Finance Assessment Task
Please provide answers/solutions to the following two Case Studies in two separate reports:
Case Study 1: Financial markets
"Troy Dexter is an affluent venture capitalist based in Sydney. In 2009 Troy founded a hedge fund called Northwest Capital Management. A hedge fund is an investment fund whose aim is to deliver positive returns on money invested while minimising risk. A hedge fund can be thought of as a company whose main activity is to invest in a range of financial assets. Troy's hedge fund adopts a macro investment strategy that aims to profit from significant shifts in the economy. Apart from his own money which he uses to invests in a range of financial assets, the fund is also open to investors who can participate in the fund for an annual management fee. Although hedge funds aim at reducing risk by employing different hedging techniques, there is still a certain element of risk as there are periods where the returns on investments are negative. Troy's vision of the future is that the strong growth in Australian housing market will come to an end, economic growth will stall and the price of oil will escalate. This Troy is currently buying treasury bonds in the debt markets and energy stocks in the share market.
1. From the point of view of Northwest Capital Management, are treasury bonds and energy stocks direct or indirect securities? Explain.
2. Consider an investor who invests money in Northwest Capital Management. The money ends up being invested in treasury bonds and energy stocks. From the perspective of the investor, does she hold direct securities by investing in Northwest Capital Management? Explain."
For this case study, please make sure you provide at least 5 different peer-reviewed references plus your prescribed textbook to develop and demonstrate your research skills as a financial analyst in training. Make sure you explain your reasons for choosing a position in each answer in your own wordsand supported by evidence in the form of peer-reviewed references.
Word limit: Case 1 should be approximately 1,500 words (or not longer than 4 pages).
Case Study 2: "Making Norwich Tool's lathe investment decision
Norwich Tool, a large lathe machine shop, is considering replacing one of its lathes with either of two new lathes-lathe A or lathe B. Lathe A is a highly automated, computer-controlled lathe; lathe B is a less expensive lathe that uses standard technology. To analyse these alternatives," (Gitman, 1994, p. 393) you, "a financial analyst, prepared estimates of the initial investment and incremental (relevant) cash inflows associated with each lathe. These are summarised in the following table:
|
Lathe A
|
Lathe B
|
|
Initial Investment
|
$660,000
|
$360,000
|
|
Year
|
Cash Inflows
|
|
1
|
$128,000
|
$88,000
|
|
2
|
$182,000
|
$120,000
|
|
3
|
$166,000
|
$96,000
|
|
4
|
$168,000
|
$86,000
|
|
5
|
$450,000
|
$207,000
|
Note that"(Gitman, 1994, p. 393), you "planned to analyse both lathes over a five year period. At the end of that time the lathes would be sold, thus accounting for the large firth-year cash inflows.
One of" (Gitman, 1994, p. 394) your "major dilemmas centred on the risk of the two lathes" (Gitman, 1994, p. 394). You "felt that although the two lathes had similar risk, lathe A had a much higher risk of breakdown and repair due to its sophisticated and not fully proven solid-state electronic technology. Because " (Gitman, 1994, p. 384) you were "unable to effectively quantify this possibility," (Gitman, 1994, p. 394), you "decided to apply the firm's 13 percent cost of capital when analysing the lathes. Norwich Tool required all projects to have a maximum payback period of 4.0 years.
Required:
a. Use the payback period to assess the acceptability and relative ranking of each lathe.
b. Assuming equal risk, use the following sophisticated capital budgeting technique to assess the acceptability and relative ranking of each lathe.
(1) Net present value (NPV)
(2) Internal rate of return (IRR)
c. Indicate which lathe you would recommend, if either, if the firm has
(1) unlimited funds or
(2) capital rationing" (Gitman, 1994, p. 394)
For this case study, please make sure you use at least 5 different peer-reviewed references plus your prescribed textbook to develop and demonstrate your research skills as financial analyst in training. Make sure you explain your reasons for choosing a position in each answer in your own words and supported by evidence in the form of peer-reviewed references.
Case 2 requires you to show timelines, formulas and calculations. Excluding the calculation, timelines and formulas.
Word limit: For the analysis of both parts to this case should be approximately 750 words (or no longer than 1 1/2 pages).
References -
GITMAN, L. J. 1994. Principles of managerial finance, New York, HarperCollins College Publishers.
PETTY, W., TITMAN, S., KEOWN, A., MARTIN, J., MARTIN, P., BURROW, M. & NGUYEN, H. 2012. Financial Management: Principles and Applications, French Forest, NSW, Australia, Pearson Australia.