Case Study #1 (20 marks)
On your first day as an intern at Tri-Star Management Pty Ltd, the CEO asks you to analyse the following information pertaining to two ordinary share investments, Tech.com and Sam’s Grocery. You are told that a one-year Treasury note will have a rate of return of 5% over the next year. Also, information from an investment advisory service lists the current beta for Tech.com as 1.68 and for Sam’s Grocery as 0.52. You are provided a series of questions to guide your analysis.
Economy Probability Estimated rate of return Tech.com Sam’s Grocery ASX 200
Recession
30%
-20%
5%
-4%
Average
20%
15%
6%
11%
Expansion
35%
30%
8%
17%
Boom
15%
50%
10%
27%
1. Using the probabilistic approach, calculate the expected rate of return for Tech.com, Sam’s Grocery and the ASX 200 Index.
2. Calculate the standard deviations of the estimated rates of return for Tech.com, Sam’s Grocery and the ASX 200 Index.
3. Which is a better measure of risk for the ordinary shares of Tech.com and Sam’s Grocery – the standard deviation you calculated in Question 2 or the beta?
4. Based on the beta provided, what is the expected rate of return for Tech.com and Sam’s Grocery for the next year?
5. If you form a two-share portfolio by investing $30,000 in Tech.com and $70,000 in Sam’s Grocery, what is the portfolio beta and expected rate of return?
6. If you form a two-share portfolio by investing $70,000 in Tech.com and $30,000 in Sam’s Grocery, what is the portfolio beta and expected rate of return?
7. Which of these two-share portfolios do you prefer? Why?
TFIN202 Corporate Finance
Top Education Institute
Sydney City School of Business
Semester 2, 2017 Individual Assignment Page 3 of 4
Case Study #2 (35 marks)
Since graduation from college, you have worked at Precision Manufacturing Pty Ltd, as a financial analyst. You have recently been promoted to the position of senior financial manager, with responsibilities that include capital budgeting decisions and the raising of long-term financing. Therefore, you decide to investigate the various alternatives for raising funds. Your goal is to make sure that the benefits received from undertaking long-term projects are greater than the costs of raising the long-term funds needed to finance those projects. With this goal in mind, you decide to answer the following questions:
1. What should managers consider when making the decision whether to finance internally or externally?
2. What services does an investment banker offer to businesses that choose to raise funds in the capital market?
3. What are the benefits to the company of going public?
4. What are the drawbacks to the corporation of going public?
5. What returns can investors in the ordinary equity expect on the first day of trading if they commit to purchase shares through the IPO issue? What factors may affect the relative amount of these first-day returns?
6. Describe the following offers: (a) seasoned equity offer; (b) rights offer, and (c) private placement. In what circumstances would a company use each of these offerings to raise funds?
7. Discuss the implications of the various capital structure theories for optimal capital structure including Trade-off Theory and Pecking Order Theory.
TFIN202 Corporate Finance
Top Education Institute
Sydney City School of Business
Semester 2, 2017 Individual Assignment Page 4 of 4
Case Study #3 (45 marks)
Casino.com Corporation is building a $25 million office building in Adelaide and is financing the construction at an 80 % loan-to-value ratio, where the loan is in the amount of $20,000,000. This loan has a ten-year maturity, calls for monthly payments, and is contracted at an interest rate of 8%.
