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Business Case Studies 1 General overview Overall, the assignment consists of: a. 6 (six) questions on time value of money and bond valuation (part 1); b. 3 (three) tasks as part of a risk and return analysis (parts 2 and 3). 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 (1 mark each): 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 new property for the amount given in Table 1. To finance this, the company’s bank has offered an amortised 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? 1 Assessment 2: Business Case Studies I ACC00716 S1 2020 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 (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 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 (15 marks): 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. 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). List your final answers, with each answer on a separate line. 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) as a separate numbered list below the initial list of answers. Parts 2 and 3 will be marked using the rubric that follows. 2 Assessment 2: Business Case Studies I ACC00716 S1 2020 Marking criteria for risk and return estimates MARKING CRITERIA Excellent Very Good Good Satisfactory Poor Accurate calculation of expected returns for companies and portfolio and accurate calculation of portfolio beta (Tasks 2a and 2b: 4 marks) Correct input data used. Technique and all final calculated figures are correct (4 marks) Mostly correct input data. Correct techniques and calculations. (3.5 marks) Correct input data. Mostly correct techniques and calculations. (2.5 marks). Mostly correct input data. Mostly correct techniques and calculations. (2 marks). Mostly incorrect data and techniques. (0 to 1.5 marks) Marking criteria for written risk and return analysis and its presentation MARKING CRITERIA Excellent Very Good Good Satisfactory Poor Insightful and relevant discussion of risk and return (Task 3a: 10 marks) Accurately and comprehensively interprets all calculated risk and return measures. Correctly compares appropriate measures and explains differences, drawing on relevant theory. Accurately weaves relevant context (e.g. company industry, market conditions) into explanations. Uses tables or graphs effectively to enhance the discussion. Uses and explains relevant technical terms. (9 to 10 marks) Accurately interprets nearly all calculated risk and return measures. Correctly compares appropriate measures and explains differences, drawing on relevant theory. Weaves relevant context into explanations. Uses tables or graphs effectively to enhance the discussion. Uses and explains most relevant technical terms. (8 marks) Accurately interprets most calculated risk and return measures. Correctly compares appropriate measures and explains some differences, drawing on relevant theory. Incorporates some relevant context. Uses tables or graphs but may not be effective or explained. Uses and explains some technical terms. (7 marks) Accurately interprets most calculated risk and return measures. Correctly compares some appropriate measures and explains some differences. Tables or graphs, if used, may not be effective or explained. Uses and explains some technical terms. Context and theory are limited or incorrect (5 to 6 marks) While an explanation of technical