NPV and BHP Calculation Assessment

Question 1

• Huawei Corporation is considering the opening of its state-of-the-art research laboratory. The project will involve an investment of $78 000 000 and will produce a positive cash flow of $25 000 000 in the first year. The cash flows will increase by 10.00 per cent each year thereafter for another five years (i.e. the project runs for six years in total). At that stage the project will Huawei expects a rate of return of 17.00 per cent on this project.
• Calculate the NPV of the project.
• Should the company proceed with this investment opportunity? Why or why not?
• The required rate of return of Rio Tinto Ltd and BHP Ltd is less than 15 per cent per
• The current earnings per share of Rio Tinto Ltd are $1.50 and the company does not reinvest any of its earnings. Calculate the current share price of Rio Tinto

• BHP Ltd’s current dividend per share is 80 cents and it is expected to grow at 5 per cent per annum. Calculate BHP Ltd’s current share

Question 2

• Linda Plant Hire Ltd has signed a loan contract to purchase a new The interest rate is 8% and the annuity consists of six cash payments of $6000 payable annually. Calculate the value of the annuity today if the first cash flow is to be paid:
• in one year
• in four years
• An investor holds the following shares in an investment portfolio:

• What does each beta coefficient imply about the volatility of each company’s shares relative to the overall market?
• Calculate the weighted average beta of the

Question 3

• Yin Zhang bought an investment property last year for $350,000. This year the value of the property has gone up to $400,000. Yin Zhang also received $12,000 in rental income for the year. What is Yin Zhang’s holding-period return on the investment?
• You have invested in Huawei Ltd whose dividend per share has grown 10% per annum for the past 10 Assume that Huawei’s growth rate is expected to be maintained indefinitely. The latest dividend per share was 90 cents was yesterday. If your required rate of return is 15 per cent, what is the value of Huawei’s shares?
• The Treasury bond rate is 3%, the average return on the All Ords Index is 12%, and ANZ has a beta of 1.2. According to the CAPM, what should be the required rate of return on ANZ shares?

Question 4

The proposed investment projects in the table are independent. The required rate of return of each project is 10%. Which project would you recommend to the firm to accept? Explain your answer, showing all working steps and logical evaluation of the three projects.

Question 5

1. Benjamin is considering a project which will generate cash flows of $150,000 per year for the next 8 years and have an initial cash outlay of $500,000. What is the project’s payback period? Show all working steps.

PHJ Ltd company is considering purchasing a new tunnelling equipment costing $125 000 that will enable it to reduce its existing labour costs by $20 000 a year for 12 years. The company estimates that it will have to spend $3000 every two years overhauling the equipment. The required rate of return is 10% per annum. Assume all cash flows are made at the end of the year, would advise PHJ Ltd to purchase the equipment? Show all the working steps of your answer.

Question 6

You are considering investing in a portfolio (Portfolio P), consisting of two shares – ABC Ltd and XYZ Ltd. You plan to invest 60% of your funds in ABC and 40% in XYZ.The return on each share over the next year depends on the state of the economy, which could be Boom, Average or Recession. The probability of each state of the economy is shown in the following table, along with the return on each share given that state of the economy. The standard deviations for ABC and XYZ have been calculated for you and are also shown below, as is the beta for each of the shares.

The correlation between the two shares is -0.4. The risk-free rate of return is 5%, and the expected return on the market is 9%.

• What is probability of a recession?
• What is the expected return on ABC and XYZ over the next year?
• What is the expected return on the portfolio?

• What is the beta of the portfolio?
• What is the expected return on the portfolio, according to the CAPM?
• Draw a diagram of the Security Market Line, showing the risk-free asset, the market portfolio, where Portfolio P plots based on your answer to part (c) and where it should plot based on the CAPM prediction given in your answer to part (e).
• Based on this diagram, would you conclude that the portfolio is currently overpriced, underpriced or correctly priced? Why?

Question 7

• Financial institutions of incorporate loan covenants into loan How does positive covenant differ from a negative loan covenant? Explain your answer.
• Pure Play approach to estimating the cost of capital poses some challenges. List two conceptual and two practical problems that may encountered.

Question 8

• Discuss two factors that influence the yield at which a commercial bill will be What effect does a bank-accepted bill have on the yield?
• Distinguish between a debenture and a preference share.
• ABC Ltd has reached the limit of its debt-to-equity ratio, as stipulated by a negative covenant in its loan contract. If ABC Ltd issues preference shares, would it violate the covenant? Explain your answer in detail.
• Explain why corporations seek to raise debt funds direct from the markets and why investors provide debt funds directly to the capital