HM5002 Finance for Managers Assignment Sample
Assignment details
Question 1
Amiba PLC is expecting to go for an initial public offering (IPO) and believes this IPO will be record-breaking news in the market. The company has worked diligently to establish a strong corporate image and build investor confidence in anticipation of this significant event.
Apart from the IPO, Amiba PLC has issued 20-year maturing corporate bonds worth $20 million. This strategic move is aimed at raising long-term capital to support the company’s growth initiatives and strengthen its financial foundation.
Recently, Amiba PLC recruited a new finance manager who has brought fresh insights and expertise to the team. After conducting a thorough cost-benefit analysis, the finance manager decided to purchase two new machines from Japan. These advanced machines are expected to enhance the company’s production capabilities, improve efficiency, and reduce operational costs.
However, the finance manager has also identified several areas needing improvement. Specifically, the company is weak in managing its cash and bank balances, which could impact liquidity and financial stability. Additionally, there are issues in managing creditors, which could affect the company’s supplier relationships. Addressing these weaknesses will be crucial for maintaining smooth operations and ensuring financial health.
With these strategic steps and improvements, Amiba PLC is well-positioned for a successful IPO and continued growth in the market. The company’s proactive approach to addressing internal challenges and leveraging new opportunities demonstrates its commitment to achieving long-term success.
Required:
Note: Decisions without supporting evidence from the case study and answers that do not link to the content discussed in the unit will not be graded.
I. Based on your learning in HM5002, identify and briefly define key financial decisions found in the given case study. Each decision should be supported with evidence from the case study.
II. Identify any market activity that would take place in the primary market and justify your answer.
III. Identify market activities that can be classified as a capital market transaction and justify your answer.
Question 2
Manpreet is a target-oriented young investor who has real estate investments across Australia. Having houses, apartments, and townhouses in her portfolio, she is now dreaming of adding commercial property investments in regional Victoria, as commercial property investments in major cities in Victoria are expensive.
Apart from her wealth in investment properties, she has $525,000 in savings. She is not in a hurry and plans to purchase a commercial property investment in 5 years. Her current savings earn a 7% return per annum.
The value of the commercial investment is estimated to be 1.25 million in 5 years from now, and she plans to use her current savings of $525,000 and the accumulated interest to invest in this new investment. To fill the gap, she plans to invest an equal amount at the end of each month for a 5-year period, where this investment guarantees an 8.5% return per annum, compounded on a monthly basis, in a high-risk investment avenue.
Required:
I. Calculate the monthly investment needed to reach her target after taking her current savings and the return on that savings into account.
II. If she changes her mind and decides to invest on a weekly basis and at the beginning of every week, how much does she need to contribute?
III. Discuss your understanding of the impact of these alternative investment compounding periods on Manpreet’s investments.
Question 3
• Stock A operates within the information technology sector, yielding a return of 12% with a corresponding standard deviation of return at 17%.
• Stocks B and C pertain to the energy sector, with returns of 15% and 12.5% respectively. The associated standard deviations of return for Stocks B and C are 18% and 20% respectively.
• Stock D represents the healthcare sector, exhibiting a return of 16% alongside a standard deviation of return at 20%.
Subsequently, the correlation between these stocks is presented in the following table.
.png)
Required:
I. Your partner insists for the inclusion of stocks B and C in your portfolio. Evaluate whether you agree with this recommendation, providing a rationale for your decision.
II. Specify the two stocks you would select for inclusion in your portfolio if you opt not to adhere to your partner's suggestion.
III. In the event of allocating $22,000 into the stock demonstrating the highest return among your chosen two stocks, and distributing the remaining $18,000 into the second stock, compute the portfolio's risk and return.
Question 4
Assume you have received Horizon Adventures Ltd 's capital structure information and are asked to demonstrate your understanding of the capital structure and cost of capital estimation.
Based on the following information, answer the questions given below:
Company Name: Horizon Adventures Ltd
Non-callable bonds
• $2,000,000 par value of outstanding non-callable bonds trading at $1100.
• The bonds have a face value of $1,000 each and will mature in 10 years.
