Order 955616: Corporate Finance
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Fin516 201830 Assessment 2
Value: 30%
Due date: 17-April-2018
Submission method options: Turitin
Task – Answer all questions.
Question 1 45 marks
Corning Limited, one of the leading glass producers, is currently evaluating a potential new
product; a tough but light curved glass designed for unusually shaped tall buildings and office
blocks. The new product would cost more than their usual commercial exterior glasses and in
market research conducted by the company’s research department at a cost of $650,000 it
was judged superior to various competing products. Monica Andrews, the Chief Financial
Officer, must analyse this project, along with other potential investments, and then present
her findings to the company’s executive committee.
The project will require construction of a new plant that would have an annual capacity of
75,000 tons and will cost an estimated $18,500,000 to build. The estimated purchase cost of
machinery is $13,500,000 but shipping costs to move the machinery to the plant would total
$425,000 and the estimated installation charge is another $575,000.The land on which the
plant will be built has been vacant since it was bought three years ago at a cost of $750,000,
which has already been paid and expensed for tax purposes.
The company expects its new plant to produce 65,000 tons of glass per year and the
management of Corning anticipates they can sell the product at $350 per ton allowing the
company to gain 10% market share in the first year of operation. Fixed costs are expected to
average $12,500,000 annually while variable costs are estimated to be around $125 per ton.
The plant and machinery will be depreciated to zero on a straight-line basis over ten years,
with an estimated sale value of $1,000,000 after 10 years at the end of the project.
Corning requires 11.5% return on the project. The company tax rate is 30%.
Now assume that you are an assistant to Monica and she has asked you to analyse the project
and then to present your findings to her. Therefore,
a. Calculate the project’s incremental cash flow for each year and present in a tabular form. 15 marks b. Using the incremental cash flows calculate the project’s:
i. Payback Period 1.5 marks ii. Net Present Value 5 marks
iii. Profitability Index 2 marks iv. Discounted Payback Period 1.5 marks v. Internal Rate of Return using interpolation method 7 marks
c. Identify and discuss any further information that you may require to help make the accept/reject decision about this project. (Maximum 500 words) 5 marks
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d. Combining all the information recommend if the project should be undertaken or not and explain your decision to Monica. (Maximum 300 words) 3 marks
e. Analyse the importance of capital budgeting for a corporation. (Maximum 500 words) 5 marks
Please note if you use a spreadsheet you cannot submit a spreadsheet via EASTS - neither can
you submit a spreadsheet as an embedded object in a Word document. If you construct your
table in Excel then please simply copy and paste into Word. You can set up your data in a
spreadsheet and use it check your answer but remember you still have to show how the NPV,
etc. was derived. This does not mean giving the Excel algorithm. It does have to show how
the solution was derived. So show how you have discounted the cash flows.
Question 2 55 marks
You are considering investing in Australian shares and decide to investigate the shares of two
Australian companies: Commonwealth Bank of Australia and Altium Ltd.
For this question please note:
Use Yahoo! Finance website at http://au.finance.yahoo.com/ for data.
This question is to be done on a spreadsheet with the results pasted and submitted in a
Word document in EASTS. Make sure that you show all your workings – for
example, do not simply put down the covariance but show how it was obtained and
this does not mean giving the Excel algorithm. Please do not give cell formulae, cell
references, etc, as the reader should be able to follow from a table. Also please note
using excel formula such as =COVAR() is not acceptable.
a. Find the monthly opening and closing prices for the period 1 July 2016 – 30 June 2017 for Commonwealth Bank (CBA.AX), Altium Ltd (ALU.AX) and the Market as proxied
by the All Ordinaries index (^AORD). 3 marks
b. Calculate monthly holding period returns (%) for the period 1 July 2016 – 30 June 2017 for CBA, ALU and Market. The monthly holding period return is the percentage return
(%) you would receive if you bought an asset on the first day of the month (opening
price) and sold it on the last day of the month (closing price). (Use 'Close' rather than
'Adjusted Close' for the selling price and include any dividends). Show the formula and
at least one sample calculation. 3 marks
c. Graph your results on one graph with returns on the y axis and time on the x axis. 4 marks
d. Calculate the average monthly holding period return for CBA, ALU and Market.
1.5 marks e. For CBA, ALU and Market, calculate:
i. The annual holding period returns; and 1.5 marks ii. The standard deviation of the monthly holding period returns 6 marks
f. Calculate the covariance of CBA, ALU, CBA & Market, and ALU & Market over the
year. 6 marks
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g. You decide to invest in a portfolio of two assets, calculate the expected portfolio return
and standard deviation if:
i. 20% of wealth is invested in CBA and 80% in ALU 5 marks ii. 80% of wealth is invested in CBA and 20% in ALU 5 marks
h. Plot CBA, ALU and Market on a risk / return graph as well as the two portfolios you
calculated in part g. (See Fig 11.2 of text for example of graph) 4 marks
i. Calculate the beta of both CBA and ALU. 2 marks
j. If average T bill rates in 2016-2017 was 2. 5% what would be the expected return of
CBA and ALU according to CAPM? 4 marks
k. Construct the Security Market Line (SML) showing where CBA, ALU and Market lie.
Identify if the shares are overvalued, undervalued or fairly priced. 5 marks
l. Incorporating all the analysis explain which asset or combination of assets would you
choose to invest in as a rational investor. (Maximum 500 words) 5 marks
Rationale
This assignment covers Topics 1 - 7 and assesses your competency towards all
four learning outcomes of this subject.
