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FINA6001 Financial Management

tag 0 Download 10 Pages / 2,283 Words tag 26-08-2021


Question 1 Risk and Return

Calculate the following using the data from Yahoo Finance  for the company you selected for Question 1 of Assignment

  1. Calculate the daily market return over the last five years from the daily prices, calculate the monthly returns from the daily returns, and calculate the yearly returns from the monthly returns.
  2. Calculate the total risk (i.e. yearly standard deviation of the daily returns).
  3. Calculate the yearly systematic / market risk using the daily returns of the stock and daily return of the market index.
  4. Calculate the unsystematic risk / firm specific risk. Suggest whether this company is a good investment. Answer the following questions while making your suggestion.
a) What is the basis for selection of this stock if you suggest this as a good investment?
b) Would you invest all your money into this stock? If not, why not? How will you address this concern?

Question 2 Capital Budgeting

ABC Ltd. would like to set up a new expansion plant. Currently, ABC has an option to buy an existing building at a cost of AUD 24 000. Necessary equipment for the plant will cost AUD 16 000, including installation costs. The economic life of the equipment and building are 5 and 40 years, respectively. The project also requires an initial investment of AUD 12 000 in net working capital. The initial working capital investment will be made at the time of the purchase of the building and equipment.

The project’s estimated economic life is four years. At the end of that time, the building is expected to have a market value of AUD 15 000 and a book value of AUD 21 600, whereas the equipment is expected to have a market value of AUD 4 000 and a book value of AUD 3 200.

Annual sales will be AUD 80 000. The production department has estimated that variable manufacturing costs will total 60% of sales and that fixed overhead costs, excluding  depreciation, will be AUD 10 000 a year. Depreciation expense will be determined for the year using straight line depreciation method.

ABC’s tax rate is 40%; its cost of capital is 12%; and, for capital budgeting purposes, the company’s policy is to assume that operating cash flows occur at the end of each year. The plant will begin operations immediately after the investment is made, and the first operating cash flows will occur exactly one year later.


  1. Compute the initial investment outlay, operating cash flow over the project’s life, and the terminal-year cash flows for ABC’s expansion project.
  2. Determine whether the project should be accepted using NPV analysis.
  3. Do the sensitivity analysis using different levels of change (e.g. 2%, 5% and 10% increase and decrease) of each of the key inputs (e.g., sales, variable costs and cost of capital)
  4. Identify the most sensitive factor
  5. Perform the scenario analysis
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