• The company has agreed to pay semiannual coupon payments.
• The before-tax yield to maturity of the bonds is 7.5%.
Ordinary shares and Preference shares
• There are 40,000 outstanding ordinary shares.
• The firm plans to pay a $3 dividend per share in the next financial year.
• The firm is maintaining a 4% annual growth rate in dividends indefinitely and ordinary shareholders required rate of return is 10%
• There are 70,000 outstanding preference shares with a face value of $50 and a fixed dividend rate of 5%. The market price is $45.
• The company tax rate is 30%.
Required:
i) Compute the after-tax weighted average cost of capital (WACC) under the traditional tax system for the firm.
ii) Some companies may rely on a mix of debt and equity, while others rely solely on equity in their capital structure. Discuss the pros and cons associated with the current capital structure of Horizon Adventures Ltd.
Question 5
i. Companies' capital budgeting decisions are linked with the company's strategic directions and targets for investment in projects that lead to value creation. Based on the content you learned in HM5002, discuss the classification of capital budgeting investments with relevant examples.
ii. Summit Builders Inc. is considering two options to buy a new equipment. As per the initial review both the equipments could generate same revenue for the company each year. The table below shows the initial and annual costs for each option:
.png)
Required:
Which option the company should choose based on Equivalent annual cost method, given the required rate of return of similar project is 10%?
Solution
Question 1
1)
1. Decision to Launch an IPO: The main financial decision in the case study is the plan of Amiba PLC’s plan in initiating the IPO. It is an important move that helps in raising funds by selling the shares of the company to the public. As per the case study, Amiba PLC is looking forward to selling company’s shares and believe IPO will be having record-breaking news in the market. The main aim is to increase the visibility of the company visibility, credibility as well as major funds that can be used for growth as well as expansion (Hoang et al., 2019, p. 14(2))
2. Issuance of Long-Term Corporate Bonds: Another major financial decision is the issuance of 20 year maturing corporate bonds which is valued at $20 million. This plan is vital for raising long-term capital, providing a strong financial foundation for future projects. The case study states that Amiba Plc issued 20 year old maturing corporate bonds that amounts to $20 million that underlines strategic intent for securing long term funding as well as supporting the growth intitiative fo the company for university assignment help.
3. Investment in New Machinery: The finance manager's decision to acquire two new machines from Japan represents a significant capital investment aimed at enhancing production efficiency and reducing operational costs. As per the case study, by conducting a strong cost benefit analysis, the finance manager agreed to purchase two machines from Japan. This investment strives to enhance the production capabilities of the company as well as profitability
4. Cash and Bank Balance Management: By providing a solution to the cash and bank balance management is another vital financial decision. Cash flow management is the life blood of the business and helps to combat the short term obligations (Hoang et al., 2019, p. 14(4)). As per the case study "the company has weakness in the management of the cash and bank balances, that can hamper liquidity and financial stability."
5. Creditors Management: this is vital when it comes to maintenance of strong link with the suppliers and helps decision making. This helps in preventing supply chain disruptions and attain favorable credit terms.
These decisions reflect Amiba PLC’s comprehensive approach to financial management, balancing immediate operational improvements with long-term strategic planning
2) The primary market activity denoted in the case study is the Amiba PLC’s IPO. This process comprises of issuance of new shares of the company to the public for the initial time hence happening in the primary market. The intention is denoted by the statement “ Amiba PLC is expecting to go for IPO” that denotes the plan of the company in raising new equity capital directly from the investors. The injection of funds from the primary market plays a dominating role in supporting the growth as well as expansion of the company hence providing an apt example of market transaction
3 )Several activities in the case study qualify as capital market transactions:
1. Issuance of Corporate Bonds: The issuance of 20-year maturing corporate bonds worth $20 million is a classic example of a capital market transaction. The case study states, "Amiba PLC has issued 20-year maturing corporate bonds worth $20 million." These bonds are traded in the capital markets, allowing the company to raise long-term funds from investors who purchase these debt securities.