terms may have been attempted, there is little or no accurate interpretation or comparison of risk and return measures. Context, theory and explanations are limited, incorrect or absent. (0 to 4 marks) Presentation, sources and written expression (Task 3a: 5 marks) Overall presentation is well organised and looks professional. All data sources and other references are provided where needed in appropriate format and detail. Use of language makes meaning consistently clear. There are no or very few grammar, syntax and spelling errors. (5 marks) Overall presentation is mostly well-organised and professional. All necessary data sources and other references are provided, mostly in appropriate positions, format and detail. Use of language makes meaning consistently clear. There are very few grammar, syntax and spelling errors. (4 marks) Overall presentation is mostly well-organised and neat. All necessary data sources and other references are provided, mostly in appropriate positions, format and detail. Use of language mostly makes meaning clear. There may be several grammar, syntax and spelling errors. (3.5 marks) Overall presentation is fairly neat and organised. Not all necessary data sources are provided or most are not in appropriate positions, format and detail. Use of language mostly makes meaning clear. There are several grammar, syntax and spelling errors. (2.5 marks) Overall presentation is generally unprofessional. Not all necessary data sources are provided or most are not in appropriate positions, format and detail. Use of language often makes meaning unclear. There may be many grammar, syntax and spelling errors. (0 to 2 marks) 3 Assessment 2: Business Case Studies I ACC00716 S1 2020 Table 1: Case company data (hypothetical except where noted) Breville (BRG) Adairs (ADH) Harvey Norman (HVN) Nick Scali (NCK) Beacon Lighting (BLX) Super Retail (SUL) Payment per month $4,359.00 $2,050.00 $15,897.00 $536.00 $891.00 $11,500.00 Annual total revenue ($millions)1 $760.00 $344.40 $2,234.10 $268.00 $247.70 $2,711.40 Annual growth in total revenue2 10.70% 15.50% 8.10% 12.40% 9.90% 5.30% Loan A (APR, compounding frequency) 3.93%, monthly 3.02%, semiannually 2.48%, quarterly 4.26%, semiannually 5.45%, monthly 6.00%, semiannually Loan B (APR, compounding frequency) 4.00%, semiannually 2.85%, monthly 2.45%, daily3 4.25%, quarterly 5.50%, semiannually 5.95%, monthly Loan C (APR, compounding frequency) 3.91%, daily3 2.95%, quarterly 2.52%, semiannually 4.24%, daily3 5.40%, daily3 5.97%, quarterly Property cost $1,540,000 $2,910,000 $9,950,000 $760,000 $1,650,000 $840,000 6 year bond annual coupon rate 5.15% 4.35% 3.95% 4.90% 5.85% 4.55% 6 year bond current price $1,111.50 $956.60 $1050.50 $980.95 $922.00 $1,077.00 4 year bond required rate of return 3.40% 4.90% 4.80% 4.10% 5.80% 3.90% 1 Data from S&P Capital IQ for the company’s most recent financial year. 2 Most recent 5 year historical CAGR from S&P Capital IQ 3 Assume a 365-day year Business Case Study CASE COMPANY ADH S&P LINK http://www.capitaliq.com PASSWORD – Finance101 ALSO, Please take the beta value of 1st April General overview Overall, the assignment consists of: a. 6 (six) questions on time value of money and bond valuation (part 1); b. 3 (three) tasks as part of a risk and return analysis (parts 2 and 3). Your case company At the beginning of Week 4, you will be assigned an ASX listed

