Name

Campus: Central Queensland University, Sydney Campus

Student ID:

Number Requirements Max Mark Marks for

Marks s each Q
Explain at least 3 reasons 5
1: RQ 3- Clarity in explanation & good 2
12(10 presentation
marks) Degree of % similarity & proper 3
referencing
Timeline 1.5
2: P 4-34 Show formula 1.5
(10 Correct answer 4
marks) Explanation of answer & degree of % 3
similarity
3: RQ 9- Describe the efficient markets 5
21 Clarity in explanation & good 2
presentation
(10marks Degree of % similarity & proper 3
) referencing
Correct explanation to both parts 5
4: RQ 10-
Clarity in explanation & good 2
9
presentation
(10
Degree of % similarity & proper 3
marks)
referencing
Part (a) Calculation 3
5: P 10- Part (b) Calculation & explanation 5
Part (c) Calculation & explanation 5
20
Timeline in all parts 2
(20 Show formulaeused in all parts 2
marks) Degree of % similarity & proper 3
referencing
6: P 12- Part (a) calculation & explanation 4
10 Part (b) calculation & explanation 4
(10 Degree of % similarity & proper 2
marks) referencing
Part (a) calculation & explanation 3
7: P 14- Part (b) calculation & explanation 3
Part (c) Calculation & explanation 2
21
Part (d) calculation & explanation 2
Show formulae used in all parts (all 2
(15 tables)
marks) Degree of % similarity & proper 3
referencing

1
 Part (a) calculation & explanation 2.5
8: P 18- Part (b) calculation & explanation 2.5
Part (c) Calculation & explanation 2.5
14
Part (d) explanation 2.5
(15 Show formulae used in all parts 2
marks) Degree of % similarity & proper 3
referencing
Total out of 100 100
Total out of 20 20
Penalty for late submission without approval @ 1
mark per day
Total out of 20 after penalty deduction (if 20
applicable)

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QNO: 1

RQ 3.12

Answer: Company needs capital for the proper running, sustaining and developing in the
market. The firm searching cash sells its securities like shares or bonds to the investors who want
to earn a reasonable rate of return. This process of selling securities directly to the investors is
known as the direct transfer of funds. In this process of direct funding there will not be any
involvement of intermediaries. The most important reason to issue share or bonds is to increases
or decreases the equity fund of the company. Petty (2012) pointed out three reasons for direct
transfer of funds as described below:

A) Since there are no intermediaries and there is direct contact with investors so there
will not be any additional expense required for the intermediaries.
B) At the time of budgetary emergency, banks will not be putting money to the business.
So it is direct funds which provide money to the firms.
C) Firms disperse their shares and bonds to general society with the goal that they can
collect a huge amount of money from open society and firms dont need to issue
substantial number of shares and bonds to the single individuals which can be
benefited to companies.

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Source: Ejler, Czerniawska and Poulfelt (2011), Managing The Knowledge Intensive Firm

QNO: 2

PQ 4.34

Answer: Given,

Price of yacht= $ 50,000

Deposited= $ 10,000

PV = $(50,000-10,000) =$ 40,000

n= 10

r= 10%

Annual Payment (PMT) =?

4
Now,

We have formula,
n
(1( 1+i ) )
PV =PMT i

10
(1( 1+0.10 ) )
Or, 40,000 = PMT 0.10

Or, 40,000=PMT*6.1446

40,000
Or, PMT= 6.1445

Therefore, PMT=$ 6509.88

Thus, for the next 10 years Liz Klemkosky needs to pay $ 6509.88 annually.

5
QNO: 3

RQ 9.21

Answer: According to the theory putted forward firstly by a finance professor Eugene Fama in
his theory called the efficient market hypothesis, Stocks reliably trade at their reasonable worth
on Stock exchanges, making it strange for financial pros to either purchase thought little of
stocks or offer stocks at swelled expenses.

