ACC00716: Your Case Company wants to Purchase an Asset: Finance Assignment, SCU, Australia

Your case company

At the beginning of Week 4, you will be assigned an ASX listed company as the context for this assignment. At that time, you can find your case company’s ASX code in ‘Grades and Feedback’ on the unit’s MySCU Learning site.

All input data you need to find for calculations in this assignment must be sourced from S&P Capital IQ. The link to the database can be found in the Web Links section of this unit’s MySCU site.

Attempt each of the following sections in your assignment submission:

1. TVM and bond valuation questions:

a. Your case company wants to purchase an asset. To finance this asset, they approached their bank. The bank has offered a fixed rate of 6% APR, compounded monthly, with your case company to make monthly payments of the amount shown in Table 1 (page 4 of this document) at the end of each month for 5 years. What amount is your case company borrowing?

b. Your case company has annual revenue as shown in Table 1. Assume this revenue will grow continuously at the annual rate shown in Table 1. Estimate annual revenue in 5 years.

c. Your case company needs to borrow funds and has several options available to it, Loans A, B, and C. The interest rates (APR) for these options are given in Table 1. What is the EAR of the loan option the company should choose?

d. Your case company is buying a new property for the amount given in Table 1. To finance this, the company’s bank has offered an amortized loan at 4.2% APR, semi-annual compounding, with 20 years of semi-annual payments. What semi-annual payment will the company have to make on this loan? Assume that the entire property cost is financed and that payments are made at the end of each period.

e. Your case company has an issue of $1,000 par value annual coupon bonds with 6 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?

f. Your company has an issue of $100 par value bonds that offer a 5% coupon rate paid semiannually. The bonds have 4 years remaining until maturity. The market’s required return on these bonds is given in Table 1. What is the market price of the bonds?

2. Risk and return estimates:

a. Use CAPM to estimate the expected return for the shares of i) your case company; and ii) a hypothetical company with a beta of 1.60. To do this, use the yield to maturity of a 10-year Australian Government bond on 1 April 2020 as a proxy for the risk-free rate, assume the market risk premium is 5.50% and use your case company’s most recent 5-year beta.

b. Using the data from part 2a, estimate portfolio expected return and beta, assuming a portfolio with 70% invested in your case company and the remainder invested in the hypothetical company.

3. Risk and return analysis:

a. Drawing on expectations from theory and incorporating the overall context of your chosen company, interpret and discuss the risk and return measures from parts 2a and 2b.