Business Case Studies 1 General overview Overall, the assignment consists of: a. 6 (six) questions on time value of money and bond valuation (part 1); b. 3 (three) tasks as part of a risk and return analysis (parts 2 and 3). 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 (1 mark each): 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 new property for the amount given in Table 1. To finance this, the company’s bank has offered an amortised 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? 1 Assessment 2: Business Case Studies I ACC00716 S1 2020 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 (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 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 (15 marks): 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. 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). List your final answers, with each answer on a separate line. 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) as a separate numbered list below the initial list of answers. Parts 2 and 3 will be marked using the rubric that follows. 2 Assessment 2: Business Case Studies I ACC00716 S1 2020 Marking criteria for risk and return estimates MARKING CRITERIA Excellent Very Good Good Satisfactory Poor Accurate calculation of expected returns for companies and portfolio and accurate calculation of portfolio beta (Tasks 2a and 2b: 4 marks) Correct input data used. Technique and all final calculated figures are correct (4 marks) Mostly correct input data. Correct techniques and calculations. (3.5 marks) Correct input data. Mostly correct techniques and calculations. (2.5 marks). Mostly correct input data. Mostly correct techniques and calculations. (2 marks). Mostly incorrect data and techniques. (0 to 1.5 marks) Marking criteria for written risk and return analysis and its presentation MARKING CRITERIA Excellent Very Good Good Satisfactory Poor Insightful and relevant discussion of risk and return (Task 3a: 10 marks) Accurately and comprehensively interprets all calculated risk and return measures. Correctly compares appropriate measures and explains differences, drawing on relevant theory. Accurately weaves relevant context (e.g. company industry, market conditions) into explanations. Uses tables or graphs effectively to enhance the discussion. Uses and explains relevant technical terms. (9 to 10 marks) Accurately interprets nearly all calculated risk and return measures. Correctly compares appropriate measures and explains differences, drawing on relevant theory. Weaves relevant context into explanations. Uses tables or graphs effectively to enhance the discussion. Uses and explains most relevant technical terms. (8 marks) Accurately interprets most calculated risk and return measures. Correctly compares appropriate measures and explains some differences, drawing on relevant theory. Incorporates some relevant context. Uses tables or graphs but may not be effective or explained. Uses and explains some technical terms. (7 marks) Accurately interprets most calculated risk and return measures. Correctly compares some appropriate measures and explains some differences. Tables or graphs, if used, may not be effective or explained. Uses and explains some technical terms. Context and theory are limited or incorrect (5 to 6 marks) While an explanation of technical terms may have been attempted, there is little or no accurate interpretation or comparison of risk and return measures. Context, theory and explanations are limited, incorrect or absent. (0 to 4 marks) Presentation, sources and written expression (Task 3a: 5 marks) Overall presentation is well organised and looks professional. All data sources and other references are provided where needed in appropriate format and detail. Use of language makes meaning consistently clear. There are no or very few grammar, syntax and spelling errors. (5 marks) Overall presentation is mostly well-organised and professional. All necessary data sources and other references are provided, mostly in appropriate positions, format and detail. Use of language makes meaning consistently clear. There are very few grammar, syntax and spelling errors. (4 marks) Overall presentation is mostly well-organised and neat. All necessary data sources and other references are provided, mostly in appropriate positions, format and detail. Use of language mostly makes meaning clear. There may be several grammar, syntax and spelling errors. (3.5 marks) Overall presentation is fairly neat and organised. Not all necessary data sources are provided or most are not in appropriate positions, format and detail. Use of language mostly makes meaning clear. There are several grammar, syntax and spelling errors. (2.5 marks) Overall presentation is generally unprofessional. Not all necessary data sources are provided or most are not in appropriate positions, format and detail. Use of language often makes meaning unclear. There may be many grammar, syntax and spelling errors. (0 to 2 marks) 3 Assessment 2: Business Case Studies I ACC00716 S1 2020 Table 1: Case company data (hypothetical except where noted) Breville (BRG) Adairs (ADH) Harvey Norman (HVN) Nick Scali (NCK) Beacon Lighting (BLX) Super Retail (SUL) Payment per month $4,359.00 $2,050.00 $15,897.00 $536.00 $891.00 $11,500.00 Annual total revenue ($millions)1 $760.00 $344.40 $2,234.10 $268.00 $247.70 $2,711.40 Annual growth in total revenue2 10.70% 15.50% 8.10% 12.40% 9.90% 5.30% Loan A (APR, compounding frequency) 3.93%, monthly 3.02%, semiannually 2.48%, quarterly 4.26%, semiannually 5.45%, monthly 6.00%, semiannually Loan B (APR, compounding frequency) 4.00%, semiannually 2.85%, monthly 2.45%, daily3 4.25%, quarterly 5.50%, semiannually 5.95%, monthly Loan C (APR, compounding frequency) 3.91%, daily3 2.95%, quarterly 2.52%, semiannually 4.24%, daily3 5.40%, daily3 5.97%, quarterly Property cost $1,540,000 $2,910,000 $9,950,000 $760,000 $1,650,000 $840,000 6 year bond annual coupon rate 5.15% 4.35% 3.95% 4.90% 5.85% 4.55% 6 year bond current price $1,111.50 $956.60 $1050.50 $980.95 $922.00 $1,077.00 4 year bond required rate of return 3.40% 4.90% 4.80% 4.10% 5.80% 3.90% 1 Data from S&P Capital IQ for the company’s most recent financial year. 2 Most recent 5 year historical CAGR from S&P Capital IQ 3 Assume a 365-day year Business Case Study CASE COMPANY ADH S&P LINK http://www.capitaliq.com PASSWORD – Finance101 ALSO, Please take the beta value of 1st April General overview Overall, the assignment consists of: a. 6 (six) questions on time value of money and bond valuation (part 1); b. 3 (three) tasks as part of a risk and return analysis (parts 2 and 3). Your case company At the beginning of Week 4, you will be assigned an ASX listed