Additionally, the powerful markets theory communicates that securities costs unequivocally
reflect future expected cash streams and rely on upon all information open to examiners (Petty et
al, 2012). Also an efficient market area is characterized as a business division in which expenses
of endeavors quickly and totally reflect every single available data which consolidates past
information, current information and unavoidable events.

We can categorize three types effective business hypothesis which are presented below:

A) Weak-form: This theory suggest that today's stock costs mirror everything of the information
of past costs and that no type of specialized examination can be successfully used to help
speculators in settling on exchanging choices.

B) Semi strong form: The individuals who subscribe to this rendition of the hypothesis trust that
exclusive data that is not promptly accessible to people in general can help investors support
their profits of returns to a performance level over that of the general business sector

C) Strong form: The theory expresses that all data both the data accessible to the general
public and any data not freely known is totally represented in current stock costs, and there is
no sort of data that can give a financial specialist favorable position available.

"The beneficial business division theory is associated with an "unpredictable walk", which is a
term inaccurately used as a part of the asset composing to depict a quality course of action where
all resulting cost changes address arbitrary departures from past costs" (Malkiel, 2003). In
addition, information's run beginning with one place then onto the following at a quick on
account of which there is no same expenses in securities trade. Additionally, investors can't
purchase stock at a low cost or offer at a high cost. It is an aftereffect of stock which reliably
bargains at their sensible qualities. So additionally, by using expert techniques with respect to
decision of stock can't help investors to beat the stock trade. By procuring the risky endeavor,
investors may increase profits.

QNO: 4

6
RQ 10.9

Answer: Earnings per share (EPS) acts as a pointer of an organization's profitability. It is the part
of a company's profit divided to each outstanding share of common stock (Petty et al 2012).
Formula to calculated EPS is

Net IncomeDividends on Preferred Stock

EPS= Average Outstanding S h ares

It describes about the income the company generated for each share of stock. This provides
company to compare its status to previous years and to other firms in the markets too ( Akroush,
2012).

a) It is difficult to find out the stock price knowing the EPS value since their relation is
complicated. This is because high profits do not necessarily mean a high price of the share. And
low profit will not always give the low stock price. The relationship between a stock price and
EPS is known as the Price per earnings ratio, or P/E. To figure P/E,is found basically by dividing
the stock price by the EPS. i.e.

Stock Price
P/E= EPS

This P/E tells us the amount that an investor must pay to capture $1 of earnings for a firm. P/E
higher says that investors are paying more to capture $1 of earnings, but also think the firm is
capable of growth in future. On the off chance that a firm doesn't create reliable profit
development or lower its P/E proportion after some time, speculators may offer the stock,
sending its value lower. Youthful or development arranged organizations that have to a great
degree high P/E proportions or lose cash may have a high stock cost because of anticipated
future development. Be that as it may, in the end an absence of income over a drawn out stretch
of time will drive a stock price down and the organization possibly out of business.

So, finally we could say that two of the major factors that effects price of stock are current
earnings and promise of future earnings.

b) The limitations of EPS to share valuation are as follows:

i) Investor ought to think about commitment position and fiscal impact yet EPS can't give
unobtrusive component information about firms commitment position and cash related impact.

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ii) Different firms have their own particular methodology; as for their course of action for
price per earning can be affected.

iii) Moreover, EPS figure can be self-rulingly change if any firm buys its own particular
stock yet again. It will lessen the amount of offer in issue.

iv) Furthermore, whole discovering the acquiring figure it should be measured with the late
reported figure at face regard however it should be adjusted for any strange components.

QNO: 5

PQ 10.20

Answer: Given,

Face value=$ 1,000

Coupon value= $ 100

n=15 years

r=12%

a) Value of bond=?

