Prepare a report analysing and comparing the risk

Assignment Help Finance Basics
Reference no: EM132185370

Assessment - Business Case Study

The assignment comprises two parts.

Part 1 consists of 5 (five) questions on time value of money, bond valuation and expected return which needs to be completed on an excel spreadsheet.

Part 2 consists of a risk and return analysis which must be completed as a word document. Further details are provided on page 4 of this document.

Part 1 - TVM and Bond Valuation Questions

Data to complete these questions is attached. Please complete and submit these questions on the Case Study 1 spreadsheet template provided.

a) Company XYZ has debt maturing in three years (amount shown in Table 1 on page 3 of this document). How much should the company invest now in an account paying 5% APR, compounded monthly, to ensure it has sufficient funds to repay the debt when it matures?

b) Company XYZ has several alternative long-term cash investment options available to it, Investment A, B or C. The interest rates (APR) for these options are given in Table 1. What is the EAR of each investment option? If EAR was the only factor in the decision highlight which Investment option Company XYZ should choose.

c) Company XYZ is buying new equipment for the amount given in Table 1. To finance this, Company XYZ's bank has offered an amortised loan at 4.5% APR, monthly compounding, with 20 years of monthly payments. What monthly payment will Company XYZ have to make on this loan? Assume that the entire equipment cost is financed and that payments are made at the end of each period.

d) Company XYZ has an issue of $1,000 par value annual coupon bonds with 10 years remaining until maturity. The annual coupon rate is given in Table 1, along with the current price of the bonds. What is the yield to maturity on the bonds?

e) Company XYZ has an issue of $1,000 par value bonds with an 8% coupon rate and quarterly coupons. The bonds have 7 years remaining until maturity. The current required return on these bonds is given in Table 1. What is the current price of the bonds?

f) An investor is considering investing in Fly Safely Limited. This is a relatively new company and there is limited data on the actual returns. They have however provided the following return estimates:

Economic Conditions

Estimated return

Recession

-25%

Expansion

12%

Boom

40%

While the investor would be very satisfied with the return during "boom" times they would not be satisfied with the estimated return during a recession. To try and assist their decision making the investor speaks to a well-regarded economist who advises that the latest economic forecasts suggest that there is a 12% probability of a recession, a 70% probability of an expansion and an 18% probability of a boom.

Using the probabilistic approach calculate the expected return and the standard deviation of Fly Safely Limited.

Table 1: Company XYZ data


Company XYZ

Debt maturing in 3 years

$198.7 ($millions)

Investment A

7.00%, (APR, compounding  semi-annually)

Investment B

6.95%, (APR, compounding monthly)

Investment C

6.97%,(APR, compounding quarterly)

New equipment cost

$740 ($millions)

10 year bond annual coupon rate

7.13%

10 year bond current price

$1,240.00

7 year bond required rate of return

4.50%

Part 2 - Risk and Return Analysis

Part 2 is to be completed and submitted in a word document.

Assume Fly Safely Limited, a fictitious company, is part of the airline industry. It has a beta of 1.43. While it has only been operating for 10 years its financial results to date have been pleasing returning a profit most years. Over the past six years it has paid its shareholders the following returns:

Year

Return %

2012

5%

2013

1%

2014

7%

2015

2%

2016

13%

2017

2%

Recently Fly Safely Limited has compared itself to a well-established airline company Always Reliable Limited. Always Reliable Limited has a beta of .88 and has a long history of paying consistent returns to its shareholders. The average shareholder returns have been 8% with a standard deviation of 1.7%.

Fly Safely Limited is currently investigating options for raising finance to expand its operations. It is considering two options, either long term bank finance or issuing corporate bonds. Currently the 10-year Australian Treasury bond rate (proxy for risk free rate) is 2.1%. Fly Safely Limited has reviewed the Annual Report published by Always Reliable Limited and have noted that their average cost of debt is 7.5%.

Required: Prepare a report analysing and comparing the risk and return for Fly Safely Limited and Always Reliable Limited. Your report needs to consider the following.

a. The overall industry context in relation to the risk profile of the comany

b. Risk and return theory

c. The meaning and relevance of beta in risk analysis

d. The relationship between risk and return

e. The relationship between company risk and the cost of debt.