(a) Interest rate = 6% / 12 months = 0.50% per month

Payment period = 5years*12 = 60 months

Monthly payment = $2,050.00

PV amount of loans borrowed = EMI*((1+ROI)n-1)/ r*(1+r)n

= $2,050*(1+.50)60 /0.50*(1+0.50)60

= $106,037.40

Payment per period (CF)

$2,050

Number of years (n)

5

Annual interest rate (r)

6.0%

No. of compounding periods per year (m)

12

Number of periods (mxn)

60

Periodic rate (r/m)

0.5%

Present value (PV)

-$1,06,037.40

Here we have monthly payment of loan 2,050, which will happen for 5 years.

(b) Annual revenue = $344.40

Annual growth rate = 15.50%

FV of revenue = PV (1+r)n

Where, PV = Present value of annual revenue

r = Annual growth rate

n = Number of years

Estimated annual revenue in 5 years = $344.40*(1.155)5 = $707.90

The present value here is the revenue current that ADH has. It will be having revenue of $ 707.9 after 5 years, when compounded at 15.5 % rate.

Continuous compounding of a lump sum

Present value (PV)

$344

Number of years (n)

5.00

Annual interest rate (r)

15.5%

Future value (FV)

$707.90

(c) EAR = (1+i/n)n-1

Where i/n = interest rate/ compounding period

n= no of period

EAR of Loan A (compounded semi-annually) = (1+(.0302/2))2-1 = 3.043%

EAR of Loan B (compounded monthly) = (1+(.0285/12)12-1 = 2.888%

EAR of Loan C (compounded quarterly) = (1+(.0295/4)4-1 = 2.983%

Company should choose Loan B having the lowest EAR among all three loans.

Loan A

Loan B

Loan C

Stated Annual rate

3.02%

2.85%

2.95%

No. Of compunding

2

12

4

EAR

3.04%

2.89%

2.98%

Hence, the firm should choose loan B since the effective annual rate is thee lowest among all the options. Based on the compounding we have to calculate the EAR. We have been provided the nominal rates.

(d) Property amount = $2,910,000

Interest rate of Loan = 4.2% APR, compounded semi-annually

Loan period = 20 years

Instalment payment period = Semi-annually

EMI = (P*r*(1+r)n)/((1+r)n-1)

Where P = Present value of loan

r = Rate of interest

n = No of period

EMI = (2,910,000*0.0210*(1+.0210)40/((1+.0210)40-1) = $108,251.66 (payable semi-annually)

APR ®

4.2%

Number of Periods (m)

40

Amount financed(PV)

$ 2,910,000.00

Installment Amount(PMT)

$ 108,251.66

If the loan is financed using 4.2% annual interest rate and semiannual copon payments are made for 20 years, then to finance the property of $2,910,000 we will have to make semiannual payments of $ 108,251.66

(e) Par Value of Bonds = $1,000

Maturity period = 6 years

Coupon rate = 4.35%

PV of Bond = $956.60

Yield to Maturity (YTM) = ((FV/PV)1/time period)-1

= ((1000/956.6)1/6)-1

= 5.21%

Par Value (F)

$ 100.00

Number of years to maturity (n)

6.00

Current Bond Price (P)

$ 95.60

Coupon rate ®

4.35%

Coupon payments

$ 4.35

Settlement date

15-04-20

Maturity date

15-04-26

Yield to Maturity (YTM)

5.21%

Since, the bond is trading at a discount, the yield to maturity for this bond will be higher than the coupon rate. For the price of the bond and face value has been shown as percent of 100, so calculation can be done using the excel formula. Settlement date is of today and maturity date is when the bond matures.

(f) Par Value of Bonds = $100

Coupon rate = 5% (paid semi-annually)

Maturity period = 4 years

Required rate of return =...

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