the portfolio. (1 mark)
b) Determine the risk of the portfolio by calculating portfolio standard deviation given
the same portfolio combination. (4 marks)
c) Using CAPM, calculate beta coefficient of ABC shares, given the risk premium of 7.5%
and risk free rate of 3.5%. (1 mark)
d) For 4 previous consecutive years, the portfolio has the rate of returns of 12%, -4%,
13% and 14%, calculate the geometric average rate of return of this portfolio for the
period. (1 mark)
ANSWER:
a) Expected Rate of portfolio (Erp) = (ErABC* WABC) + (ErXYZ* WXYZ)
(10 * 0.75) + (25 * 0 .25) = 7.5 + 6.25 = 14%
b) Risk of Portfolio = Standard DeviationABC + Standard DeviationXYZ 15
+ 35 = 50%
c) Beta (𝜷) = (CAPM - RF)/ Risk Premium = (14 - 3.5)/ 7.5 = 1.4
d) Geometric average rate of return of portfolio = (1 + rc)1/n - 1 = (1 + 0.35)¼ - 1 =
0.077. Rc =
0.12 - 0.04 + 0.13 0.14 = 0.35
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QUESTION 5 (11 marks)
Millennium Chemist Ltd. issued a bond that has 14% coupon rate, paid semi-annually.
The bond has a face value of $1,000 and will mature 10 years from now.
The company has just paid a dividend of $6.50 per its ordinary share. The company is
forecasted to maintain a steady growth of 10% in dividends over the foreseeable future.
The company’s management is considering the two following projects with the same
initial investment:
Year Project 1 Project 2
0 –$78,500 –$78,500
1 $43,000 $21,000
2 $29,000 $28,000
3 $23,000 $34,000
4 $21,000 $41,000
Required:
a) Compute the value of Millennium Chemist’s bond if the required rate of return in
bond market is 12%. (4 marks)
b) How much would investors pay for the company’s ordinary shares if the required rate
of return for shares of this type is 15%? (3 marks)
c) Which project should the company choose, using NPV method if the required rate of
return is 11%? (4 marks)
ANSWER:
(a) required rate of return = 12%.
Face value = $1000
Value of bond = 1000 / (1+12%)
1000 / 1.12
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= $ 892.85
(b) it is not worthy to invest in these shares as the return on such shares in market is 15%.
But the company made the payment of only $ 6.50 per share and forecasts a rate of
dividend of only 10%.
(c) Rate of return = 11%.
Year Cash flows of
project 1
Discounted
value of project
1
Cash value of
project 2
Discounted
value of project
2
0 -78500 -78500
1 43000 38738.738 21000 18918.9189
2 29000 23537.0506 28000 22725.428
3 23000 16825.1634 34000 24871.982
4 21000 13833.992 41000 27009.222
92934.94 93525.550
NPV of first project = 92934.94 – 78500 = 14434.94
NPV of Second Project = 93525.550 – 78500 = 15025.55
Second project is more better.
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QUESTION 6 ( 7 marks)
The following data available for UFO Deli Ltd.
Account Beginning balance Ending Balance Use/source of cash
Accounts payable 27,400 25,500
Inventory 62,600 67,700
Long term debts 125,500 95,600
Common stock 220,400 245,500
Other information:
- The company just placed an order for 700 kg of chicken drumsticks at a unit price
of $3/kg. The supplier offers credit terms of 2/15, net 45.
- Beginning balance of accounts receivable is $27,500. Ending balance of accounts
receivable of $26,800
- Total revenue (all sales are on credit) is $287,500
- Total cost of goods sold is $195,000
Required:
a. What is the discount being offered by the supplier to UFO Deli Ltd. ? How quickly
must the company pay to get the discount? If the company takes the discount, how
much should they pay? (1 mark)
b. Calculate and identify the source of cash or the use of cash for each account by filling
into the column next to the ending balance (2 marks)
c. Calculate the operating cycle and interpret the outcome (4 marks)
ANSWER:
a. Total amount of order placed = 700 * 3 = $2100
Discount given = $2/ 15kg
So, discount placed = 2100/2*15 = 2100/30 = $70
b. In the below table use or sauce of cash is calculated:
Account Beginning
balance
Ending Balance Use/source of cash
Accounts payable 27,400 25,500 1900
Inventory 62,600 67,700 5100
Long term debts 125,500 95,600 29900
Common stock 220,400 245,500 25100
c. Operating Cycle = Inventory Period + Accounts Receivable Period
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122 + 34.47 = 156.47 days
REFERENCES
Heil, M., 2017. Finance and productivity: A literature review.
Krueger, T.M., 2017. A comparison of CABS’academic journal guide, Australian business
deans council’s list, and cabell’s directory of publishing opportunities in
finance. Journal of Financial Education, 43(2), pp.313-338.
Lind, M. and Barner, K., 2018. Finance Unleashed: Leveraging the CFO for innovation.
Springer International Publishing.
Veloso, M., and et. al., 2021. Artificial intelligence research in finance: discussion and
examples. Oxford Review of Economic Policy, 37(3), pp.564-584.
Song, H., Yu, K. and Lu, Q., 2018. Financial service providers and banks’ role in helping
SMEs to access finance. International Journal of Physical Distribution & Logistics
Management.
Ye, X., Bian, X. and Xu, Q., 2018, July. Empirical analysis and optimization for supply
chain finance business process based on Petri nets. In 2018 15th International
Conference on Service Systems and Service Management (ICSSSM) (pp. 1-6). IEEE.
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END OF FINAL ASSESSMENT
HC2091 Final Assessment T2 2021