Reference no: EM132207767
Corporate Finance Assignment -
Q1. Since 1 Sept 2010, Cathy's investment policy has been to lodge fixed (term) deposits at her local bank. The bank pays interest on the maturity date of a deposit and the interest rate is expressed as an annual simple interest rate. When a deposit matures, Cathy's policy is to relodge the whole sum (principal and interest) immediately for a further period. She chooses the term of each deposit according to her assessment of the interest rates available at that time. Cathy's decisions to date are as follows:
Date - Decision
1 Sept 2010 - 6-month deposit at 9% per annum
1 March 2011 - 8-month deposit at 9.15% per annum
1 November 2011 - 10-month deposit at 8.75% per annum
Calculate, as at 1 Sept 2014, the effective annual interest rate Cathy has earned since she began this policy. (Assume that all months are of equal length.) Briefly explain each step.
Q2. The Three-Dot Mining Company has constructed a town at Big Bore. The town will be abandoned when mining operations cease after an estimated 5-year period. The following estimates of investment costs, sales and operating expenses relate to a project to supply Big Bore with meat and agricultural produce over the 5-year period by developing nearby land.
1) Investment in land is $8 million, farm buildings $2 000 000 and farm equipment $3 000 000. The land is expected to have a realisable value of $4 000 000 in 5 years' time. The residual value of the buildings after 5 years is expected to be $400 000. The farm equipment has an estimated life of 5 years and a zero residual value.
2) Investment of $2 300 000 in current assets will be recovered at the termination of the venture.
3) Annual cash sales are estimated to be $21million.
4) Annual cash operating costs are estimated to be $18 million.
Is the project profitable, given that the required rate of return is 10 per cent per annum?
Q3. Using the following data, calculate the:
1) Accounting rate of return
2) Payback period
3) Internal rate of return
4) Net present value
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Project cost:
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$150 000
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Estimated life:
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4 years
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Estimated residual value:
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$30 000
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Annual net cash flow:
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$40 000
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Required rate of return:
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9%
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How would your answers differ if the net cash flows were as follows?
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Year 1
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$50,000
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Year 2
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$30,000
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Year 3
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$60,000
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Year 4
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$80,000
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Q4. The standard deviations of returns on assets A and B are 12 per cent and 6 per cent, respectively. A portfolio is constructed consisting of 30 per cent in Asset A and 70 per cent in Asset B. Calculate the portfolio standard deviation if the correlation of returns between the two assets is:
1. 1
2. 0.5
3. 0
4. -1
Comment on your answers.