Question

The following statement was made at a recent finance seminar on capital investment analysis:

―Discounted cash flow methods of capital investment analysis often require the estimation of cash flows for many years in the future. One can rarely estimate these cash flows with confidence, and as a result there is little point in their use‖.

Required:

Comment on the above statement taking a perspective either to agree or disagree with the seminar presenter by providing a considered argument supporting your viewpoint.

(As a guide students should write no more than 150 words for this question).

Question

Comment on the following statement made by a company director at the last monthly Board meeting when discussion was taking place in relation to alternative sources of financing to be used for business expansion. The statement was:

―Our equity (share) holders want a 15% p.a. return on their investment, whereas debt (debenture) holders require only 8% p.a. The company would thus be crazy to expand its business operations using equity finance since debt is so much cheaper‖.

Your discussion should be on the basis of whether you agree or disagree with the statement made, including the correctness (or otherwise) of any underlying assumptions implied by the company director.

(Students should write no more than 225 words for this question).

Question

Assume that you had an interest-bearing investment with Fastpass Finance that provided a total return of 14% p.a. last year with an inflation rate during the same period of 6%.

Required:

a) As an existing investor in an interest-bearing investment making regular interest / coupon payments, would you generally prefer inflation rates to be relatively low or relatively high? Briefly explain your response.

(As a guide students should write no more than 125 words for this part of the question).

b) i) Based on the information provided in this question what was your real rate of return over the last year?

ii) If the anticipated rate of inflation for the following year decreased to 5% (from 6% as previously advised), in order to maintain the real rate of return on the interest-bearing investment in Fastpass Finance as calculated in part b) i) of this question, what minimum nominal rate of return would be required?

Question

Ms. Siouxsie Banshee is considering adding to her existing investments in either or both of the securities discussed below. Siouxsie’s anticipated holding period is about 12 years however she has no definite holding period. Given your level of expertise in financial matter, Siouxsie has sought your assistance in valuing each security.

The first security is a finance company bond in Fischer Z Credit that is currently selling in the market for $1,250. The bond has a $1,000 par value, pays annual coupons at a coupon rate of 14%, and is scheduled to mature in 12 years from today. For bonds of this risk class Siouxsie has assessed a required rate of return of 12%.

The second security subject to analysis is ordinary shares in Libertines Ltd., a stock exchange listed ceramic pot wholesaler which recently paid a $3 dividend. The company's earnings per share has increased from $4 to $8 over the last 10 years, which also reflects the expected growth in dividends per share for the indefinite future. Shares in Libertines Ltd. are currently selling for $32 and Siouxsie has assessed a reasonable cost of equity for the company shares of 20%.

Required:

a) Assist Siouxsie to calculate the intrinsic value of each of the bond with Fischer Z Credit and the ordinary shares in Libertines Ltd., performing all relevant calculations.

Note, in calculating any growth rate round any calculation to the nearest 1%. Show all calculations / workings in your response.

b) What decision-making outcome (buy / sell / hold) you would recommend for Siouxsie in relation to each security? Briefly justify your response.

(As a guide students should write no more than 75 words for this part of the question).

should write no more than 125 words for this part of the question).

Question

Hans Valen Holdings Ltd. is planning to invest in a security that has several possible rates of return. Given the following probability distribution of returns:

Probability	Return
10%	-10%
20%	5%
30%	10%
40%	25%

Required:

a) What is the expected rate of return on the investment?

b) What is the standard deviation of the expected return?

c) Briefly discuss the meaning of your solutions to parts a) and b) of this question in terms of what the calculations represent when assessing the security in comparison to possible alternatives investments.

(As a guide students should write no more than 125 words for this part of the question).

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