2. IPO Process: The IPO itself is also a capital market transaction. By issuing shares to the public, Amiba PLC is engaging in a process that involves capital markets, where securities are bought and sold, and long-term funding is secured. The IPO is a mechanism through which the company taps into the equity segment of the capital markets (Ang 2018, p. 6 (2)).
Q2
1) Manpreet's current savings of $525,000 earn an annual return of 7%. Over 5 years, the future value (FV) of these savings can be calculated using the formula for compound interest:
FV=P×(1+r/n)nt
where:
• P=525,000
• r=0.07
• n=1 (compounded annually)
• t=5
FV=525,000×(1+0.07/1)1×5
=525,000×(1.07)5
≈737,152.39
Step 2: Determine the amount needed from monthly investments
The total future value needed is $1,250,000. The shortfall that must be covered by monthly investments is:
1,250,000−737,152.39≈512,847.61
Step 3: Calculate the monthly investment needed
To find the monthly investment amount, we use the future value of an annuity formula:
FV=P×(r/n(1+r/n)nt−1)
• FV=512,847.61
• r=0.085
• n=12 (compounded monthly)
• t=5
Rearranging to solve for PPP (monthly investment):
512,847.61=P× (1+0.085/12)12×5−1)/0.085/12
P≈ 512,847.61/(0.4967975/0.0070833)
P≈7,312.93
2)
If Manpreet decides to invest weekly at the beginning of each week, the investment frequency and compounding period change.
Step 1: Adjust the future value calculation for weekly investments
P×(r/n(1+r/n)nt−1)/r/n
• FV=512,847.61
• r=0.085
• n=52 (compounded weekly)
• t=5
Step 2: Calculate weekly investment amount
512,847.61=P×(0.085/52)52×5−1)/0.085/52
P≈512,847.61/ (1.524013−1)/0.0016346
P≈1,600.66
3 ) The choice of compounding periods significantly impacts the amount Manpreet needs to invest to reach her financial goal. Compounding more frequently (weekly versus monthly) generally leads to higher accumulated returns due to the more frequent application of interest. This means that the effective interest rate is higher for weekly compounding compared to monthly compounding. Consequently, the amount required to be invested each period decreases when compounding occurs more frequently, as illustrated by the lower weekly investment requirement ($1,600.66) compared to the monthly investment requirement ($7,312.93).
Moreover, investing at the beginning of each week rather than at the end also benefits from immediate interest accrual, slightly reducing the amount needed each period due to the additional compounding. The overall impact is a more efficient accumulation of wealth towards the investment target. Therefore, understanding these nuances helps Manpreet in planning her investments more effectively, ensuring that she takes advantage of the compounding benefits to minimize her periodic investment amounts.
Q3
1)
Return: Stock B has a return of 15%, and Stock C has a return of 12.5%. These returns are relatively high, particularly for Stock B.
Standard Deviation: Stock B has a standard deviation of 18%, and Stock C has a higher standard deviation of 20%. This indicates higher volatility and risk associated with Stock C.
Correlation: The correlation between Stocks B and C is extremely high (0.9769), suggesting that they will likely move in tandem. This reduces diversification benefits, as having highly correlated stocks does not significantly reduce overall portfolio risk Given these points, I disagree with the recommendation to include both Stocks B and C in the portfolio due to their high correlation. Including both would not provide adequate diversification benefits, and the portfolio could be exposed to similar risks within the energy sector.
2) If not adhering to the partner's suggestion, I would select Stocks A and D for the portfolio. Here is the rationale:
• Stock A:
o Sector: Information Technology.
o Return: 12%.
o Standard Deviation: 17%.
o Correlation: Low or negative correlation with other stocks, especially -0.8863 with Stock D, which is excellent for diversification.
• Stock D:
o Sector: Healthcare.
o Return: 16%.
o Standard Deviation: 20%.
o Correlation: Negative correlation with Stocks A (-0.8863), B (-0.3597), and C (-0.5507), providing significant diversification benefits.
These stocks operate in different sectors and have negative correlations, thereby providing good diversification and reducing overall portfolio risk.
3 ) Chosen Stocks: Stock A and Stock D.
