Answer all questions in one word document. Total marks 80
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
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 the 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 one Word document. 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 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
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 marksRationale
This assignment covers Topics 1 – 6.
It will assess your competency towards all four learning outcomesof this subject:
- be able to assess critically the scope of the finance function and its role in corporate management;
- be able to synthesise relevant finance theories that will assist in the evaluation of investment, financing and dividend policies of firms through critical analysis and evaluation;
- be able to apply acquired skills in the evaluation of financial data to enable informed decision making;
- be able to communicate and analyse financial data at an appropriate level for post-graduate finance students.
The feedback will assist you to determine where you may need to revise your work.Marking criteriaPlease read the section ‘ Presentation‘ below after the marking guidelines.Remember, you must reference accuratelyand 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 as handwritten, hand drawn assignments will not be accepted.Assignments should show all workingsand students will be penalised for failing to do this. Please adhere to a convention of 4 decimal places for the answer and approximationswithout 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;
- written communication skills;
- critical thinking and analysis.
Please see below the marking guidelines incorporating various types of questions and criteria.In all questions (and parts of questions) pay careful attention to what type of question it is. This table below is a guide to the performance standard expected at each level. Performance standards
|Criteria||HD 85% to 100%||DI 75% to 84%||CR65% to 74%||PS 50% to 64%||FL0% to 49%|
|1. Quantitative questions:Solves financial problems.||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 one or two minor errors.||Applies correct principles and calculations, substantiated with workings or diagrams in order to arrive at the right answer, shows workings but contains more than two minor or any major 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: Discusses relevant concepts and principles, analyses and communicates effectively in response to a variety of financial
|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.|
|3. Communicate financial analysis: Interpretation of findings and communication of methods using financial terminology in a structured and coherent fashion that follows conventions of grammar, spelling and punctuation.||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:Analysis presents appropriate data from identified sources.||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 in-depth criticisms, interpretations and analysis based on a wide range of sources||Research is presented with some criticisms and rational analysis, but it is based on limited number of sources.||Research is presented uncritically, based on limited number of sources and with superficial analysis.||Incorrect research or no evidence of research or irrelevant research|
The following points are a general guide for presenting assessment items.
- Assessment items should be typed. Scanned handwritten / hand drawn assignments will not be accepted.
- Please submit one word document not multiple files.
- 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.
- Number your pages.
- Answer the questions chronologically.
- Always keep a copy of your assessments.
- 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.
As per the CSU Referencing Policy, assessment should be fully referencedand 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
This assignment must be submitted through Turnitin in one word document. It is recommended that your name and student ID are included in the front page of the assignment. You must also insert page numbers. Further details about submission in Turnitin are provided under ‘Online Submissi
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