BAP53 A T2 2021 FEX BASIC MATH IS HELFULL PDF

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P53 A T2 2021 FEX BASIC MATH IS HELFULL...

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TRIMESTER 2 2021 FINAL EXAMINATION STUDENT ID STUDENT NAME

SUBJECT NAME:

Corporate Finance

SUBJECT CODE:

BAP53

TIME ALLOWED:

3 Hours

PERMITTED MATERIALS: 

This is an Open Book exam.

INSTRUCTIONS FOR STUDENTS:      

You do not require a separate answer booklet. Please type your responses in the space provided. Type your full name and ID at the top of this page. This exam consists of 9 questions. All questions are to be answered. Each question may have sub question(s). Questions are not of equal value and indicated besides each subquestion. Workings should be shown. Total marks for this exam are 100. This exam is worth 60% of the total grade for this subject.

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There are 9 questions in this Examination. All questions are to be answered. Marks are indicated for each subdivided question. Question 1 (10 Marks) a. Explain why bond prices and interest rates are negatively related. Indicate at least three bond theorem with example. (5 marks) b. What are the fundamental decisions that financial managers are concerned when running a business? Elaborate on each concept. (5 marks) [Answer here] a)

b)

Question 2 (10 marks) The following probability distribution relating to returns on an individual security and the market portfolio are given: State

Probability

Boom Good Average Poor Crash

0.10 0.14 0.31 0.25 0.20

Return on a Security, % 31 23 10 3 -15

Return on a selected Market Index, % 25 17 14 5 -5

Required: Calculate the expected return and standard deviation of returns for the market index portfolio.

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[Answer and show workings here] Expected Return: 3 marks

Variance: 3 marks

Standard Deviation: 4 marks

Question 3 (10 marks) A family purchases a holiday cottage and borrows $400,000 from their bank at 6% payable monthly. The level monthly instalments of principal and interest are required for 20 years. Required: a. Calculate the monthly instalment amount. (5 marks) b. By setting up a loan repayment schedule, find the amount of loan repaid in first three months. (5 marks)

[Answer and show workings here] a)

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b)

Month

Loan

Interest due

Principal repaid

Loan

outstanding at

outstanding at

start of month

the end of the month

1 2 3

[Show workings here]

Question 4 (15 marks) a. The risk-free rate is 3.5% and the expected market return on the portfolio is 10%. What is the expected return on a share equity portfolio with a beta equal to 1.6? (4 marks) b. Sydney Ltd expects its growth in ordinary share dividends to be a very steady 3.5 per cent per year for the indefinite future. The company’s share is currently selling $15, and the company just paid dividend of $3.00 yesterday. What is the cost of ordinary share equity for this company? (4 marks) c. As at 30 June you obtain the following information for Sydney Ltd:    

The estimated required rate of return on equity after company tax but before personal tax is 16.5% The estimated cost of debt before tax is 9.24% Net debt as at 30 June 2021 is $244m The number of shares on issue is 231.mm

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 

The share price of Sydney is 3.34 Assume that the effective tax rate on gross free cash flows is the current corporate tax rate (Base rate Entity) is 27.50%.

Estimate the company cost of capital which can be applied to free cash flows that have had the full rate of effective corporate tax applied them. (7 marks)

[Answer and show workings here] a)

b)

c)

Question 5 (15 marks) a. You are looking for two debentures that are identical in every way except for their coupons and, of course, their prices. Both have 12 years to maturity.

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The first debenture has 10 per cent coupon rate and sells for $93.508. A little exercise using either excel program [IRR(A1:A13)] or trial and error reveals that the market yield is actually 11 per cent. The second has a 12 per cent coupon rate. Required: What do you think the second debenture would be sell for? Indicate as to whether it would be selling at a discount or premium. (7 marks) b. Assume on the recovery of COVID-19 in Australia G Ltd will be growing at a phenomenal rate of 10 per cent. It is also believed that this growth rate will be last for three more years and drop to 5.5 percent per year and remains this rate indefinitely. As well, assume that total unfranked dividend just paid were $20 million for 10 million shares.