Attachment:- Assignment File.rar

Reference no: EM132185370

Questions Cloud

Define development of new knowledge for social work : Research problems can come from a variety of places. A topic can come up during a discussion with a colleague that motivates you to want to learn more about it.
Define how the people of los angeles stay connected : Problems of Place: The Southern Californian Sprawl Define urban sprawl and explain how the people of Los Angeles stay connected geographically to this area.
Why enforceable environmental regulations are critical : Assess why enforceable environmental regulations are critical to sustaining development. Use technology and information resources to research issues.
How might your own personality traits : How might your own personality traits affect your choice for a therapeutic approach?
Prepare a report analysing and comparing the risk : Assessment - Business Case Study. Prepare a report analysing and comparing the risk and return for Fly Safely Limited and Always Reliable Limited
Combine in counseling practice : Which therapeutic approaches might you combine in your counseling practice? Why?
Make good choices and bad choices for yourself : This stage of adulthood presents many opportunities to make good choices and bad choices for yourself.
Define social inequalities related to the social issue : Identify and explain in the map at least two examples of the social inequalities related to this social issue. Some examples of social inequalities include.
What is schizoaffective disorder : What is schizoaffective disorder? What are the signs and symptoms?

Reviews

len2185370

12/4/2018 3:54:36 AM

Assignment is clearly explained in the case study 1 document which i provided which consists of two parts. Which is 1000 words word document and a spreadsheet which i am sending below .u must use those spreadsheet only. I need best grades for this assessment .please give me best solution as u always give to me. Thanks.

len2185370

12/4/2018 3:54:28 AM

This assignment is worth 25% of the overall mark for this unit. It focuses on content from Topics 3, 4 and 5. It will be marked out of 25. The assignment consists of a word document that should not exceed 1,000 words (excluding the reference list), and a spreadsheet. You must submit both files.

len2185370

12/4/2018 3:54:21 AM

Overall, the assignment comprises two parts: Part 1 consists of 5 (five) questions on time value of money, bond valuation and expected return which needs to be completed on an excel spreadsheet. A template has been provided and can be found in the ‘Assessment Tasks and Submission’ / ‘Business case study 1’ section on the unit’s MySCU Learning site. Download the Assignment spreadsheet template and save it with your details in the file name. Use the following format: Last name_First name_Student ID_ACC00716_Case Study_1. For example, Liz Duncan, would save the file as: Duncan_Liz_12345678_ACC00716_Case Study_1. Make sure your submitted spreadsheet file name is in this format otherwise your spreadsheet may not be marked. Part 2 consists of a risk and return analysis which must be completed as a word document. Further details are provided on page 4 of this document.

Write a Review

Finance Basics Questions & Answers

  If discretionary expenses are 500 cash flow before

if discretionary expenses are 500 cash flow before discretionary expenses are 2000 and discretionary capital

  Contrast different types of probability sampling techniques

Compare a sample and a population. Under what circumstances can a sample be used to draw conclusions about a population?

  Probability by using the binomial distribution

Then, using the binomial tables, approximate this probability by using the binomial distribution. What justifies the approximation?

  Test the hypothesis that the average content of containers

test the hypothesis that the average content of containers of a particular lubricant is 10 liters if the contents of a

  Should he buy the equipment

The value you obtain will apply to each of the six years. 2. what is the expected net present value? 3. should he buy the equipment? why or why not?

  What are the projects net present values

1. What are the projects' net present values, assuming the cost of capital is 5%? 2. What are the projects' net present values, assuming the cost of capital is 10%? 3. What are the projects' net present values, assuming the cost of capital is 15%?

  Calculate the defensive interval ratio

Using the following financial statement data excerpts from KRJ Enterprises annual report, calculate the defensive interval ratio

  Calculate the range for the npv given each scenario

The company has estimated expected cash inflows for three scenarios: pessimistic, most likely, and optimistic. These expected cash inflows are listed in the following table. Calculate the range for the NPV given each scenario.

  Providing for a variable rate of interest

Bruce Wayne borrowed $14 300.00 for investment purposes on May 19, on a demand note providing for a variable rate of interest and payment of any accrued interest on December 31. He paid $1,300.00 on June 28, $1,450 on September 25,

  Developing financial policies for an organization

Discuss the impact of risk aversion and uncertainty when developing financial policies for an organization.

  Study on sales channel

STUDY ON SALES CHANNEL OF TOTAL S.A IN SUB-SAHARA AFRICA

  Is the variance different under these probabilities

Find a function ξ(Rt) such that under the density, ξ(Rt)f(Rt), Rt has a mean equal to the risk-free rate r = .05.(b) Find a ξ(Rt) such that Rt has mean zero.(c) Under which probability is it "easier" to calculate (d) Is the variance different under t..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd