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PRINCIPLES OF FINANCIAL MANAGEMENT
TRIMESTER 3, 2021
Assessment Weight: 50 total marks
• All questions must be answered by using the answer boxes provided in this paper.
• Completed answers must be submitted to Blackboard by the published due date and time.
Please ensure you follow the submission instructions at the end of this paper.
This assessment consists of six (6) questions and is designed to assess your level of knowledge of the key topics covered in this unit.
Question 1 (7 marks)
A 3-year investment has a quoted interest rate of 15%. You wish to invest AUD 75,000.
a) Calculate the expected returns from year 1 to year 3 if the investment earns simple interest. (1 x 3 = 3 marks)
ANSWER a): ** Answer box will enlarge as you type
b) Calculate the expected returns from year 1 to year 3 if the investment earns compound interest. (1 x 3 = 3 marks)
c) Is there a difference in the returns you have calculated? Explain why. (1 mark)
Question 2 (7 marks)
As the finance manager for an expanding construction company, you approached Bendigo Bank to discuss their range of available business loan facilities.
a) Identify the fundamental principle of finance related to the use of both short-term and medium to long-term finance by a business. (2 marks)
b) Explain the principle and why it is important for decision-making in taking out loans.
c) State 1 example each for short-term and medium to long-term credit that businesses can avail. Describe their purpose. (1.5 x 2 = 3 marks)
Question 3 (7 marks)
The Commonwealth Government has announced a $500 million Treasury bond issue by competitive tender. The 10-year bonds have a fixed coupon of 6.5% per annum. The Reserve Bank plans to take $100 million of the allocation, and the remaining $400 million will be allocated according to the bids received. The electronic bidding system has received the following bids:
Bank A $100 million Yield 6.75% per annum
Bank B $150 million Yield 6.70% per annum
Bank C $120 million Yield 7.25% per annum
Bank D $175 million Yield 6.50% per annum
Bank E $250 million Yield 6.90% per annum
Bank F $100 million Yield 7.50% per annum
a) Allocate the competitive bids. State in ascending order which bank gets the allocation and the specific amount. (5 marks)
b) At what yield will the Reserve Bank obtain its $100 million allocations? (2 marks)
Question 4 (11 marks)
a) Risks for a business may be categorised as operational risk or financial risk. Compare and contrast these two risk categories. (2.5 x 2 = 5 marks)
b) State and explain 2 types of operational risk. (1.5 x 2 = 3 marks)
c) Identify and discuss 2 kinds of financial risk. (1.5 x 2 = 3 marks)
Question 5 (7 marks)
a) Explain the purpose of derivatives in financial markets. (3 marks)
b) Select one derivative product and explain its purpose. (4 marks)
Question 6 (11 marks)
a) Explain the 2 ways an investor can obtain a return in the equity market. (2 x 2 = 4 marks)
b) Calculate the portfolio beta if an investor holds the following shares: (2 marks)
Westpac Bank $15,000 Beta 1.35
Domino’s Pizza $9,000 Beta 1.5
Vodafone $12,500 Beta 0.95
c) If the investor added to the portfolio with a purchase of $10,000 worth of shares in Coles with a beta of 1.8, what impact would that purchase have on the risk structure of the portfolio? (Hint: Calculate the new portfolio beta and explain your answer.) (5 marks)
END OF FINAL ASSESSMENT
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