Subject Code & Title: FIN201 Investment Management Final Exam Alternative
Permitted items for this exam:
1.Non programmable calculators; English dictionaries
2.This examination paper, with Formulae Sheet at the back
3.This is an open-book alternative assessment and you may access any materials when answering the questions. As a minimum, you should have available and make use of the following from Moodle:
4.Course Tutorial Exercises in the form of Solutions to End-of-Chapter Questions, Topics 7 to 11 and Answers to Quizzes 6 to 10; and
5.Lecture Power-points under Topics 7 to 11, and the e-book for the prescribed text-book.
FIN201 Investment Management Final Exam Alternative Assessment – King’s Own Institute Australia.
Materials provided for the examination:
This examination paper, with Formulae Sheet at the back.
Materials expected for the examination:
Computer – all answers should be typed.
Instructions for Students:
This exam consists of five (5) long-answer questions. Each question is worth 10 marks, for a total of 50 marks – each to be answered in the space provided after every question or part-question.
- No extra time will be given for reading, typing or loading the completed Assessment to Moodle.
By uploading this Alternative Assessment, I confirm that I have not received help from any other person.
There are five (5) questions in this Exam. Each question (including parts) carries 10 marks.
Show answers in the space provided after each question or part-question.
Show all workings for every question. All answers must be typed.
If additional space is required for your answers, use extra pages at end of this Exam paper.
QUESTION 1.
A. Sarah, an Australian investor whose portfolio only includes Australian assets (Cash, Australian fixed interest, Australian listed shares and Australian property) is considering adding international equities in her portfolio.
State:
I. two advantages of investing in international or foreign equities;
II. two risks associated with investing in international or foreign equities;
III. one foreign country in which you would recommend a share investment now, and why: and
IV. one foreign country in which you would not recommend a share investment now, and why.
B. In August, 2021, in Australia, Qantas Ltd and Flight Centre Ltd (an airline and a holiday booking company) both announced substantial financial losses for the financial year, 2020-21. Yet on the day of these announcements, the share prices of each company rose by between 3% and 5%. Give two possible reasons for these share price rises.
QUESTION 2.
It is 1 July, 2021. Hawk Ltd has a market capitalization rate (or required return) of 11%. Over 2021-22 (the financial year ending 30 June, 2022, the company’s return on equity (ROE) is expected to be 16% and its earnings per share (EPS) is predicted to be $4.80. The firm’s plow back ratio is 30%.
FIN201 Investment Management Final Exam Alternative Assessment – King’s Own Institute Australia.
I. Calculate, for Hawk Ltd:
i. The dividend payout ratio.
ii. The expected dividend at the end of 2021-22.
iii. The dividend growth rate (“g”).
iv. The theoretical share price at 1 July, 2021 (correct to the nearer cent).
v. The P / E ratio.
II. Do the above answers suggest that an ordinary share purchase in Hawk Ltd is an attractive investment? Explain why.
B. You have been supplied with the following financial forecasts for Dragon Ltd for 2021-22 (the financial year ending 30 June, 2022).
A. EBIT (Earnings before interest and taxes), $75,000,000
B. Annual depreciation, $6,000,000
C.New capital expenditure, $18,000,000
E.Increase in NWC (net working capital), $10,500,000
F.Interest expense, $9,000,000
G.Additional net debt, $8,000,000
H.Number of fully paid ordinary shares issued, 10,000,000
I.Company tax rate, 30%.
REQUIRED:
Calculate for Dragon Ltd Ltd, over 2021-22,
i. The free cash flow for the firm (FCFF) over 2021-22;
ii. The free cash flow to equity (FCFE) over 2021-22; and
iii. The intrinsic value of one ordinary share in Dragon Ltd at 30 June, 2021, based on the present value of the FCFE in perpetuity, assuming a rate of annual growth in FCFE of 4% per annum each year after 2021-22 and a discount rate (required return) of 12% per annum.
QUESTION 3:
A. a. Henry Black Ltd’s Balance Sheet as at 30 June, 2021 and Profit and Loss Statement for the financial year ending 30 June, 2021 (2020-21) contained the following items :
- Accounts Receivable (and Average Accounts Receivable for 2020-21), $50,000,000
- Inventories (and Average Inventories for 2020-21), $80,000,000
- Other Assets, $270,000,000
- Total Liabilities (Current and Long-term), $150,000,000
- Issued and paid-up capital – 15,000,000 fully paid ordinary shares $150,000,000
- Other Shareholders Equity Items, being Reserves and Retained Earnings, $100,000,000
- Sales (all credit), $800,000,000
- Cost of sales, $600,000,000
- Earnings before Interest and Taxes (EBIT), $100,000,000
- Interest Expense, $20,000,000 (paid on Total Liabilities above)
- Company Income Tax Rate, 30%
- Interest rate on Total Liabilities, 13.3333%
Additional information:
All reported items and the resultant profit or loss figures relate to the company’s basic operations.The company operates in a competitive industry.
REQUIRED :
Calculate as at 30 June, 2021, the following financial ratios for Henry Black Ltd :
i. Return on sales (also known as profit margin or operating profit margin)
ii. Return on assets (ROA)
iii. Return on equity (ROE)
iv. Interest coverage
v. Debt to equity
vi. Inventory turnover
vii. Average receivable turnover
viii. Average collection period
[NOTE: Show all workings.]
b. Comment upon these ratios as to whether they are favour able or not for a prospective investor. Is there any further information you require before you make an investment recommendation?
B. Based on the data and your answers in Part A. above, calculate:
I. the ROE using the Du Pont method (using Formula 20 on the attached Formulae Sheet); and
II. the ROA (using Formula 22 on the attached Formulae Sheet).
III. Are your answers the same as in Question 3. A. a. iii. and ii. above? Why or why not?
(NOTE: Show all workings. Responses to I. and II. above which simply show the same answers as in Question 3.A. a. iii. and ii., without using the Formulae 20 & 22, will receive zero marks.)
QUESTION 4.
The following data, relating to the performance of the Fantastic Fund and the Market Portfolio over the calendar year, 2020, are available.
The risk-free rate (T-bills) during 2020 was 3%.
REQUIRED:
i. Calculate the following measures of performance evaluation for the Fantastic Fund and the Market Portfolio over the observation year.
I. The Sharpe ratio
II. The Treynor ratio
III. The Jensen alpha
IV. The M2 measure for the relevant adjusted portfolio
FIN201 Investment Management Final Exam Alternative Assessment – King’s Own Institute Australia.
ii. On the basis of your calculations, would you prefer to invest in the Fantastic Fund, the Market portfolio or the relevant adjusted portfolio in i. IV. above? State why.
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