FNCE10002 Principles of Finance Unimelb Assignment Answer

This is the assignment sample of FNCE10002 Principles of Finance Unimelb.

This subject introduces students to the key concepts of finance. Topics include time-value-of-money, risk, and return, present value, capital budgeting, diversification asset allocation.

This is the first in a series of courses on finance offered by our faculty for those interested in studying more than one course within this area as well as for people from other disciplines who would like to take just one class about it all!

This course is part of the Business Core, which also includes two other mandatory courses.

Students who complete the Business Core will be able to articulate how they have gained cross-functional knowledge and skills as well as a thorough understanding of business principles.

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Assignment Solution Of FNCE10002 Principles of Finance Unimelb.

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Assignment Activity 1. Use financial mathematics to solve basic financial problems

The financial mathematics aspect of finance deals with the application of mathematical techniques (such as calculus, probability, and statistics) to problems in finance.

For example: Studying the movement of stock prices in order to identify trends is a statistical technique. Conversely, realizing that inheritance is less valuable due to inflation effects requires one to calculate with interest rates.

Often people on coursework choose to solve some problems on their own and others based on presented solutions.

In any case, it is recommended that you complete the assignment as soon as possible because the earlier you submit your work the more feedback you will receive from us.

Assignment Task 2. Apply alternative capital budgeting techniques for project evaluation purposes

Answer: Alternative capital budgeting techniques can be applied to a project evaluation purpose in order to generate a return on investment (ROI) and net present value (NPV) for the project.

This is done by evaluating how much incremental revenue will be generated each day, the time period it takes for payback to occur, the comparative risk of sale versus borrowing funds, and interest rates.

Projects with a longer payback period can still achieve an ROI as long as there is an increase in revenue that exceeds the increased amount being spent on loans.

However, given that NPV figures take into account both returns and costs these projects may have a higher or lower ROI depending on how you evaluate their cost/return ratio.

Assignment Activity 3. Explain the role of risk and return in the asset allocation decision and the pricing of risky assets

Answer: Risk and return represent the flip side of each other and should be considered together when making asset allocation decisions.

The principle of risk parity means that all stocks, bonds, gold, etc., have different returns but the same amount of risk. There is a strong argument that stocks are riskier because they have a wider range of potential price outcomes.

Rather than allocating funds in an equal proportion to both asset types, it’s better to allocate more money to assets with lower returns for safety as well as simplicity.

Markets are not perfect because some – like expensive ones – are too expensive. Others can be cheap. If markets were perfect, then everyone would get the same rate everywhere, but they don’t.

An individual investor will not always see a difference in their overall return between different types of investments.

In theory, markets should be efficient because if there is a change in expected future cash flows those changes will affect the price. However, recent research suggests that investors’ sentiment can cause irrational and inefficient market price fluctuations.

This means that some stocks may be overvalued while others are undervalued. This allows people to make abnormal returns on investments.

Assignment Task 4. Discuss the issues and choices involved in a firm’s capital structure decision

A firm’s capital structure decision reflects an optimization trade-off between all of the costs and benefits that come with a particular mix of debt (bonds) and equity.

On one hand, the opportunity cost associated with issuing debt can include forfeiting the tax deductions for interest payments.

On the other hand, depending on how risk is priced in financial markets, equity may suffer from the agency and asymmetric information problems and moral hazards.

Furthermore, the more risk that you take on, the less likely you will be to get more money. And if you want to sell your investment, it might be hard to do because people are not sure how much it is worth.

These days we are seeing a trend where pension funds use leverage, for example, this trend led to the financial collapse in 2008.

Assignment Task 5. Discuss the issues and choices involved in a firm’s distribution decision

Answer: The issue with a firm’s distribution decision is the balance of its representation in each major market.

In any market, there are typically many competing brands vying for consumers’ attention and spending.

When deciding on a location to locate production facilities and stores, firms have to determine how present they would like to be in the market and what their strategy for distribution is.

For example, Tesco has invested heavily in emerging markets such as India but not China because the brand had already saturated most of China’s large cities.

This becomes an important strategic decision about how “all-present” a company would like to be within each country it operates within, as well as what its goals are for future growth.

If future goals take precedence over immediate goals, then it might make sense to invest in less competitive markets with higher long-run growth potential.

Assignment Activity 6. Explain how options can be used to manage basic financial risks

There are several ways to use options to manage basic financial risks.

Options can be used for hedging, speculation, and arbitrage. The key is in understanding differentiating between intrinsic value and time value of an option, which is how the premium price of an option is determined.

Intrinsic value is when the strike price falls below the market price – that means the call owner can buy shares at a discount.

It is also when there’s intrinsic value with puts if they’re trading above the market prices.

Time value of an option refers to any potential profits that might occur within a set period of time – so you could sell calls or buy puts for time value, where there’s no payoff if the stock either falls or doesn’t rise by a certain price.

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