FNCE2000 Introduction to Finance Principles
FNCE2000 Introduction to Finance Principles
ASSIGNMENT COVER SHEET
Name: Student ID
(If the given name by which your tutor knows you, differs from your name on University records, please indicate BOTH names)
Tutor:
Day & Time of Tutorial:
Due date: To be submitted by 5pm on Monday 13 May AWST
IMPORTANT INSTRUCTIONS:
Show all working to demonstrate you have understood how to solve each problem.
If you use a financial calculator, state the sequence of steps to solve the problem.
Please present your answers in at least 4 non-zero decimal places. i.e., 0.00001234 or 0.1234.
Students are to submit their assignments onto Blackboard. The assignment must be typed (Word, Excel or PDF).
Answer must be legible. If the marker cannot follow or read your answers, marks cannot be rewarded.
Answer all sections.
Your assignment should meet the following requirements
A copy of the assignment has been retained by me
Declaration below is complete.
Declaration
Except where I have indicated, the work I am submitting in this assignment is my own work and has not been submitted for assessment in another Unit or course. I warrant that any computer files submitted as part of this assignment have been checked for viruses and reported clean.
________________________________________
(Signature of student)
All forms of plagiarism, cheating and unauthorised collusion are regarded seriously by the University and could result in penalties including failure in the course and possible exclusion from the University. If you are in doubt, please contact your lecturer, Unit Controller, or your Course Coordinator.
Part 1 Case study (25 marks)
You are placed in the role of an analyst for Hill Country Snack Food Co. Hill Country Snack Food Co is considering investing in a new product, SuperBar. You have been asked by the CEO to provide a recommendation on whether to go ahead with the investment in SuperBar.
The research and development costs so far have totalled $40 million (exotic superfoods and rare minerals of dubious origin are expensive!). If approved by the CEO, SuperBar could be put on the market at the beginning of next year (Year 1), and Hill Country expects it to stay on the market for a total of four years (from Year 1 to Year 4).
If the project proceeds, the initial investment will occur immediately (Year 0), and operational cash flows will occur at beginning of next year (Year 1). Hill Country must initially invest $1 million in production equipment to make the SuperBar (in Year 0). This equipment can be sold for $800,000 at the end of four years (Year 4). Hill Country would sell the SuperBar through its current channels, so sales will be able to commence as soon as the equipment is operational.
SuperBar is expected to wholesale for $2 per bar. The variable cost to produce each bar is $1. In order to secure appropriate celebrity endorsement for the new SuperBar, Hill Country will incur $20 million in marketing and general administration costs in the first year (Year 1). Both selling price and costs (including variable cost and marketing and general administration cost) are expected to increase at the inflation rate in the subsequent years (Year 2 to Year 4). Hill Countrys corporate tax rate is 35.5 percent. Annual inflation is expected to remain constant at 3.25 percent over the life of the project.
Industry research suggests the following sales targets are reasonable: 30 million bars sold in the first year, 20 million in year two, 15 million in year three, and 15 million in year four. The production equipment would be depreciated using the straight-line depreciation method over 4 years to a zero balance. The immediate initial working capital requirement is $1 million in Year 0. At the end of Year 4, the company will get all working capital back.
For the purposes of this analysis, assume a 10% discount rate is appropriate.
Please complete the following questions.
Calculate the incremental free cash flow during the projects life (starting from Year 0 to Year 4). Show workings. (15 marks)
Calculate the NPV, payback period and IRR of the project. Should the project be accepted based on NPV rule? Show workings and explain your answer(s). (10 marks)
Students may present the workings using the table below. Please set out your work clearly and neatly. If you choose you can take advantage of the table below or you can continue your workings on the following page which has been intentionally left blank.
THIS PAGE IS LEFT BLANK PAGE FOR YOUR WORKINGS
Part 2 Risk and Return (25 marks)
Is the following statement true of false according to Capital Asset Pricing Model (CAPM). Please explain your answers 2 marks
Stock with a beta of zero will offer a zero rate of return.
If CAPM is valid, is the following scenario possible? Please explain your answers. No calculation required. 2 marks
Portfolio Beta Expected Return
Risk-free 0 9%
Market 1 17%
Stock A 1.2 15%
Using the following table to answer parts a) to c).
Recession Normal Boom
Probability 0.1 0.6 0.3
Stock INV -10% 18% 25%
Stock DEV -20% 20% 40%
What are the expected rates of return for Stocks INV and DEV? 2 marks
What are the standard deviations of returns on Stocks INV and DEV? 5 marks
Assume you invest $8,000 in Stock INV and $2,000 in Stock DEV, what is the expected return on your portfolio? 2 marks
You decide to invest in one of the 4 stocks: FIM, IFP, PMT and QTB. Based on the historical prices presented in the following table, please answer parts a) and b).
Year FIM IFP PMT QTB
2017 63.8 34.6 12.7 24.3
2018 66 29.9 13.2 26.1
2019 77.1 32.5 16.8 30.8
2020 72.2 33.8 10.1 37.9
2021 79.1 36.1 9.3 38.5
2022 85.1 41.1 11.5 35.9
2023 73.5 34.4 8.6 36.7
Calculate the return and risk (standard deviation) of each stock. 10 marks
Based on your calculation, which stock would you pick? 2 marks
