Your case company
At the beginning of Week 4, you will be assigned an ASX listed company as the context for this assignment. At that time, you can find your case company's ASX code in ‘Grades and Feedback’ on the unit's MySCU Learning site.
All input data you need to find for calculations in this assignment must be sourced from S&P Capital IQ. To use this database, you will need to apply for a user account. Instructions and the link to the database can be found in the Web Links section of this unit’s MySCU site. Please read those instructions carefully and set your account up early in the session.
Attempt each of the following sections in your assignment submission:
1. TVM and bond valuation questions (1 mark each): a. Your case company has just made a large sale on an instalment contract. The contract requires the customer to pay your case company the amount shown in Table 1 (page 4 of this document) at the end of every month for 5 years. Your case company would like the cash now for an investment and so has asked its bank to discount the instalment contract and pay it the discounted value. The bank will discount the contract at 6% APR, compounded monthly. How much cash will your case company receive from the bank?
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 7 years?
c. Your company needs to borrow funds and has several options available to it, Loans A, B and C. The interest rates (APR) for these options are given in Table 1. What is the EAR of the loan option the company should choose?
d. Your company is buying new property for the amount given in Table 1. To finance this, the company’s bank has offered an amortised loan at 3.65% APR, quarterly compounding, with 11 years of quarterly payments. What quarterly payment will the company have to make on this loan? Assume that the entire property cost is financed and that payments are made at the end of each period. Assessment
e. Your company has an issue of $100 par value annual coupon bonds with 7 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 that offer a 8% coupon rate paid semiannually. The bonds have 5 years remaining until maturity. The market’s required return on these bonds is given in Table 1. What is the amount of each coupon payment?
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 -0.30 as at 6 December, 2019. To do this, use
the yield to maturity on that date of a 10-year Australian Government bond as a proxy for the risk-free rate, assume the market risk premium is 7% and use the company’s most recent 5 year 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.
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. You may include additional measures. If so, clearly source the data and ensure you clearly explain your calculations.