Required: Based on non-constant growth, calculate the value of shares today assuming the required rate of return is 12 percent. What would be the total value of equity and price for each share today? (8 marks) [Answer here] a)

b) [Answer here] Year

Dividend Amount

1 2 3

Share Price: (Discounted present values) Year 1 2 3

Dividend

Discount factor

Growth model value

-

Amount

-

3

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Total

=

[Show workings here]

Question 6 (10 marks) Castle Ltd is attempting to evaluate the feasibility of investing $450,000 in a new printing machine with a five-year life. The company has estimated the cash inflows associated with the proposal as shown below. The company has 11% cost of capital.

Year 1

Cash Inflows $120,000

2

$194,000

3

$186,000

4

$191,000

5

$101,000

Required: a. Calculate the payback period for the proposed investment.

(2 marks)

b. Calculate the discounted payback period for the proposed investment.

(2 marks)

c. Calculate the NPV for the proposed investment.

(4 marks)

d. Would you, as a financial advisor opt for this investment? Why? Why Not? (2 marks)

[Answer and show workings here] a) Payback Period Year

0 1 2 3

Workings Cash flow

net cash flow(remaining amount)

-450000 1200000 194000 186000

-450000 -330000(450000-120000) -136000(330000-194000) 50000(136000-186000

So payback period is 2.731 years

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b) Discounted Payback Period Year

Workings Discounted cash flows

0 1 2 3 4

net discounted cash flows

-450000 -450000 108108.11(1200000(1+11%)-1 -341891.89 157454.75 -184437.14 136001.60 -48435.54 1255817.62 77382.07 So the discounted payback period is 3.385 years

c) NPV Year

Cash Flows

Discount factor

PVs

0 1 2 3 4 5

-450000 120000 194000 186000 191000 101000

1 0.901 0.812 0.731 0.659 0.593

-450000 108108.11 157454.75 136001.60 125817.62 59938.58 = 137320.66

NPV [Show workings here] Years 1 1

discounted factors 1+11%^-1

2

1+11%^-2

3

1+11%^-3

4

1+11%^-4

5

1+11%^-5

d) Decision

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Question 7 (10 marks) a. Why capital structure theory is relevant?

(4 marks)

b. On 30 June 2021 you obtained the following information for J Ltd: 

The estimated company cost of capital under an imputation system of tax to be applied to cash flows after tax is 10% (assuming the effective tax rate is 30%)



The free cash flows before tax for the year ended 30 June 2021 are: Cash receipts from operations Less cash payments from operations Less net cash flows investment activities Free Cash flows before tax

$543m $434m $ 43m $ 66m



The number of shares outstanding 231.46 million



The net debt reported in the statement of financial position (balance sheet) is $141.5 million



Federal treasury was forecasting economic growth after COVID-19 of 4.5% for the year ended 30 June 2022.

Required: Assuming that the free cash flows of J Ltd are sustainable and are expected to grow perpetually at the current forecast long term nominal interest rate, estimate the value of each share. (6 marks)

[Answer here] a)

b) [Answer and show workings here]

Free cash flows after tax

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Value of firm using growth model Value of equity Value of each share

[Show workings here]

Question 8 (10 marks) a. Elaborate on MM’s (Modigliani and Miller) ‘dividend irrelevance policy”.

(5 marks)

b. If a company pays $6,750,000 franked dividend distribution, how much of imputation tax credit is attached with this distribution? Assume tax rate is 27.5% as an Australian base rate entity. (round to 1 dollar)

(5 marks)

[Answer here] a)

b) [Answer and show workings here]

Question 9 (10 marks) a. JONO has negotiated a put option contract for 250,000 ounces of gold at an exercise price of $290/oz. The seller of this put option charges an option premium of $20/oz, so that the total premium that UBSS pays is 5,000,000. Under the terms of the put option, JONO is entitled to sell the gold to the option writer at any time up to the maturity, which is in three months’ time.

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How does this strategy perform as a risk management technique, if three months’ time the price of the gold is $270/oz.? (5 marks) b. How does this strategy perform for JONO as a risk management technique, if three months’ time the price of the gold is $315/oz.? (5 marks)

[Answer and show workings here] a)

b)

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Some Formulae

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END OF EXAM PAPER

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[Extra writing/working space if required]

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