The feedback will assist you to determine where you may need to revise your work.
Marking criteria
Please read the section ' Presentation' below after rubric.
Remember, you must reference accurately and failure to do so will attract a penalty of up to
10% of available marks of the assignment. Also please note, Assessment items should be
typed and handwritten, hand drawn assignments will not be accepted.
Assignments should show all workings and students will be penalised for failing to do
this. Please adhere to a convention of 4 decimal places for the answer and approximations
without rounding for calculations prior to the answer. Where necessary, state any
assumptions you have made.
You will be assessed on:
your understanding of the problem;
your choice of method for solving the problem;
your application of techniques;
the accuracy of your answer;
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written communication skills;
critical thinking and analysis.
Please see below marking rubric incorporating various types of questions and criteria. In all
questions (and parts of questions) pay careful attention to what type of question it is and
amount of mark allocated to each question (and parts of each question).
This table below a guide to performance standard expected at each level.
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Performance standards
Criteria
High Distinction(HD)
85% to 100%
Distinction (DI) 75%
to 84%
Credit (CR) 65% to
74%
Pass (PS) 50% to 64% Fail (FL) 0% to
49%
1.
Quantitative
questions
Applies correct principles
and calculations,
substantiated with
workings or diagrams in
order to arrive at the right
answer. There are
negligible errors/no errors
in calculations.
Applies correct
principles and
calculations,
substantiated with
workings or diagrams
in order to arrive at the
right answer, shows
workings but contains
few minor errors.
Applies correct
principles and
calculations,
substantiated with
workings or diagrams in
order to arrive at the
right answer, shows
workings but contains
some errors.
Applies basic
understanding of relevant
principles, shows
workings but contains
some major errors.
Frequent errors and
mistakes indicative of a
lack of understanding of
core principle(s). Failed
to show ALL workings.
Only showed excel
formula or calculator
key stokes.
2. Conceptual
Questions
Principles are applied in
the appropriate manner to
arrive at the correct
answer. The use of
relevant principles shows
creativity and imagination.
Focuses on key issues and
avoids or dismisses
tangential issues.
Quantitative and
qualitative analysis
persuasively supports the
convincing
recommendations and
conclusions, which are
strongly related to the
overall issues.
Discussion reflects
excellent understanding
of relevant principles.
Mainly focuses on key
issues. Quantitative and
qualitative analysis is
strong. Conclusions
and recommendations
are convincing and
related to the overall
issues.
Discussion reflects good
understanding of relevant
principles. Focuses on
key issues, but spends
some time on some
tangential issues.
Quantitative and
qualitative analysis is
good. Conclusions and
recommendations are
convincing, reasonably
well related to the overall
issues.
Discussion reflects basic
understanding, but not
deep understanding of
relevant principles.
Focuses on key issues but
spends too much time on
some tangential issues.
Quantitative and
qualitative analysis is
adequate to make
reasonable and believable
conclusions and/or
recommendations.
Discussion reflects lack
of basic understanding
of relevant principles.
Focuses on tangential
rather than key issues.
Quantitative and
qualitative analysis too
simplistic or convoluted.
Conclusions and
recommendations are
wrong or implausible.
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3.
Communicate
financial
analysis
Uses terms correctly.
Clearly and accurately
interprets findings and
communicates methods.
Contains no grammar and
spelling errors.
Makes negligible errors
in using terms,
interpreting findings,
and/or communicating
methods. Contains few
or no grammar and/or
spelling errors.
Makes a few minor
errors in using terms,
interpreting findings,
and/or communicating
methods. Contains few
grammar and spelling
errors.
Makes some minor errors
in using terms,
interpreting findings,
and/or communicating
methods. Contains a
number of grammar and
spelling errors.
Frequently misuses
terms, misinterprets
findings, and/or
miscommunicates
methods. Grammar and
spelling errors are
commonplace.
4. Financial
research
Has developed and
justified own ideas based
on a wide range of sources
which have been
thoroughly analysed,
applied and discussed.
Research is presented
with good criticisms, in
a descriptive way and
indicates good
understanding.
Research is presented
with some criticisms, in
a descriptive way and
indicates few limitations
of understanding.
Research is presented
uncritically, in a
descriptive way and
indicates some limitations
of understanding.
Incorrect research or no
evidence of research or
irrelevant research
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Assessment Presentation
The following points are a general guide for presenting assessment items.
Assessment items should be typed. Handwritten assignments will not be accepted.
Use 1.5 spacing.
Use a wide left margin. Markers need space to be able to include their comments.
Use a standard 12pt font such as Times New Roman, Calibri or Arial.
Include a separate title page with your name, student number, subject code and
assessment number.
Number your pages (except the cover page).
Use a header or footer with your name and student number on each page.
Always keep a copy of your assessments. Both a hard copy and an electronic copy.
Most importantly, always use your spelling and grammar checker, but remember that
this does not pick up all errors. You must still manually and carefully edit your work.
Requirements
As per the CSU Referencing Policy, assessment should be fully referenced and you must
reference accurately as failure to do so will attract a penalty of up to 10% of available
marks of the assignment.
The Faculty of Business requires that students apply APA (American Psychological
Association) referencing. If you are unsure of this style, please go to CSU Referencing
website at http://student.csu.edu.au/study/referencing-at-csu