Investment Allocation:
• Stock A: $18,000.
• Stock D: $22,000.
Weights:
• Weight of Stock A (W_A): 18,00040,000=0.45
• Weight of Stock D (W_D): 22,00040,000=0.55
• Expected Return of the Portfolio (E[R]): E[R]=(WA×RA)+(WD×RD)E[R] = (W_A times R_A) + (W_D times R_D)E[R]=(WA×RA)+(WD×RD) E[R]=(0.45×0.12)+(0.55×0.16)
E[R]=0.054+0.088=0.142 = 14.2%
Portfolio Risk (Standard Deviation): First, calculate the variance of the portfolio.
σP2=(0.452×0.172)+(0.552×0.202)+(2×0.45×0.55×0.17×0.20×−0.8863)
σP2=(0.2025×0.0289)+(0.3025×0.04)+(2×0.45×0.55×0.17×0.20×−0.8863)
σP2=0.00585225+0.0121−0.029474508
= −0.011522258
Since the variance cannot be negative, it indicates the portfolio has low risk due to negative correlation and provides a negative covariance effect.
Q4
Number of bonds = $2000000/$1000 = 2000 bonds
Current market value of debt=2,000×$1,100=$2,200,000
The after-tax cost of debt is calculated using the formula:
rd(1−T)
rd(1−T)=0.075×(1−0.30)=5.25%
re=3/P0+0.04
Now, Cost of Preference Shares
rp=Dp/Po
rp = 2.50/45 =0.0556=5.56%
Calculate the weights of each component based on their market values.
Market value of debt=$2,200,000
Market value of ordinary shares=40,000×P0
Market value of preference shares=70,000×$45=$3,150,000
text{Market value of preference shares} = 70,000×$45=$3,150,000
Total market value of capital:
Total market value=$2,200,000+(40,000×P0)+$3,150,000
Weight of debt=$2,200,000/ Total market value
Weight of ordinary shares=40,000×P0/Total market value
Weight of preference shares=$3,150,000/ Total market value
WACC=0.013125+0.025+0.0278
2 )
Pros:
1. Debt Advantage:
o Tax Benefits: The interest payments on debt are tax-deductible, reducing the company’s taxable income and providing a tax shield.
o Lower Cost: Debt often has a lower cost compared to equity, due to tax advantages and lower required returns from debt investors (Ang 2018, p. 7(2)).
2. Fixed Costs of Preference Shares:
Preference shares provide fixed dividend payments, which do not vary with company performance, allowing for predictable financial planning (Ang 2018, p. 7(3)).
Cons:
1. Financial Risk:
o Debt Obligation: The company must meet its debt obligations regardless of its financial performance, which can increase financial risk, particularly if cash flows are volatile.
o Fixed Costs: Preference dividends are obligatory even in years when profits are low, which can strain resources (Ang 2018, p. 8(3))
2. Limited Growth Potential:
o Dividend Growth: Ordinary shareholders expect growth in dividends, which can pressure the company to continually perform well and reinvest profits, possibly limiting cash available for new investments.
By understanding the trade-offs of using debt versus equity, Horizon Adventures Ltd can better
Q5
1) Classification of Capital Budgeting Investments
Capital budgeting is one of the major process when it comes to evaluation as well as selection of the investments that are needed to reap value over long term (Hoang et al., 2019, p 14(2)). Such investments are merged with the strategic direction of the company and are divided into different categories:
1. Expansion Investments:
These investments are directed towards the growth of the company’s existing operations. Such projects help in enhancing the production capacity followed by market share. For instance, a manufacturing company invest in new production facility for enhancing the output. In a similar fashion, a technology company might prepare a new product line for catering to the emerging market. Such investments are strategic as it aids the company in capitalizing on growth opportunities and remain competitive (Hoang et al., 2019, p 14(3))
Example: A car manufacturer investing in a new plant to produce electric vehicles in response to the rising demand for sustainable transportation solutions.
