Assessment : Business Case Studies

1. TVM and bond valuation questions:

a. Your case company has debt maturing in three years (amount shown in Table 1 on page 4 of this document). How much should the company invest now in an account paying 5% APR, compounded monthly, to ensure it has sufficient funds to repay the debt when it matures?

b. Your company has annual operating revenue as shown in Table 1. Assume this revenue will grow continuously at the annual rate shown in Table 1. What is your prediction for annual operating revenue in 10 years?

c. Your company has several long-term cash investment options available to it, Investments A, Band C. The interest rates (APR) for these options are given in Table 1. What is the EAR of the investment option the company should choose?

d. Your company is buying new equipment for the amount given in Table 1. To finance this, the company's bank has offered an amortised loan at 4.5% APR, monthly compounding, with 20 years of monthly payments. What monthly payment will the company have to make on this
loan? Assume that the entire equipment cost is financed and that payments are made at the end of each period.

e. Your company has an issue of $1,000 par value annual coupon bonds with 10 years remaining until maturity. The annual coupon rate is given in Table 1, along with the current price of the bonds. What is the yield to maturity on the bonds?

f. Your company has an issue of $1,000 par value bonds with an 8% coupon rate and quarterly coupons. The bonds have 7 years remaining until maturity. The current required return on these bonds is given in Table 1. What is the current price of the bonds?

2. Risk and return estimates:

a. Use CAPM to estimate the expected return for the shares of: i) your case company; and ii) a hypothetical company with a negative beta of -0.25 as at 30 March 2018. To do this, use the yield to maturity on that date of a 10-year Australian Treasury bond as a proxy for the riskfree rate, assume the market risk premium is 6.5% and use the company's current beta.

b. Using the data from part 2a, estimate portfolio expected return and beta, assuming a portfolio made up of your case company and the hypothetical company in equal weighting. Tasks to be completed and submitted in a word document through the A2 Turnitin Link:

3. Risk and return analysis :

a. Drawing on expectations from theory and incorporating the overall context of your chosen company, discuss and interpret the risk and return measures from parts 2a and 2b.