Task – Answer all questions.

Question 1 20 marks

You are a banker working for Commonwealth Bank of Australia (CBA). Your neighbour is retired and has invested some of his superannuation in a share portfolio that includes CBA shares. Although he is not unhappy about the bank’s share performance he believes CBA can do better by its shareholders. In particular he is not sure about the values of socially responsible projects CBA undertakes. As you are to present a brief on an issue of your own choice on the next monthly staff meeting you decide to write the brief on the following topic: ‘Is maximising the value of the firm to its shareholders consistent with the firm exercising considerable social responsibility?’ Incorporate various social obligations undertaken by CBA and specify how CBA maximises shareholder’s value to illustrate your argument. (Maximum 1000 words)

Question 2 35 marks

Dazzle Pty was founded in 1980 by Dean Adams, an industrial designer with two of his university friends Andrea Larson and Daniel Zhan. Initially they produced and sold various glass products locally, but in the late 1990s, they joined with several other glass producers to form The Opal Glass Company, which then began an aggressive promotion campaign. Today, the company is one of the leading glass producers in Australia.

The management of Opal Glass is currently evaluating a potential new coloured structural glass product. The new product would cost more than their usual commercial exterior glasses and in market research conducted by the company’s research department at a cost of $150,000 it was judged superior to various competing products. Molly Rogers, the Chief Financial Officer, must analyse this project, along with other potential investments, and then present her findings to the company’s executive committee.

The project will require construction of a new building that would have an annual capacity of 100,000 tons and will cost an estimated $25,000,000 to build. The estimated purchase cost of machinery is $14,000,000 but shipping costs would be $500,000 and the estimated installation charge is another $500,000.The land on which the plant will be built has been vacant since it was bought three years ago at a cost of $2,000,000. John Holmes, the chief accountant, believes that this outlay, which has already been paid and expensed for tax purposes, should be charged to the new project. His contention is that if the land had not been bought, the firm would have had to spend the $2,000,000 (or even more) to buy the land for new project.

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The company expects its new plant to produce 60,000 tons of glass per year and the management of Opal Glass anticipates they can sell the product at $510 per ton allowing the company to gain 12% market share in the first year of operation. Fixed costs are expected to average $15,000,000 annually while variable costs are estimated to be around $100 per ton. The plant will be fully depreciated on a straight-line basis over ten years, with an estimated salvage value of $1,000,000 (building and equipment) after 10 years at the end of the project. The required rate of return on the project is taken as 15% due to the high degree of systematic risk associated with the new product. The company tax rate is 30%.

Now assume that you are an assistant to Molly and she has asked you to analyse the project and then to present your findings to her. Therefore,

a. Calculate the project’s incremental cash flow for each year and present in a tabular form. 15 marks b. Using the incremental cash flows calculate the projects: i. Net Present Value 5 marks ii. Internal Rate of Return using interpolation method 7 marks iii. Payback Period 1.5 marks iv. Discounted Payback Period 1.5 marks

c. Combining all the information recommend if the project should be undertaken or not and explain your decision to Molly outlining any specific points of consideration. (Maximum 250 words) 5 marks

Please note if you use a spreadsheet you cannot submit a spreadsheet via EASTS – neither can you submit a spreadsheet as an embedded object in a Word document. If you construct your table in Excel then please simply copy and paste into Word. You can set up your data in a spreadsheet and use it check your answer but remember you still have to show how the NPV, etc. was derived. This does not mean giving the Excel algorithm. It does have to show how the solution was derived. So show how you have discounted the cash flows.

Question 3 45 marks

You are considering investing in Australian shares and decide to investigate the shares of two Australian companies: Commonwealth Bank of Australia and Hansen Technologies Limited.

(For this question please note:

 Use the Yahoo! Finance website at http://au.finance.yahoo.com/ for data.  This question is to be done on a spreadsheet with the results pasted and submitted in a Word document. EASTS does not support spreadsheets. Make sure that you show all your workings – for example, do not simply put down the covariance but show how it was obtained and this does not mean giving the Excel algorithm. Please do not give cell formulae, cell references, etc, as the reader should be able to follow from a table. Also please note using excel formula such as =COVAR() is not acceptable.)

a. Find the monthly opening and closing prices for the period 1 Jan 2015 – 31 Dec 2015 for Commonwealth Bank of Australia (CBA.AX), and Hansen Technologies Limited (HSN.AX) and the Market as proxied by the All Ordinaries index (^AORD). 3 marks
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b. Calculate monthly holding period returns (%) for the period 1 Jan 2015 – 31 Dec 2015 for CBA, HSN and Market. The monthly holding period return is the percentage return (%) you would receive if you bought an asset on the first day of the month (opening price) and sold it on the last day of the month (closing price). (Use ‘Close’ rather than ‘Adjusted Close’ for the selling price and include any dividends). Show the formula and at least one sample calculation. 3 marks

c. Graph your results on one graph with returns on the y axis and time on the x axis. 5 marks d. Calculate the average monthly holding period return for CBA, HSN and Market. 3 marks e. For CBA, HSN and Market, calculate:

i. The annual holding period return; and 1.5 marks ii. The standard deviation of the monthly holding period returns 4.5 marks

f. Calculate the covariance of CBA and HSN over the year. 4 marks

g. You decide to invest in a portfolio of two assets, calculate the expected portfolio return and risk if:

i. 30% of wealth is invested in CBA and 70% in HSN 5 marks ii. 90% of wealth is invested in CBA and 10% in HSN 5 marks

h. Plot CBA, HSN and Market on a risk / return graph as well as the two portfolios you calculated in part g. (See Fig 11.2 of text for example of graph) 4 marks

i. Incorporating all the analysis explain which asset or combination of assets would you choose to invest as a rational investor. (maximum 250 words) 5 marks

j. Would you change the decision you have made in part i above if you also consider the analysis conducted in Question 1? Explain. (maximum 100 words) 2 marks

Rationale

This assignment covers Topics 1 – 7 and assesses your competency towards all four learning outcomes of this subject.

The feedback will assist you to determine where you may need to revise your work.

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