We have formula,

Vb= PMT( PVIFAi,n)+ FVn(PVIFi,n)

(1( 1+0.12 )15 ) 1

=100* 0.12 +1000* (1+0.12)15

=100*6.811+1000*0.183

=681.1+183

=$864.1

Therefore value of bond is $ 864.1

b)

8
 (i) if r=15%

We have formula,

Vb= PMT( PVIFAi,n)+ FVn(PVIFi,n)

(1( 1+0.15 )15 ) 1

=100* 0.15 +1000* (1+0.15)15

=100*5.847+1000*0.123

=584.7+123

=$707.7

Therefore when required rate of return increases to 15 %, its value of bond decreases to
$707.7.

(ii) if r=8%

We have formula,

Vb= PMT( PVIFAi,n)+ FVn(PVIFi,n)

(1( 1+0.8 )15 ) 1

=100* 0.8 +1000* (1+0.8)15

=100*8.56+1000*0.315

=856+315

=$1171

Therefore when required rate of return decreases to 8 %, its value of bond increases to
$1171.

9
C)

Given, n=5 years

(i) r=15%

We have formula,

Vb= PMT( PVIFAi,n)+ FVn(PVIFi,n)

(1( 1+0.15 )5 ) 1
=100* 0.15 +1000* (1+0.15)5

=100*3.352+1000*0.497

=335.2+497

=$832.2 Answer

(ii) if r=8%

We have formula,

Vb= PMT( PVIFAi,n)+ FVn(PVIFi,n)

(1( 1+0.8 )5 ) 1
=100* 0.8 +1000* (1+0.8)5

10
 =100*3.993+1000*0.681

=399.3+681

=$1080.3 Answer

So, in conclusion we can say that bond value and rate of return has inverse relationship.

QNO: 6

PQ 12.10

Answer:

a) Given

r=10%

For project A, EAAA=?

We have formula as,

n
ACF
NPV = (1+ k)tt IO
t =1

65000 65000 65000 85000

(1+0.1)
1 + (1+0.1)2 + (1+0.1)3 + (1+0.1)4 -160000

=59091+53720+48836+58057-160000

11
=219704-160000

=$59,704

Now,

NPV
EAAA = PVIFA i , n

59704
= 3.170

EAAA =$18,834.06

For project B, EAAB=?

We have formula as,

n
ACF
NPV = (1+ k)tt IO
t =1

35000 35000 35000 40000 40000 40000

+
(1+0.1)
1 + (1+0.1)2 + (1+0.1)3 + (1+0.1)4 (1+0.1)
5 + (1+0.1)6 +

45000 45000 45000

(1+0.1)
7 + (1+0.1)8 + (1+0.1)9 -160000

=31819+28926+26296+27320+24837+22579+23092+20993+19084-160000

=$64,946

Now,

NPV
EAAB= PVIFA i , n

64946
= 5.759

EAA=$11277.30

We prefer to select project A which has higher amount $ 18834.06.

12
 (b)Net present values are calculated for each projects as under

For Project A,

Net Present value = EAA/r

= 18,834.06/0.1
=$1,88,340.6

For Project B,

Net Present value = EAA/r

= 11,277.30/0.1
=$1,12,773

QNO: 7

PQ 14.21

Answer:

a)

For debt:

Debt
Market value proportion= Total equity *100

1500000
= 3700000 *100

=40.54%

For preference shares:

Preference s h ares
Market value proportion= Total equity *100

550000
= 3700000 *100

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 =14.86%

For ordinary shares:

Ordinay s h ares
Market value proportion= Total equity *100

1650000
= 3700000 *100

=44.59%

b)

After tax calculation:

Cost of Debt= rate of cost of debt before tax*(1-T)

=0.08*(1-0.3)

=5.6%

D PS
Cost of Preference shares = P PS

94 cents
= 9.09(10.04 )

= (94 cents /8.73)*100

=10.77%

Cost of ordinary shares= (dividend per ordinary share/ current market price per ordinary share)
+growth rate

