business finance

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Assessment Task – Tutorial Questions Assignment 2 Unit Code: HC2091 Unit Name: Business Finance Assignment: Tutorial Questions Assignment 2 Due: Week 13 (26th June, 2020) Weighting: 25% Total Marks: 50 Marks Purpose: This assignment is designed to assess your level of knowledge of the key topics covered in the unit. Unit Learning Outcomes Assessed: 1. Critically analyse finance alternatives to manage short- and long-term debts.

2. Critically understand and practice valuation of financial instruments, including ordinary shares,

preferred shares and bonds.

3. Describe the effects of interest rates on business finance.

4. Evaluate the firm capital structure policy and payout policy.

5. Evaluate alternative funding policies and instruments available to businesses including the

banking sector and nonbanking sector.

Description Each week students are provided with three tutorial questions of varying degrees of difficulty. The tutorial questions are available on Blackboard in the Tutorial Folder weekly. The Interactive Tutorials are designed to assist students with the process, skills and knowledge to answer the provided tutorial questions. Your task is to answer a selection of tutorial questions from weeks 7 to 12 inclusive and submit these answers in a single document.

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The questions to be answered are:

Week 7 – Question 1 (10 marks)

a. Middleton expects to buy a 9.5% coupon, 15 years bond today, when it is first issued by Alex

PLC. If interest rates suddenly rise to 12.5%, what happens to the value of Middleton’s bond?

Why? (Word limit 20 - 30 words) (3 Marks)

b. A corporate bond has a face value of $1 000, a coupon rate of interest of 10.5% per annum,

payable semi-annually, and 20 years remaining to maturity. The market interest rate for bonds

of similar risk and maturity is currently 8.5% per annum.

Required: i. What is the coupon payment of the bond? (1 mark)

ii. What is the present value of the bond? (3 marks)

iii. If the coupon payment is payable annual (based on the same information), what is

the value of the bond? (3 marks)

Week 8 – Question 2 (10 marks) a. Briefly discuss the relationship between the following: (Word limit 50-70 words)

i. Share price and investors required rate of return ii. Share price and divided growth rate

(3 Marks)

b. Otama LTD has an issue of preference shares outstanding that pays a $2.85 divided every year. If this issue currently sells for $77.32 per share, what is the required return?

(3 Marks)

c. Price Tigers LTD expects to pay a $3.25 per share dividend next year. The company pledges to increase its dividend by 5.1% per year, indefinitely. If you require a return of 11% on your investment, how much will you pay for the company’s share?

(4 Marks)

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Week 9 – Question 3 (10 marks) a. Calculate both the arithmetic and the geometric average return of the following investment;

Year 1 2 3 4

Return 10.5% 12.2% -5.5% 2.8%

(4 marks) b. Teena is considering investing in Stock A and stock B. She plans to invest $ 25,000 in the low risk stock and $ 50,000 in the high-risk stock. You have been given the following information about these two stocks in the table below:

Stock A B

E(R) 15% 10

𝜎 25% 22%

Correlation between A and B 0.20

Based on the given information above, you are required to:

i. Calculate the portfolio weights

ii. Calculate the portfolio return.

iii. Calculate the portfolio risk.

iv. Compare portfolio risk with the individual stock risks and identify the benefit of the

diversification of the portfolio.

(6 marks)

Week 10 – Question 4 (10 marks) XYZ Corporation has 45,000 ordinary shares outstanding which are currently selling for 110 per share. The number of preference share outstanding is 30,000 and the book value of a share is $100 while the market value is $105. Company has issued 2500 bonds with face value of 1000. The Market value of bond is higher than the face value and it is $1,100. The required rate of return of ordinary shareholders, preference shareholders and bond holders are 10%, 12% and 15% respectively. The Company is subject to 30% corporate tax. Based on the information given;

i. Calculate the market value of the firm (4 marks)

ii. Calculate the capital structure weights (2 marks)

iii. calculate the Weighted Average Cost of Capital (WACC) of the company (4 marks)

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Weeks 11 and 12 – Question 5 (10 marks) a. Venture Capital is an alternative for financing new and often high-risk ventures. Briefly discuss

minimum of 3 key considerations of choosing a venture capitalist. (Word limit 70 - 100 words)

(3 marks)

b. Explain the cost of having too much cash balance or too little cash balance in a business.

(Word limit 30-50 words)

(2 marks)

c. Matilda Company financial statement information has given in the following table.

Item Beginning Ending

Inventory 1783 1965

Accounts Payable 2560 2820

Accounts Receivables 4920 4200

Revenue 12500

Cost of sales 9500

Required:

Based on the financial statement information above, calculate the operating and cash cycle.

(5 marks)

Submission Directions

The assignment has to be submitted via Blackboard. Each student will be permitted one submission

to Blackboard only. Each student needs to ensure that the document submitted is the correct one.

Academic Integrity

Academic honesty is highly valued at Holmes Institute. Students must always submit work that

represents their original words or ideas. If any words or ideas used in a class posting or assignment

submission do not represent the student’s original words or ideas, the student must cite all relevant

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sources and make clear the extent to which such sources were used. Written assignments that include

material similar to course reading materials or other sources should include a citation including source,

author, and page number.

In addition, written assignments that are similar or identical to those of another student in the class is

also a violation of the Holmes Institute’s Academic Conduct and Integrity Policy. The consequence for

a violation of this policy can incur a range of penalties varying from a 50% penalty through to

suspension of enrolment. The penalty would be dependent on the extent of academic misconduct

and the student’s history of academic misconduct issues. All assessments will be automatically

submitted to Safe-Assign to assess their originality.

Further Information

For further information and additional learning resources, students should refer to their Discussion

Board for the unit.