Southern Cross university End of Session 3 - 2021 Examination
UNIT: ACCT6004 - Finance - Final Examination
TIME ALLOWED: 4 hrs + 10 minutes including file download and submission upload and reasonable adjustments
PERMITTED MATERIALS: This is an OPEN BOOK exam where the use of unit study resources such as textbooks and tutorial materials is permitted. Your completed Word document is submitted through Turnitin, hence academic standards of referencing and originality are mandatory.
SPECIAL INSTRUCTIONS:
Only one attempt is permitted.
You must complete your exam on this document.
Upload your completed exam document by 17:10 AEDT 16 February 2022 using the link in the “Final exam paper and submission- folder of the Assessment Tasks and Submission section of the ACCT6004 MySCU learning site.
The exam has 6 main questions and all questions are compulsory.
Type your answers under each question. You can expand the space under each as needed.
Workings for calculations must be shown for full marks. You can show workings by typing them or you can paste the relevant part of a spreadsheet you have used.
Action required if you have any submission problems:
• Take photos of any error messages or other evidence of the problem and email these and your completed exam to the UA (cindy.machalek@scu.edu.au).
• If you are unable to email the completed exam file, you must take clear photos of the document properties (click on “File- on the top menu), cover page and answers to each question. Email these to the UA, along with the photos (point above) evidencing the problem.
Regardless of any problems, your exam will not be marked until it has been successfully uploaded through Turnitin and evidence provided of its completion before the 17:10 pm AEDT.
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All exams include 10 minutes reading time which allows you to spend some time at the start of the examination for composing yourself reading the exam paper, and planning which questions to answer, and how. We advise you to read the instructions and questions carefully before you begin.
Record your full name and student ID in the spaces provided below.
STUDENT NAME:...............................
I.D. NUMBER:..............................
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QUESTION 1 (5 marks)
Woolworths Ltd sells new shares to institutional investors.
(a) Is this an investing, financing or dividend decision by Woolworths?
(b) Is this an investing, financing or dividend decision by the institutional investors?
(c) What type of financial capital is involved: debt or equity? (1 mark)
(d) What type of financial market is involved: primary or secondary? (1 mark)
(e) One of the institutional investors is included in the major United Kingdom stock market index. What is the name of that index?
QUESTION 2 (10 marks)
(a) Each of the bonds in the following table has a $1,000 par value and pays annual coupons. Calculate the missing values. (5 marks)
Bond Coupon interest rate (% p.a.) Years to maturity Yield to maturity (% p.a.) Bond price ($)
X 8 7 5 ?
Y 3 7 ? 970
(b) Which risk will not differ between Bonds X and Y in part (a): default risk or maturity risk? Why? (2.5 marks)
(c) Explain what will happen to the yield to maturity and price of Bonds X and Y in part (a) if inflation is expected to increase. (No calculations required.) (2.5 marks)
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QUESTION 3 (20 marks)
(a) The share price for Bee Ltd at 1 July 2020 was $3.40 and at 30 June 2021 was $4.80 You have collected the following per share dividend data for 2020 and 2021:
$0.13, paid 31 March 2020
$0.14, paid 31 September 2020
$0.15, paid 31 March 2021
$0.16, to be paid 31 September 2021
What is the rate of return on Bee Ltd shares for the year ending 30 June 2021?
(7 marks)
(b) The All Ordinaries Total Return index rose from 81,695 at the end of May 2021 to 83,786 at the end of June 2021.
i. What was the monthly rate of return for the index? (2.5 marks)
ii. You expect the All Q.rdS to increase by 10% in 2022. Woolworths has a beta of 0.50. What you expect to happen to the return of Woolworths? (2.5 marks)
(c) Explain what happens to the risk of a portfolio as the number of assets in the portfolio is increased. (8 marks)
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QUESTION 4 (25 marks)
XYZ Ltd is considering some projects and has asked you to assess them from a financial perspective. They have given you the following information:
Table 1: Project Information
Project N Project 0 Project P Project Q
Project useful life 5 5 6 8
NPV SO.86m $1.25m -$2.50m -$2.90m
IRR 18.3% 14.2% n/a n/a
Risk rating High High Average Average
Notes: 1. The company can only make an investment in one of Projects N and 0. 2. Projects P and Q are alternative air conditioning systems for head office and will be repeated indefinitely.
Table 2: Discount rate guidelines
Current WACC 7%
Risk rating WACC adjustment (percentage points)
Low -3
Average 0
High +5
(a) What accept/reject decisions should be made regarding Projects N and O and why? (8 marks)
(b) What discount rate(s) should have been used in the analysis of Projects N and 0? (3 marks)
(c) XYZ is a very large listed company with access to capital markets, yet managers state that the reason an investment can be made in only one of Projects N and 0 is due to a limit in the capital budget. What is the name given to such a situation? (3 marks)
(d) Why would no IRR be available for Projects P and Q? (3 marks)
(e) What accept/reject decisions should be made regarding Projects P and Q and why? (8 marks)
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QUESTION 5 (20 marks)
Qualitatively determine the debt level (low/high) you would expect for a company under each independent situation below. Provide a brief explanation for each and include the name of the relevant theory.
(a) A company has great potential for unexpected NPV positive opportunities.
(b) A company has positive free cash flows and concentrated share ownership.
(c) Most of a company’s assets are motor vehicles, fixtures and fittings, buildings and land.
(d) The unlevered beta adjusted for cash for a company’s industry is 0.60
(e) A company pays corporate tax
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QUESTION 6 (20 marks)
(a) ABC Ltd pays fully franked dividends. The company announces that its next dividend per share will increase. The market was not expecting this increase.
i. Explain the effect of the dividend announcement on the companys share price. (5 marks)
ii. Explain what would happen to the share price on the ex-dividend date, assuming no other events. (5 marks)
(b) DEF Ltd, a company with volatile earnings, is determining its payout policy.
i. What level of cash dividends (low/highj is appropriate? Clearly explain your
reasoning. (5 marks)
ii. If the company was to pay cash dividends, which type of payout policy (constant payout ratio policy, constant dollar payout policy, or low-regular and extra payout policy) would you recommend it use and why? (5 marks)
END OF EXAM
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