Assignment:
Individual Research Project
This project will further your understanding of how financial markets function. The assignment consists of two parts.
Part A of the assignment focuses on the financial instruments of two companies, AMP and Commonwealth Bank of Australia (CBA).
Part B of the assignment focuses on the fundamentals of capital budgeting. To successfully complete this project, you will use/apply not only theories studied in this FIN203 but also other appropriate resources.
Part A: AMP( Australian Mutual Provident Society) and CAB ( Commonwealth Bank) Share Price
1. What is the current price of ordinary / common shares in AMP and CBA? How has each evolved over the past 5-years? Graph each series and discuss their evolution.
2. How may the Royal Commission inquiring into the activities of financial institutions in Australia affect systematic (market) risk and unsystematic (firm-specific) risk? Explain how items of news reported from the Royal Commission have moved the share prices of both AMP and CBA.
Part B: Capital Budgeting Henry Property Ltd requests you to evaluate two new capital budgeting proposals and provide your recommendations. You are required to submit a report responding to the underlisted questions.
Instructions are as follows: Provide an evaluation of two proposed projects X and Y, both with identical initial outlay of $300,000. The required rate of return on both projects is set at 12%. The expected after-tax cash flows from each project are as presented in the table below.
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Project X
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Project Y
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Inflow year 1
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$80,000
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$160,000
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|
Inflow year 2
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$140,000
|
$160,000
|
|
Inflow year 3
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$130,000
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$160,000
|
|
Inflow year 4
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$160,000
|
$160,000
|
|
Inflow year 5
|
|
$160,000
|
|
Inflow year 6
|
|
$160,000
|
|
|
|
|
In evaluating these projects, please respond to the following questions:
1. Distinguish between required rate of return and internal rate of return (IRR).
2. Determine the net present value (NPV) of both projects. Should the projects be accepted? Explain in detail, including all calculations.
3. Determine the IRR for each of each project. Should the projects be accepted? Explain in detail, including all calculations.
4. Would your conclusions in parts (2) and (3) change if the required rate of return decreased to 10%? Explain in detail, including all calculations.
5. Under what circumstances will the NPV and IRR offer different recommendations, and which recommendation is preferred? Carefully explain.
Some suggested sources that you may find useful:
CHAPTER OF TEXT BOOK: Viney, C. and Phillips, P. (2015). Financial Institutions, Instruments and Markets. 8th edition.
Australian Securities Exchange
BHP Billiton Limited
Commonwealth Bank of Australia
Google! Finance
Reserve Bank of Australia
Yahoo! Finance
Presentation and Lodgement
You should follow the following typing conventions:
• Times New Roman font (at minimum, 12 pitch)
• 1.5 line spacing
• Top, bottom, left and right margins to be at least 2.5 cm from the edge of the page
• A4 paper; and
• Length - 2,500 words
Research and Referencing
You should begin by seeking references relating to the topic and subject content via Google or another search engine. It is suggested that you familiarize yourself with the Australian financial system by reading appropriate chapters in the text-book. You will need to discover at least 6 other references. This should include at least one other book and one journal article. Search the web-sites suggested in the text and the SO.