Distance 2-2020 JNB518 Finance for Decision-Making Page 2 of 5 Pages
Attempt ALL FIVE (5) questions.
a) The below information is extracted from the balance sheet of ABC Shipping
10% debentures ($100 par) $10,000,000
Paid-up capital²ordinary shares
12% preference shares ($10 par) $5,000,000
x The ordinary shares are currently traded at $5.00 per share.
x The beta coefficient of ABC Shipping Asia Ltd is 1.5.
x The risk free rate (a 10-year government bond) in the market is 3%.
x The average historical market premium for the past 10 years is 8%.
x Its debentures are priced at $102.
x Its preference shares are trading at par.
x The current return (i.e. market yield) on the compan\¶s debentures is
x Company tax is 30%.
x The existing capital structure is unlikely to change.
Calculate the Weighted Average Cost of Capital (WACC) of the company.
b) ABC Shipping Asia Ltd is planning to add one new container vessel to its
operation for 10 years. Two container vessels with various capacities are
considered. Both vessels are expected to have equal lives of 20 years. The
capital cost of each new vessel can be depreciated using the straight-line
depreciation method. The below table shows estimated projected revenue
and costs for each Vessel Project and the residual value of each vessel at the
end of year 20. The vessel will be sold at the end of year 10 and the
expected market value of each vessel for sale is also given in the table. The
company tax rate is 30%. The required rate of return used for evaluating the
projects is the compan\¶s WACC from part a.
Initial investment costs $15 million $9 million
Incremental annual revenue $7 million $4.5 million
Incremental annual operational costs (exclude
depreciation) $3 million $1.8 million
Estimated life of the vessel 20 years 20 years
Residual value of the vessel at the end of year 20 $2.5 million $1 million
Expected market value of each vessel for sale at the
end of year 10 $6 million $4 million
Distance 2-2020 JNB518 Finance for Decision-Making Page 3 of 5 Pages
i) Using a table in Word or an Excel spreadsheet, set up the cash flows for
each Vessel Project.
ii) Calculate the payback period of each Vessel Project. The company has a
maximum acceptable payback period of 5 years.
iii) Calculate the Net Present Value (NPV) of each Vessel Project.
iv) Calculate the Internal Rate of Return (IRR) of each Vessel Project. You
can use the formula function in Excel to get the IRR but need to show
v) Which Vessel Project should the company accept based on your answers
in part ii, iii and iv? Why?
The table below shows the two-year financial ratios of XYZ Engineering Ltd and
the industry average.
Ratio 2018 2019 Industry average
Current Ratio 5.00 3.50 5.00
Quick Ratio 2.70 2.00 3.00
Inventory Turnover 30 days 40 days 25 days
Average Collection Period 25 days 35 days 20 days
Debt Ratio 34.69% 40.50% 33.00%
Interest Earned Ratio 6.00 5.00 7.00
Total Asset Turnover 0.51 times 0.50 times 0.75 times
Net Profit Margin 12.00% 9.17% 12.00%
Return on Total Assets 6.12% 5.40% 9.00%
The company has a long-term investment plan and needs a loan. Suppose that
you hold a position of loan manager of a bank. XYZ Engineering approaches your
bank to apply for a new loan of 1 million dollars. Will you approve the application?
Justify your answer. (Word limit: 400 words)
a) A 60% debt-financed Australian iron ore company sells its iron ore into the
Chinese market. Identify risks faced by the company and specific instruments
that can be used to control these risks. (Word limit: 200)
b) A large and well-known listed company wants to raise $1 million next month
for its 12-month period project. Identify and explain four different financing
options available to it. (Word limit: 200)
Distance 2-2020 JNB518 Finance for Decision-Making Page 4 of 5 Pages
The below table contains the monthly returns of two shares BHP and Qantas for
the 12 months from 1 September 2019 to 1 August 2020.
Date BHP Qantas
1/09/2019 0.01 0.03
1/10/2019 -0.02 0.02
1/11/2019 0.06 0.14
1/12/2019 0.02 -0.03
1/01/2020 0.01 -0.10
1/02/2020 -0.15 -0.14
1/03/2020 -0.14 -0.42
1/04/2020 0.12 0.20
1/05/2020 0.07 0.03
1/06/2020 0.03 -0.05
1/07/2020 0.03 -0.15
1/08/2020 0.03 0.22
a) Calculate the average monthly holding-period returns and the standard
deviations of these returns for BHP and Qantas.
b) Assume you have decided to invest 60% of your money in BHP and 40% in
Qantas. Calculate the expected monthly holding-period return and the
standard deviation of the return for the two-share portfolio.
c) Discuss whether you have gained benefits through the creation of the
portfolio of 60% in BHP and 40% in Qantas.
Note: You can use Excel spreadsheet to work on part a and b. However, the
answers, working process explanation including formula used, and discussion
should be in Word document. The spreadsheets are submitted as an appendix.
a) µWhen the inflation rate in AXstralia is relatiYel\ higher than the inflation rate
in the USA, the value of the Australian dollar will increase relative to the US
dollar.¶ Comment on the aboYe statement Xsing the theory that explains the
adjustment of foreign exchange rates. (Word limit: 150)
Distance 2-2020 JNB518 Finance for Decision-Making Page 5 of 5 Pages
b) ABC Engineering Australia is expected to pa\ ¼200,000 to a company in
Germany for importing machinery three months from now. The spot
e[change rate is A$/¼0.63. However, it is forecast that Australian dollars will
depreciate, and the e[change rate ma\ moYe to A$/¼0.58 in three months
when the company will need the Euro. The company is considering using
either a forward hedge or an option hedge to mitigate the foreign exchange
risk. Relevant information is provided below.
x The 90 da\ forZard rate as of toda\ is A$/¼0.60.
x A call option on ¼ that expires in 90 days has an exercise price of
A$/¼0.61 with a premium of A$0.01.
x A pXt option on ¼ that e[pires in 90 da\s has an e[ercise price of
A$/¼0.59 Zith a premiXm of A$0.01.
Which is the best strategy for the company to mitigate the foreign exchange
rate risk? Why?
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