Calculate the expected return for Aussie Traders

Reference no: EM132164420

Introduction to Corporate Finance Assignment -

Group Assignment Questions -

On your first day as an intern at Tri-Star Management Pty Ltd, the CEO asks you to analyse the following information pertaining to two ordinary share investments, Aussie Traders and Blue Star Limited. You are told that a one-year Treasury note will have a rate of return of 5% over the next year. Also, information from an investment advisory service lists the current beta for Aussie Traders as 1.68 and for Blue Star 0.52. You are provided a series of questions to guide your analysis:

Economy	Probability	Estimated rate of return
Economy	Probability	Aussie Traders	Blue Star Limited	ASX 200
Recession	30%	-20%	5%	-4%
Average	20%	15%	6%	11%
Expansion	35%	30%	8%	17%
Boom	15%	50%	10%	27%

1. Using the above data, calculate the expected return for Aussie Traders, Blue Star Limited and ASX 200 Index.

2. Calculate the standard deviations of the estimated rates of return for Aussie Traders, Blue Star Limited and ASX 200.

3. Which is a better measure of risk for the ordinary shares of Aussie Traders and Blue Star Limited - the standard deviation you calculated or the beta? Why?

4. Based on the beta provided, what is the expected rate of return for Aussie Traders and Blue Star Limited for the next year?

5. If you are to form a two-share portfolio by investing $50,000 in Aussie Traders and $100,000 in Blue Star, what is the portfolio beta and the expected rate of return?

6. If you are to form a two-share portfolio by investing $100,000 in Blue Star and $50,000 in Aussie Traders, what is the portfolio beta and the expected rate of return?

7. Which of these two-share portfolios do you prefer? Why?

Now that you have chosen your portfolio, the management is considering two alternative investment proposals. The first proposal calls for a major renovation of the company's manufacturing facility, while the second proposal involves replacing the obsolete pieces of equipment in the facility. The company will choose only one project and the company will use the WACC at 15%.

YEAR	RENOVATE	REPLACE
0	-$90,000	-$240,000
1	$30,000	$200,000
2	$30,000	$80,000
3	$30,000	$20.000
4	$30,000	$20,000
5	$30,000	$20,000

1. Calculate the payback period of each project and, based on this criterion, indicate which project you would recommend for acceptance.

2. Calculate the Net Present Value of each project and, based on this criterion, indicate which project you would recommend for acceptance.

3. Calculate the Internal Rate of Return of each project and based on this criterion, indicate which project you would recommend for acceptance.

4. Calculate the Profitability Index of each project and based on this criterion, indicate which project you would recommend for acceptance.

5. Overall, you should find conflicting recommendations based on the various criteria. Why is this occurring?

Reference no: EM132164420

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len2164420

11/12/2018 4:43:49 AM

You are to work in a team of 3-5 members and solve the given questions as asked. Each of the team members are required to participate and contribute equally in this assignment. Please select a team leader that will be responsible for submitting the assignment into Moodle. The assignment is required to be submitted in Moodle in Week 11. You are required to use this template to submit your assignment carefully completing your Student name and ID details on the front cover. Each of the calculations is required to be shown in full to attract full marks. The total weightage of this group assignment is 20 marks.

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