Reference no: EM132136798 , Length: 2600 Words

FINANCE FOR DECISION-MAKING ASSIGNMENT QUESTIONS -

Must answer ALL parts of SIX (6) questions.

Question 1 - The Australian government wants to raise more money to finance its public expenditure programs. It can issue treasury bonds to raise that money from investors.

a. If these bonds come in $1,000 maturity value per bond, what would be the market price of a five-year bond that pays $40 interest every half-year if the current market rate required by investors is 8% p.a. (compounded half-yearly)?

b. What would happen to the value of the bond if current market interest rates rise to 10% p.a.?

c. What would happen to the value of the bond if current market interest rates fall to 6% p.a.?

d. In terms of the results found in a, b and c, discuss the relationship between the interest rate and bond value and explain two factors that decide the degree of interest rate risk. (Word limit is 100 words).

Question 2 - AMC Soups Company uses the standard Economic Order Quantity (EOQ) formula to determine how frequently it will order a particular raw material. Relevant information is provided below:

Estimated usage - 10000kg per annum

Working days - 200 days per year

Purchase price - $4 per kg

Cost of placing each order - $10

Carrying cost - 40 cents per kg per annum

Delivery time - 2 weeks

Desired safety stock - 100 kg

a. Calculate the EOQ.

b. How frequently should orders be placed?

c. What is the reorder point?

Question 3 -

a. A 60% debt-financed Australian iron ore company sells its iron ore into the Chinese market. Identify risks faced by the company and specific instruments that can be used to control these risks. (Word limit is 200 words).

b. A company wants to raise $100 million to finance a project for a two-year period. Discuss the different methods available to the company and their possible risks and costs. (Word limit is 200 words).

Question 4 - The financial information for Wombat Pty Ltd is provided in the below table. Company tax rate is 30%, and no dividend will be paid out in 2017 (i.e. the net profit for the year 2017 will be reserved as retained earnings). Complete the following tasks for the company.

a. Prepare an income statement for the year ended 30 June 2017.

b. Prepare a balance sheet at 30 June 2017 in a vertical format.

Sales	$1,500,000	Account receivables	450,000
Costs of Sales	800,000	Inventory	330,000
Buildings and plants	1,000,000	Operating expenses	300,000
Depreciation	80,000	Prepayments	200,000
Interest payments	60,000	Ordinary shares	500,000
Accounts payable	180,000	Mortgage loan	400,000
Accumulated depreciation	240,000	Long-term debt securities	200,000
Promissory notes (borrowings)	100,000	Retained earnings 2016	?
Cash	200,000	Retained earnings 2017	?

Question 5 -

a. The below information is extracted from ABC Shipping Asia Ltd's balance sheet.

10% debentures ($100 par)	$10,000,000
Paid-up capital-ordinary shares ($1 par)	$45,000,000
12% preference shares ($10 par)	$5,000,000

Additional information:

• The ordinary shares are currently traded at $5.00 per share.
• The beta coefficient of ABC Shipping Asia Ltd is 1.5.
• The risk-free rate (a 10-year government bond) in the market is 3%.
• The average historical market premium for the past 10 years is 8%.
• Its debentures are priced at $102, and its preference shares are trading at par.
• The current return (i.e. market yield) on the company's debentures is 8% .
• Company tax is 30%.
• The existing capital structure is unlikely to change.

Calculate the Weighted Average Cost of Capital (WACC) of the company.

b. ABC Shipping Asia Ltd is planning to add one new container vessel to its operation for 10 years. Two container vessels with various capacities are considered. Both vessels are expected to have equal lives of 20 years. The capital cost of each new vessel can be depreciated using the straight-line depreciation method. The below table shows estimated projected sales and costs for each Vessel Project and the residual value of each vessel at the end of year 20. The vessel will be sold at the end of year 10 and the expected market value of each vessel for sale is also given in the table. The company tax rate is 30%.

The required rate of return used for evaluating the projects is the company's WACC from part a.

	Vessel 1 Project	Vessel 2 Project
Initial investment costs	$15 millions	$9 millions
Incremental annual revenue	$7,000,000	$4,500,000
Incremental annual operational costs (exclude depreciation)	$3,000,000	$1,800,000
Estimated life of the vessels	20 years	20 years
Residual value of the vessels at the end of year 20	$2.5 millions	$1million
Market value sold at the end of year 10	$6 millions	$4 millions

i. Set out the cash flows of each Vessel Project.

ii. Calculate the payback period of each Vessel Project. The company has a maximum acceptable payback period of 5 years. Which Vessel Project should the company accept based on the payback period?

iii. Calculate the Net Present Value (NPV) of each Vessel Project.

iv. Calculate the Internal Return Rate (IRR) of each Vessel Project. You can use the formula function in Excel to get the IRR but need to show the process.

v. Which Vessel Project should the company accept based on your answers in part ii, iii and iv? Why?

Question 6 -

a. Imagine that you are an Australian wine exporter who receives all payments in foreign currencies. The Reserve Bank of Australia begins to undertake an expansionary monetary policy, which will result in a higher inflation in Australia compared to other countries. Would it be wise to use forward markets to protect yourself against future losses resulting from the deterioration of the value of the Australian dollar? Discuss. (Word limit is 200words).

b. An international shipping company is expected to receive US$100,000 in 90 days from now by providing a shipping service to an exporter in the USA. The financial manager of the company decides to use currency options to mitigate the foreign exchange risk when it needs to convert the amount of US dollars into A$ dollars in 90 days. Relevant information is provided below.

• The spot rate is A$/US$0.78
• The company has forecast the future spot rate in 90 days. There is a very high probability that the US$ will depreciate to A$/US$0.83
• A put option on US$ that expires in 90 days has an exercise price of A$/US$0.81 with a premium of A$0.01.
• A call option on US$ that expires in 90 days has an exercise price of A$/US$0.82 with a premium of A$0.01.

How can the company best mitigate the foreign exchange rate risk? Why?