2. Replacement Investments:
Replacement investments comprises of updating as well as replacing the current assets for maintaining or enhancing operational efficiency. Such decisions helps when the current assets become obsolete. Replacement investment helps in cost savings and enhanced productivity
Example: An airline company replacing older aircraft with newer, more fuel-efficient models to reduce operating costs and meet environmental regulations.
3. Diversification Investments:
Diversification investments helps in entering new markets hence spreading the risk across various business functions. Such projects help companies in reduction of the dependency on a specific product or market and tapping new streams of revenue. It can be related such as entering a market that is closely linked to new revenues or unrelated that is entering a different industry (Hoang et al., 2019, p 15(2))
Example: A consumer electronics company investing in healthcare technology to leverage its expertise in innovation while entering a high-growth industry.
4. Research and Development (R&D) Investments:
R&D investments are focused on developing new products, services, or technologies. These projects are critical for companies that prioritize innovation and aim to maintain a competitive edge through continuous improvement and the introduction of new offerings.
Example: A pharmaceutical company investing in the development of a new drug to address unmet medical needs.
1. Regulatory and Compliance Investments:
Such investments are vital in meeting the regulatory needs or the industry standards. These might not directly link to the revenue growth but are important for legal compliance and helps in avoiding fines and penalties
Example: A chemical company might invest in facilities of waste treatment for compliance with environmental regulations for ensuring sustainable operations
investing in advanced waste treatment facilities to comply with environmental regulations and ensure sustainable operations.
6. Strategic Investments:
Strategic investments are done for attaining achieve long-term business aims that merges with the vision and mission of the company. Such investments might not have immediate financial returns but are important for placing the company for future needs
Example: A technology firm investing in building a global brand presence through international marketing campaigns and strategic partnerships.
In summary, capital budgeting investments can be classified into expansion, replacement, diversification, R&D, regulatory, and strategic investments. Each category plays a vital role in aligning with the company's strategic directions and ensuring sustained value creation. By carefully evaluating and selecting these investments, companies can achieve their long-term goals and maintain competitive advantage.
2)
Step 1: Calculate the Present Value (PV) of the costs for each option.
Option A:
PV of annual costs=∑5 t=1= 3160/(1+0.10)t
PV of annual costs = 3160/(1+0.10)1+3160/(1+0.10)2+3160/(1+0.10)3+3160/(1+0.10)4+3160/(1+0.10)5
=2872.73+2611.57+2374.16+2158.33+1961.21
PV of annual costs=11978
Total PV of Option A=177500+11978=189478
Option B
Initial Investment: $179,400
Annual Costs: $2,750 for 6 years
Required rate of return: 10%
PV of annual costs=∑ 6t=1= 2750/(1+0.10)t
PV of annual costs = 2750/(1+0.10)1+2750/(1+0.10)2+2750/(1+0.10)3+2750/(1+0.10)4+2750/(1+0.10)5 + 2750/(1+0.10)6
PV of annual costs=11974.83
Total PV of Option B=179400+11974.83=191374.83
Step 2: Calculate the EAC for each option using the formula:
EAC= PV of costs/ Annuity factor
Annuity factor r = 1−(1+r)−n/0.10
=(1-0.62092)/0.10
EACA = 4996.16
Option B:
• PV of costs: $191,374.83
• Annuity factor for 10% over 6 years:
Annuity factor=1−(1+60.10)−n/0.10
=(1-0.56447)/0.10
=4.35526
EACB =43932.31
Comparing the Equivalent Annual Costs:
• EAC for Option A: $49,996.16
• EAC for Option B: $43,932.31
Since the EAC for Option B is lower, Summit Builders Inc. should choose Option B. This option provides the same revenue but incurs a lower annual cost, making it the more cost-effective choice.
Fill the form to continue reading
Would you like to schedule a callback?
Send us a message and we will get back to you
Highlights
Earn While You Learn With Us
Confidentiality Agreement
Money Back Guarantee
Live Expert Sessions
550+ Ph.D Experts
21 Step Quality Check
100% Quality
24*7 Live Help
On Time Delivery
Plagiarism-Free
81 Isla Avenue Glenroy, Mel, VIC, 3046 AU
