Reference no: EM132551295

HC2091 Business Finance Tutorial Questions Assignment - Holmes Institute, Australia

Purpose - This assignment is designed to assess your level of knowledge of the key topics covered in the unit.

Unit Learning Outcomes Assessed -

1. Critically analyse finance alternatives to manage short- and long-term debts.

2. Critically understand and practice valuation of financial instruments, including ordinary shares, preferred shares and bonds.

3. Describe the effects of interest rates on business finance.

4. Evaluate the firm capital structure policy and payout policy.

5. Evaluate alternative funding policies and instruments available to businesses including the banking sector and nonbanking sector.

The questions to be answered are:

Question 1 -

a. Middleton expects to buy a 9.5% coupon, 15 years bond today, when it is first issued by Alex PLC. If interest rates suddenly rise to 12.5%, what happens to the value of Middleton's bond? Why? (Word limit 20 - 30 words)

b. A corporate bond has a face value of $1 000, a coupon rate of interest of 10.5% per annum, payable semi-annually, and 20 years remaining to maturity. The market interest rate for bonds of similar risk and maturity is currently 8.5% per annum.

Required:

i. What is the coupon payment of the bond?

ii. What is the present value of the bond?

iii. If the coupon payment is payable annual (based on the same information), what is the value of the bond?

Question 2 -

a. Briefly discuss the relationship between the following: (Word limit 50-70 words)

i. Share price and investors required rate of return

ii. Share price and divided growth rate

b. Otama LTD has an issue of preference shares outstanding that pays a $2.85 divided every year. If this issue currently sells for $77.32 per share, what is the required return?

c. Price Tigers LTD expects to pay a $3.25 per share dividend next year. The company pledges to increase its dividend by 5.1% per year, indefinitely. If you require a return of 11% on your investment, how much will you pay for the company's share?

Question 3 -

a. Calculate both the arithmetic and the geometric average return of the following investment;

b. Teena is considering investing in Stock A and stock B. She plans to invest $ 25,000 in the low risk stock and $50,000 in the high-risk stock. You have been given the following information about these two stocks in the table below:

Based on the given information above, you are required to:

i. Calculate the portfolio weights.

ii. Calculate the portfolio return.

iii. Calculate the portfolio risk.

iv. Compare portfolio risk with the individual stock risks and identify the benefit of the diversification of the portfolio.

Question 4 -

XYZ Corporation has 45,000 ordinary shares outstanding which are currently selling for 110 per share. The number of preference share outstanding is 30,000 and the book value of a share is $100 while the market value is $105. Company has issued 2500 bonds with face value of 1000. The Market value of bond is higher than the face value and it is $1,100.

The required rate of return of ordinary shareholders, preference shareholders and bond holders are 10%, 12% and 15% respectively. The Company is subject to 30% corporate tax.

Based on the information given;

i. Calculate the market value of the firm.

ii. Calculate the capital structure weights.

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

Question 5 -

a. Venture Capital is an alternative for financing new and often high-risk ventures. Briefly discuss minimum of 3 key considerations of choosing a venture capitalist. (Word limit 70 - 100 words).

b. Explain the cost of having too much cash balance or too little cash balance in a business. (Word limit 30-50 words).

c. Matilda Company financial statement information has given in the following table.

Required - Based on the financial statement information above, calculate the operating and cash cycle.

Note - Please note that you cannot provide excel work files. You should show all steps in manual calculation.