financial management

| September 29, 2018

Question 1(4 marks) Briefly explain the key objective of corporate financial management and why this might not be the same as maximising accounting profit.Question 2(4 marks) For the year ended 30 June 2012, a sole trader earned $240,000 in revenue and incurred operating and depreciation expenses of $100,000 and $20,000 respectively. The trader also received fully franked dividends of $30,000 and unfranked dividends of $10,000 from investments in blue chip companies. What the trader’s (a) income tax liability and (b) after tax income? [Ignore Medicare levy]. Please refer to Individual income tax rate 2012-13Taxable incomeTax on this income0 – $18,200Nil$18,201 – $37,00019c for each $1 over $18,200$37,001 – $80,000$3,572 plus 32.5c for each $1 over $37,000$80,001 – $180,000$17,547 plus 37c for each $1 over $80,000$180,001 and over$54,547 plus 45c for each $1 over $180,000Question 3(4 marks) Briefly describe the principal characteristics of primary and secondary capital markets. Give example of recent initial public offering of shares/bonds in Australian market.Question 4(4 marks) (a) You plan to save $30,000 after two years to purchase a band new car you’ve always wanted. The bank is currently offering 6% interest rate on deposit per annum compounded quarterly. How much would you have to invest today? (b) Assume you borrowed a sum of $30,000 repayable by six equal quarterly instalments (loan repayments) at an interest rate of 8% per annum (2% per quarter). What is the necessary loan payment at the end of each quarter?Question 5(4 marks) (a) If the current market yield for 90 day bank accepted bills 4.2%, the market price of a $2,000,000 would be? (b) Basis of credit analysis for some time has been the so called ‘five Cs of credit’. In your own words elaborate the five Cs of credit. If you were assessing a loan application, what would be the most important C and why?Question 6 (4 marks) Briefly explain the significance of systematic risk and how it is measured.Question 7(4 marks) Briefly explain the inverse relation between price and yield in the bond market.Question 8(4 marks) Bathurst Copper Mine is experiencing a period of rapid growth due to demands from China. Earnings and dividends are expected to grow at a rate of 24% over the next two years, 16% in third year and then at a constant rate of 6% thereafter. Bathurst Copper Mine’s last dividend which has been paid was $1.15 If the required rate of return on the stock is 14%, what is the price of the stock today?Question 9(4 marks) (a) If a company is considering investing $200,000 in new equipment, for which the expected cash flows are as follows:CASH FLOW Initial outlay -$150,000 Year 1 $50,000 Year 2 $40,000 Year 3 $30,000 Year 4 $20,000 Year 5 $20,000 If the company has an 18% required rate of return, should this project be accepted? (b)A company must invest in either of the following two projects.Project A Project B Initial Outlay $100,000 $150,000 Useful Life 5 years 5 years Net Present Value 130,000 $140,000 If the required rate of return is 12% which project should the company accept?Question 10(4 marks) ABC Ltd is considering two mutually exclusive projects. The cash flows associated with the projects are as follows:Year Project A Project B 0 -$150000 -$150,000 1 $45,000 $0 2 $45,000 $0 3 $45,000 $0 4 $45,000 $80,000 5 $45,000 $200,000 The required rate of return on these projects is 12%. (a)What is each project’s payback period? (b)What is each project’s net present value? (c)What is each project’s internal rate of return? (d)What has caused ranking conflict? (e)Which project should be accepted? Why?Marking criteriaWhere necessary, state any assumptions you have made. Assignments should show all workings and students will be penalized for failing to do this.You will be assessed on:your understanding of the problem;your choice of method for solving the problem;your application of techniques;the accuracy of your answers;written communication skills;critical thinking and analysis.Question 11 (5 marks) Briefly define sensitivity analysis and steps involving use of it. In your own words why do you think it is important to use sensitivity analysis in assessing a project?Question1 2 (5 marks) Calculate the firm’s Weighted Average Cost of Capital:Source of Finance Market Value Cost Bank Overdraft $400,000 6% Preference Shares $200,000 16% Ordinary Shares $1,200,000 12% Debentures $500,000 8% Trade Creditors (average) $100,000 5%Question 13(5 marks) (a)What are the main features of debt funds and equity funds? (b)In your own words briefly state the advantages and disadvantages of both debt and equity instruments.Question 14(5 marks) A company is considering raising $12 million through a rights issue. It has 10 million ordinary shares outstanding, currently selling for $8.40 each. The subscription price on the new shares will be $6 per share. i. How many shares must be sold to raise the desired funds? ii. How many shares must a shareholder own in order to have one right? iii. What is the theoretical value of the shares ex-rights? iv. What is the value of the right? RationaleThis assignment is designed to assess student learning of the material covered in Weeks 7-11.Marking criteriaWhere necessary, state the assumptions you have made. All workings must be shown and students will be penalised for failing to do this.You will be assessed on:your understanding of the problem;your choice of method for solving the problem;your application of techniques;the accuracy of your answers;written communication skills;critical thinking and analysis.

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