Assessment Task – Tutorial Questions
Unit Code: HI5002
Unit Name: Finance for Business
Assignment: Tutorial Questions 2
Due: 11:30pm 26th June 2020
Total Assignment Marks: 50 marks
Purpose: This assignment is designed to assess your level of knowledge of the key topics covered in
Unit Learning Outcomes Assessed:
1. Identify business financial decisions, and critically analyze their impacts on value, and the nature
oader financial and regulatory environment in which these decisions are made;
2. Critically evaluate the role of finance in business and appraise the way corporate managers use
financial theory to solve practical problems;
3. Apply underlying finance theories, concepts, assumptions, limitations and arguments to make
corporate finance decisions within real-world constraints.
Description: Each week students were provided with three tutorial questions of varying degrees of
difficulty. These tutorial questions are available in the Tutorial Folder for each week on Blackboard.
The Interactive Tutorials are designed to assist students with the process, skills and knowledge to
answer the provided tutorial questions. Your task is to answer a selection of tutorial questions for
weeks 6 to 10 inclusive and submit these answers in a single document.
The questions to be answered are:
Cotton On Ltd. cu
ently has the following capital structure:
Debt: $3,500,000 par value of outstanding bond that pays annually 10% coupon rate with an annual
efore-tax yield to maturity of 12%. The bond issue has face value of $1,000 and will mature in 20
Ordinary shares: $5,500,000 book value of outstanding ordinary shares. Nominal value of each share
is $100. The firm plan just paid a $8.50 dividend per share. The firm is maintaining 4% annual growth
ate in dividends, which is expected to continue indefinitely.
ed shares: 45,000 outstanding prefe
ed shares with face value of $100, paying fixed dividend
ate of 12%.
The firm's marginal tax rate is 30%.
a) Calculate the cu
ent price of the corporate bond? (4 marks)
) Calculate the cu
ent price of the ordinary share if the average return of the shares in the same
industry is 9%? (3 marks)
c) Calculate the cu
ent price of the prefe
ed share if the average return of the shares in the same
industry is 10% (3 marks)
Giant Machinery Ltd is considering to invest in one of the two following Projects to buy a new
equipment. Each project will last 5 years and have no salvage value at the end. The company’s required
ate of return for all investment projects is 9%. The cash flows of the projects are provided below.
Project 1 Project 2
Cost $175,000 $185,000
Future Cash Flows
a) Identify which project should the company accept based on NPV method. (4 marks) (Note: Please
ound up the result of each calculation of PV to 2 decimal places only for simplification)
) Identify which project should the company accept based on simple pay back method if the
payback criteria is maximum 2 years. (4 marks)
c) Which project Giant Machinery should choose if two methods are in conflict. (2 marks)
Bermuda Cruises issues only common stocks and coupon bonds. The firm has a debt-equity ratio of
0.45. The cost of equity is 17.6 percent.
What is the pre-tax cost of the company debt if weighted average costs of the company is 13.5% and
the firm's tax rate is 35 percent? (10 marks)
Western Electric has 35,000 ordinary shares outstanding at a price per share of $47 and a rate of
eturn of 13.5%. The firm has 5,000 preference shares paying 7% dividend outstanding at a price of
$58 a share. The prefe
ed share has a par value of $100. The outstanding bond has a total face value
of $450,000 and cu
ently sells for 102% of face. The pre-tax yield-to-maturity on the bond is 8.49%.
a) Calculate the total market value of the firm. (3 marks)
) Calculate the capital structure of the firm. (3 marks) (Please round up the result at 3 decimal
c) Calculate the firm's weighted average cost of capital if the tax rate is 30%, assuming a classical tax
system. (4 marks)
The Giant Machinery has the cu
ent capital structure of 65% equity and 35% debt. Its net income in
ent year is $250,000. The company is planning to launch a project that will requires an
investment of $175,000 next year. Cu
ently the share of Giant machinery is $25/share.
a) How much dividend Giant Machinery can pay its shareholders this year and what is dividend
payout ratio of the company? Assume the Residual Dividend Payout Policy applies. (4 marks)
) If the company is paying a dividend of $2.50/share and tomo
ow the stock will go ex-dividend.
Calculate the ex-dividend price tomo
ow morning. Assuming the tax on dividend is 15%. (2 marks)
c) Little Equipment for Hire is a subsidiary in the Giant Machinery and cu
ently under the liquidation
plan due to the severe contraction of operation due to corona virus. The company plans to pay
total dividend of $2.5 million now and $ 7.5 million one year from now as a liquidating dividend.
The required rate of return for shareholders is 12%. Calculate the cu
ent value of the firm’s equity
in total and per share if the firm has 1.5 million shares outstanding. (4 marks)
The assignment has to be submitted via Blackboard. Each student will be permitted one
submission to Blackboard only. Each student needs to ensure that the document submitted
is the co
Academic honesty is highly valued at Holmes Institute. Students must always submit work
that represents their original words or ideas. If any words or ideas used in a class posting or
assignment submission do not represent the student’s original words or ideas, the student
must cite all relevant sources and make clear the extent to which such sources were used.
Written assignments that include material similar to course reading materials or other
sources should include a citation including source, author, and page number.
In addition, written assignments that are similar or identical to those of another student in
the class is also a violation of the Holmes Institute’s Academic Conduct and Integrity Policy.
The consequence for a violation of this policy can incur a range of penalties varying from a
50% penalty through to suspension of enrolment. The penalty would be dependent on the
extent of academic misconduct and the student’s history of academic misconduct issues.
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For further information and additional learning resources, students should refer to their Discussion
Board for the unit.