Order 955616: Corporate Finance

Page 1 of 7

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

Page 2 of 7

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

Page 3 of 7

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;

Page 4 of 7

 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.

Page 5 of 7

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.

Page 6 of 7

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

Page 7 of 7

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