Current Market price per ordinary share(P0) =Market Price-Discount10% on market price-Issue
Cost

=3.03-0.303-0.30=2.427

D 0(1+ g)
Cost of ordinary shares = P0 +g

14
 D1
= P0 +g

16 cents
= 2.427 +0.09

=15.59%

The after-tax weighted average cost of finance =( market value proportion of debt)(After-tax cost
of debt) +(market value proportion of preference share) (cost of preference stock)+(market value
proportion of common equity)( cost of common equity)

= (40.54%)(5.65%)+ (14.86%)(10.77%)+(44.59%)(15.59%)

=10.82%

d) net present value calculations:

project A npv=-200000+(140000/1.1109)+(140000/1.11092)

=$39467.05

project B npv=-125000+(87500/1.1109)+(87500/1.11092)

=$24666.91

project C npv=-150000+(105000/1.1109)+(105000/1.11092)

=$29600.29

Project D npv=-275000+(192500/1.1109)+(192500/1.11092)

=$54267.19

Since Project D has higher NPV. Therefore, it is the profitable project.

QNO 8

PQ 18.14

Answer:

a) Effective annual interest rate=?

PMT=$69000

Deposite=$50000

15
n=5

PV=300000-50000= $ 250000

We have formula,

PV=PMT(PVIFAi,n)

Or, PVIFAi,n=PV/PMT

=250000/69000

PVIFAi,n =3.6231

For 5 instalments looking at PVIFA table,

EAR=12%

So, the required yearly interest rate is 12%.

b) Annual payment on the bank loan=?

PV=$ 300000

r= 16%

n=10( half-yearly)

PMT=?

PV=PMT(PVIFAi,n)
52
(1( 1+0.16 /2 ) )
300000=PMT( 0.16/2 )

300000=PMT*6.710

PMT=$44709

The customer should pay $ 44709 yearly to bank.

(c) Yearly interest rate for the term loan from the finance broker=?

FV= $ 425000

PV=300000

n=5

16
r=?

FV / PV
1
r= ( n 1

5
425000
= ( 300000 ) -1

=1.072-1

r=7.2%

The annual rate of interest for the term loan from finance broker is 7.2%

d)

Here when the organization Temple pays $50000 initial installment took after by five yearly
portions of $69000 every then the aggregate expenses will be 50000+69000*5=$447090

At the point when Temple Company runs with single amount installment then aggregate expense
will be $425000.

Among these the slightest cost that organization will happen is when organization pays $50000
initial installment took after by five yearly portions of $69000. So, the organization ought to
choose this account source taking into account cost thought just.

References:

Akroush N M 2012, An empirical model of markering strategy and shareholder value: A value-
based marketing perspective, Competitive review: An international business journal, vol. 22, no.
1, pp. 48-89.

Bepari M K 2015, Relative and Incremental value relevance of book value and earnings during
the global financial crisis, international journal of management, vol. 25, no. 4.

Besley, S & Brigham, E 2000, Essentials Of Managerial Finance, Fort Worth : Dryden Press.

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Ejler, N, Czerniawska, F, & Poulfelt, F 2011, Managing The Knowledge Intensive Firm,
Abingdon, Oxon: Routledge, eBook Collection

Petty J W, Titman S, Keown A, Martin J D, Martin P, Burrow M & Nguyen H, 2012, Finance
management : principles and applications, 6th edn, pp. 32.

Petty J W, Titman S, Keown A, Martin J D, Martin P, Burrow M & Nguyen H, 2012, Finance
management : principles and applications, 6th edn, pp. 618-619.

Petty J W, Titman S, Keown A, Martin J D, Martin P, Burrow M & Nguyen H, 2012, Finance
management : principles and applications, 6th edn, pp. 312-313.

Petty J W, Titman S, Keown A, Martin J D, Martin P, Burrow M & Nguyen H, 2012, Finance
management : principles and applications, 6th edn, pp. 48-89.

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