Attempt each of the following sections in your assignment submission

Attempt each of the following sections in your assignment submission:

1. TVM and bond valuation questions (1 mark each):

a. Your case company has just made a large sale on an instalment contract. The contract requires

the customer to pay your case company the amount shown in Table 1 (page 4 of this

document) at the end of every month for 4 years. Your case company would like the cash now

for an investment and so has asked its bank to discount the instalment contract and pay it the

discounted value. The bank will discount the contract at 7% APR, compounded monthly. How

much cash will your case company receive from the bank?

b. Your company has annual operating revenue as shown in Table 1. Assume this revenue will

grow continuously at the annual rate shown in Table 1. What is your prediction for annual

operating revenue in 5 years?

c. Your 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 company is buying new property for the amount given in Table 1. To finance this, the

company’s bank has offered an amortised loan at 3.8% APR, quarterly compounding, with 10

years of quarterly payments. What quarterly 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.

Assessment 2: Business Case Studies I ACC00716 S1 2019

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e. Your company has an issue of $100 par value annual coupon bonds with 8 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 $1,000 par value bonds that offer a 7% coupon rate paid semiannually. The bonds have 6 years remaining until maturity. The market’s required return on

these bonds is given in Table 1. What is the amount of each coupon payment?

2. Risk and return estimates (4 marks):

a. Use CAPM to estimate the expected return for the shares of: i) your case company; and ii) a

hypothetical company with a negative beta of -0.20 as at 5 April, 2019. To do this, use the

yield to maturity on that date of a 10-year Australian Government bond as a proxy for the riskfree rate, assume the market risk premium is 6% and use the company’s most recent 5 year

beta.

b. Using the data from part 2a, estimate portfolio expected return and beta, assuming a portfolio

made up of your case company and the hypothetical company in equal weighting.

3. Risk and return analysis (15 marks):

a. Drawing on expectations from theory and incorporating the overall context of your chosen

company, discuss and interpret the risk and return measures from parts 2a and 2b. You may

include additional measures. If so, clearly source the data and ensure you clearly explain your

calculations.

Marking Criteria:

The answer to each TVM and bond valuation question in part 1 will be marked as correct (1 mark) or

incorrect (0 marks). Give your final answer to each of the 6 questions on a separate line in the first

section of your assignment submission. Give all answers to two decimal places. No workings are

required and no part marks will be provided but if you want feedback on any errors, provide brief

workings (e.g. screenshot of completed spreadsheet template section) for each question under the

list of 6 answers.

Parts 2 and 3 will be marked using the rubric that follows.