Finance for Managers

This assignment is designed to introduce you to:

• Determining the value of shares and other assets,

• Risk/return analysis as a basis for making investment decisions,

• Financial planning and controlling operations in international finance, and

• Additional research skills outside course materials/delivery.

Question 1

The Cell Retailing Company has been engaged in the process of forecasting its financing needs over the next quarter and has made the following forecasts of planned cash receipts and disbursements:

1. Historical and predicted sales:

Historical Predicted

April $80,000 July $130,000
May 100,000 August 130,000

June 120,000 September 120,000

October 100,000

2. The firm incurs and pays a monthly rent expense of $3,000.

3. Wages and salaries for the coming months are estimated as follows (with payments coinciding with the month in which the expense is incurred):

July $18,000

August 18,000

September 16,000

4. Of the firm's sales, 40% is collected in the month of sale, 30% one month after sale, and the remaining 30% two months after sale.

5. Merchandise is purchased one month before the sale month and is paid for in the month it is sold. Purchases equal 80% of sales.

6. Tax repayments are made on the calendar quarter, with a prepayment of $1,000 in July based on earnings for the quarter ended 30 June.

7. Utilities for the firm average 2% of sales and are paid in the month of their incurrence.

8. Depreciation expense is $12,000 annually.

9. Interest on a $40,000 bank note (due in November) is payable at an 8% annual rate in September for the three-month period just ended.

10. The firm follows a policy of paying no cash dividends.

Required

Based on the above, supply the following items:

a. Prepare a monthly cash budget for the three-month period ended 30 September 20X5.

b. If the firms beginning cash balance for the budget period is $5,000 and this is its minimum desired balance, determine when and how much the firm will need to borrow during the budget period. The firm has an $80,000 line of credit with its bank, with interest (12% annual rate) paid monthly (e.g. for a loan taken out at the end of December, interest would be paid at the end of January and every month there after so long as the loan was outstanding).

c. Prepare a pro forma income statement for Cell covering the three-month period ended 30 September 20X5. Use a 40% tax rate.

d. Given the balance sheet dated 30 June 20X5, and the pro forma income statement from (c), prepare a pro forma balance sheet for 30 September 20X5.

Cell Retailing Co., Balance Sheet, 30 June 20X5.

Question 2

The Kasyer Co. Ltd has ordinary, Australian-resident shareholders and the company pays its profits as franked dividends which have a high utilisation factor in the hands of shareholders. The board of directors is considering a major investment to expand its highly technical facilities. The expansion will take a total of four years until it is completed and ready for operation. The following data and assumptions describe the proposed expansion:

a. To make this expansion feasible, R&D expenditures of $200,000 must be made immediately to ensure that the construction facilities are competitively efficient (+=0).

b. At the end of the first year the land will be purchased and construction on stage 1 of the facilities will begin, involving a cash outflow of $150,000 for the land and $300,000 for the technical facilities.

c. Stage 2 of the construction will involve a $300,000 cash outflow at the end of year 2.

d. At the end of year 3, when production begins, inventory will be increased by $50,000.

e. The first sales from the operation of the new plant will occur at the end of year 4 and be $800,000 and continue at that level for ten years (with the final flow from sales occurring at the end of year 13).

f. Operating costs on these sales are composed of $100,000 fixed operating costs per year and variable operating costs equal to 40% of sales.

g. When the plant is closed, equipment will be sold for $50,000 and the land will be sold for $200,000 (t = 13).

Required

The company has a 12% required rate of return. What is the NPV of this project? Should it be accepted?

Question 3

Part 1:

You own a portfolio consisting of the following shares:

Share Percentage of portfolio Beta Expected return

1 20% 1.00 16%

2 30% 0.85 14%

3 15% 1.20 20%

4 25% 0.60 12%

5 10% 1.60 24%

The risk-free is 7%. Also, the expected return on the market portfolio is 15.5%.

Required

a. Calculate the expected return of your portfolio.

(Hint: The expected return of a portfolio equals the weighted average of the individual shares expected returns, where the weights are the percentage invested in each share).

b. Calculate the portfolio beta.

c. Given the information above, plot the security market line on paper. Plot the shares from your portfolio on your graph.

d. From your plot in part (c), which shares appear to be your winners and which ones appear to be losers?

e. Why should you consider your conclusion in part (d) to be less than certain?

Part 2:

What is the meaning of Beta? How is it used to calculate R, the investors required rate of return? (300 words)

Further notes for assignment completion. Please read these notes thoroughly. It is your responsibility to meet the requirements

• Show workings, include all relevant steps and ensure that your final response is expressed in simplified form. You will not be penalised for consequential errors in calculations.

• You will be penalised for poor interpretation and presentation of workings e.g. missing $ signs and minimum 2 decimal points.

• Assignments will not be accepted if not typed (including formulae). We recommend that you use computer software for word-processing and spreadsheet modelling.

• Interpretation of calculations where requested will require a minimum of one paragraph.

• Unless otherwise advised in writing, all work submitted for assessment must be completed by the student alone. While discussion of the topic is encouraged, no student is permitted to use any work of any other person and any material used from any publication must be acknowledged in full.

• You must use the official TSBE cover sheet for the assignments. Your student number and student name should be included in the header or footer of every page of the assignment.

• Any applications for extensions must be received by the unit coordinator before the due dates. Such applications will be treated on their merits. Work and family commitments do not normally constitute sufficient reason for the granting of extensions.

• Please do not put your assignments in any type of folder. Just attach the coversheet to the front of your assignment.

• Bibliographies are required for assignments. You should acknowledge all references you used to assist you in completing the assignment. This includes your textbooks and your study notes.