a. A telecommunication company has recently launched a new mobile phone network. The project was financed...

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a. A telecommunication company has recently launched a new mobile phone network. The project was financed through a series of bank loans arranged by the company's finance manager. Identify two primary activities of the finance manager in this situation and briefly explain how those activities are related to the firm's balance sheet. 6 marks b Finance can be classified into two major areas of study: financial services and managerial finance. Briefly describe the differences between the two. 4 marks c. Suppose you have been offered a job as a financial advisor for a group of risk-averse investors. How would you differentiate risk-averse investors from other types of investors? Briefly explain your answer. Would you recommend a project with a relatively large dispersion of expected returns to more risk-averse investors or to less risk-averse investors? Explain why. 5marks d. What is the principal-agent relationship in the context of a business organisation? Briefly explain how this relationship can lead to the agency problem. 5 marks 2. a. Mr. Mighty has $15,000 to deposit in King Bank today at 5.1% interest compounded annually. i. Determine the balance of his savings account at the end of five years and at the end of ten years, respectively. 2 marks Use your findings in part (i) to calculate the amount of interest eamed in the first five years and the next five years, respectively. Briefly explain why the amounts of interest earned in each succeeding five-year period are similar or different. 4 marks b. You have just started a new job. Based on your salary, you plan to make a deposit of $17,000 at the end of each year in a savings account that pays a fixed interest rate of 8% compounded annually. Suppose you are able to buy a small apartment at the end of six years for a guaranteed price of $129,000. Determine whether you will have enough money to buy the apartment at the end of six-year period. Briefly explain your answer. 5 marks c. You have just agreed to sell your car to your friend. You are given an option of either receiving a total of $75,000 today or being paid $13,000 at the end of each year for the next 8 years. If you can earn 9% interest rate compounded annually from your bank, which option should you take? Briefly explain your answer. 5 marks d. BVO Manufacturing Company has the option of making an investment in a new machine that will cost $150,000 today. It is estimated that this investment will provide the net cash inflows to the company over the next four years as shown in the following table. End of Year 1 2 3 Should the company make this investment if it requires a minimum annual rate of return of 11% compounded annually? Show your workings. Initial Investment Year 1 2 4 3. Alberta Limited is considering two mutually exclusive projects. The relevant cash flows for each project are shown in the table below. Project Ajax 3 4 Net Cash Inflows $35,000 $50,000 $40,000 $60,000 $55,000 Project Eden Net Cash Inflows $22,000 $22,000 $22,000 $22,000 $60,000 $35,000 $25,000 $20,000 $15,000 a. Define the terms "mutually exclusive projects" and "independent projects". Page 2 of 4 b. Determine the payback period of each project. If the company has the maximum acceptable payback period of three years, which project(s) should the company invest in? Explain why. 7 marks c. Suppose the company has a cost of capital of 12%. Determine the Net Present Value (NPV) of each project. Which project is preferred in this situation and why? 7 marks d. The finance manager at Alberta Limited is considering using the following equation to determine the risk-adjusted discount rate for each project. (RADR;) (RADR;) R; +[b, x (k-R)] Where: 4 marks RF b k Risk-free rate of return Beta for project j = Cost of capital. = Suppose the risk-free rate (R) observed in the market is 8% and the market rate of return (km) is 14%. The beta (b), which is a measure of risk, for project Ajax is 0.75 and the beta for project Eden is 2.0. Determine the risk-adjusted net present value for each project. Which project is preferred in this situation and why? 8 marks e. Compare your investment decision made in part (c) to that made in part (d). Briefly explain why they are similar or different. 4 marks 4. Serco Industries is concerned about managing cash in an efficient manner. The average age of inventories is 75 days and accounts receivable are collected in 45 days. Accounts payable are paid approximately 30 days after they arise. All calculations are based on a 365-day year. The firm spends $40 million on operating cycle investments each year, at a constant rate. a. Determine the firm's operating cycle, cash conversion cycle and the amount of financing required to support the firm's cash conversion cycle. 6 marks b. Explain why a financial manager must pay attention to the firm's cash conversion cycle. Discuss how the firm's financial manager might be able to efficiently manage the firm's cash conversion cycle. Page 3 of 4 5. Ordinary shareholders are suppliers of long-term capital for the firm. What risks do ordinary shareholders take that other suppliers of long-term capital do not? