ACCT6004 Finance Session 3, 2021 Assessment 2: Business Case Studies 1
ACCT6004 Finance Session 3, 2021 Assessment 2: Business Case Studies 1 Due date: 17 December 2021, 11PM (AEDT) General overview This assignment has a 25% weighting in your overall mark for this unit and focuses on content from Topics 3, 4 and 5. It will be marked out of 25. Your assignment submission will consist of a word document that should not exceed 1,500 words (excluding the reference list). 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). Instructions: Do NOT include a coversheet on your assessment document. Your details are known to us because you submit electronically through your login. You have been assigned an ASX listed company as the context for this assignment. The company you will use is Bega Cheese, ASX code (BGA). You will also download a spreadsheet to assist you in completing part 1 of the assessment. This spreadsheet can be located in the Assessment 2 folder under the Assessment Tasks and Submission tab on the unit blackboard site. All input data you need to find for calculations in part 2a of this assignment must be sourced from S&P Capital IQ. This database will also provide you with useful information for general background research on the company, To use this database, you will need to apply for a user account. Instructions and the link to the database can be found in the Web Links section of this unit’s MySCU site. Please read those instructions carefully and set your account up early in the session. Attempt each of the following sections in your assignment submission: 1. TVM and bond valuation questions (1 mark each, give answers to 2 decimal places): a. Bega Cheese (BGA) has decided to purchase a new asset necessary for a proposed expansion to its business. The company has decided to speak with their bank. The bank is offering a fixed rate of 2.55% APR, compounded quarterly. BGA is required to make payments quarterly as shown in the spreadsheet every quarter for 10 years. What amount will BGA be required to borrow? b. Refer to the spreadsheet for the annual operating revenue of BGA. Assume this revenue will grow continuously at the annual rate shown in the spreadsheet. What is your prediction for annual operating revenue for BGA in 5 years? c. BGA wishes to invest funds and has several options available to it. The investment options are X, Y and Z. All three of these options have equal risk. The interest rates (EAR) for these options are given in the spreadsheet. What is the EAR of the investment option BGA should choose? Assessment 2: Business Case Studies I ACCT6004 S3 2021 2 d. BGA is buying new property for the amount provided in the spreadsheet. To finance this, the BGA’s bank has offered an amortised loan at 2.55% APR, quarterly compounding, with 30 years of quarterly payments. What quarterly payment will BGA 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. BGA has an issue of $1000 par value annual coupon bonds with 11 years remaining until maturity. The annual coupon rate is given in the spreadsheet, along with the current price of the bonds. What is the yield to maturity on the bonds? f. BGA has an issue of $100 par value bonds that offers an annual coupon rate (located in the spreadsheet) paid semi-annually. The bonds have 8 years remaining until maturity. The market’s required return on these bonds is provided in the spreadsheet. What is the amount of each coupon payment? 2. Risk and return estimates (4 marks): a. Use CAPM to estimate the expected return for the shares of: i) Bega Cheese Ltd; and ii) a hypothetical company called Flyaway with a beta of 1.20. To do this, use the yield to maturity of a 10-year Australian Government bond on 26 November 2021 as a proxy for the risk-free rate, assume the market risk premium is 3.50% and use the BGA’s most recent 5-year beta. b. Using the data from part 2a, estimate portfolio expected return and beta, assuming a portfolio made up of Bega Cheese and Flyaway with 40% invested in Bega Cheese Ltd and 60% invested in Flyaway. 3. Risk and return analysis (15 marks): a. Interpret and discuss your 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). Give your final answer to each of the 6 questions on a separate line in the first section of your assignment submission. Give all answers to the nearest two decimal places. No part marks are provided so it is important that you round your decimals correctly. Parts 2 and 3 will be marked using the rubric that follows --- Assessment 2: Business Case Studies 1 ACCT6004 Finance Session 3, 2021 The deadline is December 17, 2021, at 11 p.m. (AEDT) a broad overview This assignment counts for 25% of your overall grade for this course and covers content from Topics 3, 4, and 5. It will be graded on a scale of one to twenty-five. Your assignment will be submitted as a word document with a word count of no more than 1,500 words (excluding the reference list). The assignment is divided into two parts: a. six (six) questions on time value of money and bond valuation (part one); and b. three (three) tasks as part of a risk and return analysis (parts 2 and 3). Instructions: On your assessment paper, do not add a coversheet. We have access to your information since you provide it online through your login. As the context for this project, you've been given an ASX listed firm. Bega Cheese (ASX code: BEGA) is the firm you will use (BGA). You'll also get a spreadsheet to help you do the first section of the assessment. This spreadsheet may be found in the Assessment 2 folder on the unit blackboard site, under the Assessment Tasks and Submission tab. All of the data you'll need for section 2a of this assignment's calculations must come from S&P Capital IQ. This database will also offer you with important information for conducting general company research. To access this database, you must first create a user account. The Web Links section of this unit's MySCU site has instructions and a link to the database. Please carefully study those instructions and set up your account as soon as possible throughout the session. In your assignment submission, try each of the following sections: 1. 1 mark each for TVM and bond valuation questions (provide answers to 2 decimal places): a. Bega Cheese (BGA) has decided to purchase a new asset that is required for an anticipated business expansion. The business has opted to contact their bank. A fixed rate of 2.55 percent APR, compounded quarterly, is available from the bank. BGA is expected to make payments every quarter for the next ten years, as shown in the spreadsheet. How much money will BGA have to borrow? c. Look up BGA's annual operating revenue on the spreadsheet. Assume that the revenue will continue to rise at the annual pace indicated in the spreadsheet. What do you think BGA's annual operating revenue will be in five years? c. BGA is looking to invest money and has a number of choices. X, Y, and Z are the investing alternatives. All three solutions carry the same level of risk. In the spreadsheet, the interest rates (EAR) for various choices are listed. What is the expected annual return (EAR) of the investment choice BGA should select? ACCT6004 S3 2021 ACCT6004 S3 2021 ACCT6004 S3 2021 ACCT6004 S3 2021 ACCT6004 S 2 d. BGA is purchasing new real estate for the price specified in the spreadsheet. The BGA's bank has offered an amortised loan with a 2.55 percent annual percentage rate, quarterly compounding, and 30 years of quarterly payments to fund this. What is the amount of the quarterly payment that BGA will be required to make on this loan? Assume that the entire cost of the property is covered by insurance and that payments are made at the end of each period. e. BGA has a $1000 par value annual coupon bond issue with an 11-year maturity date. What is the yield to maturity on the bonds? The annual coupon rate is presented in the spreadsheet, along with the current price of the bonds. f. BGA has a $100 par value bond issue with a semi-annually paid yearly coupon rate (included in the spreadsheet). The bonds have an 8-year maturity period. The spreadsheet includes the market's necessary return on these bonds. How much does each coupon payment cost? 2. Estimates of risk and return (4 points): a. Calculate the expected return for the shares of: I Bega Cheese Ltd; and ii) Flyaway, a hypothetical company with a beta of 1.20. To do so, use the yield to maturity of a 10-year Australian Government bond on November 26, 2021 as a proxy for the risk-free rate, assume a 3.50 percent market risk premium, and the BGA's most recent 5-year beta. b. Estimate portfolio anticipated return and beta using the data from section 2a, assuming a portfolio made up of Bega Cheese and Flyaway, with 40% invested in Bega Cheese Ltd and 60% in Flyaway. 3. Risk and return analysis (15 points): a. Interpret and analyze the risk and return measures you calculated in parts 2a and 2b.