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Subject Code : HC2091
Country : Australia
Assignment Task

 

Unit Learning Outcomes Assessed: 
• Explain financial markets and different types of securities and the processes related to  their investment;  
• Interpret the impact of future developments in the financial markets on business  structure and performance; 
• Understand the concept of the time value of money and apply it in investment and  portfolio evaluation and management; 
• Critically understand and practice valuation of financial instruments, including  ordinary shares, preferred shares, and bonds;  
• Critically analyze finance alternatives to manage short- and long-term debts;

Evaluate the firm capital structure policy, dividend payout policy, and alternative funding policies and instruments available to businesses.


Question 1;
1. Your manager asked you to evaluate an investment opportunity. Select and explain two (2) investment criteria you will use to make a decision as to whether to accept or reject the opportunity. (2.5 x 2 = 5 marks)
2. You are the CFO of Midas Mining Ltd and the company is looking to expand its mining operations. Your staff has narrowed it down to two (2) projects, with the cash flows presented in the table below. However, given the substantial cash outlay, your company can only choose one of the projects (A or B). 

CFO of Midas Mining Ltd and the company


Required: 

a) Perform a project evaluation, using the Net Present Value (NPV) method. The prevailing discount rate is 12%.
b) Identify which project (if any) should be accepted by Midas Mining Ltd. 


Question 2
(This question is from the Week 3 and Week 4 Tutorials) Alice has $5 000 now. She wants to save $25 000 to buy her first car. She decides to put that $5 000 in an investment fund that pays an interest rate of 10% per annum (per year), compounding annually.
Required:
a) How long does Alice need to wait until she has saved $25 000? 
b) If Alice wishes to have that $25 000 in five (5) years, how much does she need to put into the investment now with the same interest rate of 10%? 

c) Assume that Alice was offered an alternative investment, which requires an initial investment of $6 000 for seven (7) years. Calculate the amount of money that Alice would accumulate after seven (7) years, if the rate of return is 12%, compounding quarterly.

 

Question 3
MLC Fund Management is considering the following three (3) options for their new investment portfolio:
Option 1 - A non-callable corporate bond that pays a coupon rate of 8% annually. The bond will mature in 30 years. The yield-to-maturity (YTM) of the bond is 7.5% and the face value of the bond is $1 000.
Option 2 - An ordinary share that just paid a dividend of $6.00 with a constant dividend growth rate of 5% each year. The current market price of this share is $85.
Option 3 - A $100 par value preference-share which pays a fixed dividend of 6%. The required rate of return for the preference shares with the same risk is 8%.


Required:
a) How much should MLC pay for the corporate bond that pays the coupon annually? If the coupon is paid quarterly, what is the new bond value? 
b) Calculate the market required rate of return for the ordinary share.
c) Compute the value of the preference share.
d) Explain why a preference share is considered a hybrid between an equity and a debt instrument. 

 

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  • Posted on : February 13th, 2019
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