Subject Overview
This subject integrates the study of the accounting and finance functions of the firm in the context of a global financial institutional environment. The subject examines the objectives of corporate finance and develops specific student competencies pertinent to corporate treasury management and institutional finance.
Learning outcomes
On successful completion of this subject, you should be able to evaluate and explain the congruence of accounting, finance and treasury functions; be able to explain and critique the objectives of financial management in contemporary organisations;
be able to critically evaluate mainstream financial theory and concepts;
be able to discuss and evaluate ethical considerations in financial dealings;
be able to demonstrate appropriate communication skills in the context of corporate finance; be able to demonstrate specific technical competencies and skills in utilising quantitative techniques in financial analysis.
Part -1 :Task
You recently joined a small investment company in Sydney as an intern. As part of your first assignment you've been given an opportunity to invest $10,000 of a not so sophisticated investor to the following alternatives:
Capital Fashion Ltd bonds (apparel retailers), with a face value of $1,000 and a coupon interest rate of 8.75% are selling for $1,314 and mature in 12 years.
Agri Credit Ltd (financial services provider) preference shares are paying a dividend of $2.50 and selling for $25.50
Southern Cross Electrical Ltd (electrical appliances manufacturer) ordinary shares are selling for $36.75. The shares recently paid a $1.32 dividend and the company's earnings per share have increased from $1.49 to $3.06 in the past five years. The firm expects to grow at the same rate for the foreseeable future.
Your client's required rates of return for these investments are 6% for the bond, 7% for preference shares and 15% for the ordinary shares. Using the above information, answer the following questions:
1. Calculate the value of each investment based on the required rate of return.
2. Which investment would you recommend and why? Research on the current trends and future prospects on each of the industries and include a summary.
3. Assume Southern Cross Electricals' Chief Finance Officer expects an earning downturn and a resulting decrease in growth of 3%. How does this affect your recommendation?
4. What required rates of return would make your recommendation indifferent to all three options?
Part -2:
Assessment item Case Study - Valuation
Task
You've been offered a full time position as an assistant financial analyst at Bathurst Metal Works. Your latest assignment involves the analysis of several risky projects. Because this is your first assignment dealing with risk analysis, you have been asked not only to provide a recommendation on the project in question but also respond to a number of questions aimed at judging your understanding of risk analysis and capital budgeting. The memorandum you received outlining your assignment follows:
To: Assistant Financial Analyst From: Chief Financial Officer
Re: Capital budgeting and risk analysis
You are required to conduct a risk analysis of the following new project, as outlined below. This new project involves purchase of a new laser cutting tool that can be used in Bathurst Metal Works' manufacturing division. The products manufactured using the new technology are expected to sell for an average price of $300 per unit, and the company analyst performing the analysis expects Bathurst Metal Works can sell 20,000 units per year at this price for a period of five years. To get started this business will require the purchase of a $2 million piece of equipment that has a residual or salvage value in five years of $200,000. In addition, Bathurst Metal Works expects to have to invest an additional $300,000 in working capital to support the new business. Other pertinent information concerning the business venture is as follows:
In addition, estimates for unit sales, selling price, variable cost per unit and cash fixed cost for the base- case, worst-case and best-case scenario are as follows:
i. Estimate the cash flows for the investment under the listed base-case value assumptions. Calculate the project's NPV for these cash flows.
ii. Evaluate the NPV of the investment under the worst-case assumptions.
iii. Evaluate the NPV of the investment under the best-case assumptions.
iv. Explain how sensitivity and scenario analysis are useful for evaluating project risk?
v. How can break-even analysis be helpful in evaluating project risk?