The University of Manchester
BMAN23000 Foundations of Finance
Semester 2, 2012-2013
Group-based assignment
Please Read This Document Carefully
This document describes the coursework component for BMAN23000 which counts for 20% of the final mark for the course. You are required to complete this coursework in groups. You will be randomly allocated to a coursework group of approximately 6 fellow students in the same workshop. Details of coursework groups and companies allocated to each coursework group will be available on Blackboard (in a file called Group and Company Allocation). Details of the assignment are given below. The assignment will be discussed in detail in Workshop 1 in Week 4.
Assignment
Each coursework group will be
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Also briefly indicate how your advice would change if other assets became available to the investor.
Part 2
The senior management of Company A employ you to advise them on the cost of capital the company should use to calculate net present value and decide whether or not to undertake a new investment project. You may assume that the new project is comparable to the average of the company’s existing projects in all respects.
Make sure you correctly identify which of your two companies is “Company A”. Note also that you were allocated randomly drawn and randomly paired companies. Therefore, Company B is probably not a useful comparable for Company A’s new project.
Required:
a) Calculate investors’ required returns on Company’s A’s equity. Remember, there are many ways of estimating investors’ required returns (see Lectures 1-2, Semester 2). You should use two alternative ways of calculating the required returns to check how sensitive your result is to using different methods; i.e. to check the robustness of your result. For example, you could use the Fama-French three-factor model in addition to the Security Market Line (SML), which uses a single factor (beta). See e.g. the article by Fama and French (1997) in the suggested readings below.
b) Calculate Company’s A’s debt cost of capital. The bond yield can be calculated as Yield = risk-free
Barb Williams and Rick Thomas, while attending an executive education course at a well-known business school, came across a case which involved calculating the cost of capital for Telus Corporation (Telus). Basic data such as the Balance Sheet, Income Statement, Data on Telus’ Common Stock, Market Index, and the Average Annual Returns in North American Capital Markets were provided. In order to calculate Telus’ cost of capital we need to calculate the company’s Cost of Equity, Cost of Debt, and Tax Rate along with their weighted cost and then apply these to the Weighted
PHL 458 Complete Class Week 1 - 5 – All Assignments, Presentations, DQs – A+ Graded Course Material
Here we choose VW NYSE, AMEX, and NASDAQ data as market returns, because it’s value weighted and more reliable. The results show CSC’s equity beta = 2.27, QRG’s equity beta = 1.79.
Hypothetical Answer: It would be a huge loss if the new projects undertaken would not yield a good rate of return. The rate of return on invested capital is the most important thing and maximizing shareholder value is the most important thing. Would you help in this decision making process so I do not take on risky
Star Appliance is looking to expand their product line and is considering three different projects: dishwashers, garbage disposals, and trash compactors. We want to determine which project would be worth doing by determining if they will add value to Star. Thus, the project(s) that will add the most value to Star Appliance will be worth pursuing. The current hurdle rate of 10% should be re-evaluated by finding the weighted average cost of capital (WACC). Then by forecasting the cash flows of each project and discounting them by the WACC to find the net present value, or by solving for the internal rate of return, we should be able to see which projects Star should undertake.
* We assume the cost of capital to be a stated annual rate to facilitate calculations;
We use the equation ri=(Pt-Pt-1+Dt)/Pt-1 to calculate the monthly return of stock of Charles Schwab Corp, Quick & Reilly Group and Waterhouse Investor Srvcs. Then we have two methods to calculate the Beta of Equity for each company.
Our analysis attempts to answer the question, “What are the things a company must consider when analyzing a new investment or project?” According to the text, a firm’s first objective when deciding to take on new debt should be that its return on net assets (RONA) should be greater than its weighted average cost of capital (WACC). Since we are working with an income statement only and do not have an amount for net assets, we will instead use return on invested capital (ROIC), which measures how well a company is using its money to generate returns. Comparing a company 's return on capital (ROIC) with its cost of capital (WACC) reveals whether invested capital was used effectively. From our spreadsheet calculations we see that using our estimated operating profit provides us with a 19.9% return on invested capital with only a 7.2% weighted average cost for that same capital. If these numbers are even close to correct, George should definitely make the move.
The present value of the net incremental cash flows, totaling $5,740K, is added to the present value of the Capital Cost Allowance (CCA) tax shield, provided by the Plant and Equipment of $599K, to arrive at the project’s NPV of $6,339K. (Please refer to Exhibit 4 and 5 for assumptions and detailed NPV calculations.) This high positive NPV means that the project will add a significant amount of value to FMI. In addition, using the incremental cash flows (excluding CCA) generated by the NPV calculation, we calculated the project’s IRR to be 28%. This means that the project will generate a higher rate of return than the company’s cost of capital of 10.05%. This is also a positive indication that the company should undertake the project.
These two cases present the capital investment decisions under consideration by executives of a large chemicals firm in January 2001. The A case (case 20) presents a go/no-go project evaluation regarding improvements to a polypropylene production plant. The B case (case 21) reviews the same project but from one level higher, where the executive faces an either/or investment decision between two mutually exclusive projects. The objective of the two cases is to expose students to a wide range of capital budgeting issues:
3. Based on the above information, select two companies that you will work with throughout this project. The first company should be a large cap stock with high book to market (BM) ratio. The second company should be a small cap stock with low BM ratio. You can check how Prof. Kenneth French constructs these ratios. Look at the explanations from the data library on his website:
FINS 5535 Computer Assignment For this assignment, you may work in groups of up to four. The due date for the assignment is Friday, 1 June, 2012 by 6:00pm. You may hand in the assignment at the Banking and Finance assignment boxes on the ground floor of the Australian School of Business building. To find the assignment boxes, go to the west elevator (further from the bookstore, closer to the Roundhouse), and go straight out the back through the glass doors (left of the elevator). On the left-hand side you’ll see the Banking and Finance assignment boxes. Let’s use Assignment box 2. I’ll put up a sign closer to the due date. Or, you can hand them directly to me, or bring them to my office during my consultation hours. Please do not disturb
Assignments are to be submitted using student ID numbers only; do not include your name. Please note that assignments that include names or that do not have the box below checked will not be graded.
1. Explain the role of the financial system and why it is important to individuals and to the economy as a whole
Based on my 22 Years of experience in the field of Real Estate, if I were given this opportunity to advice on the investment of this big amount.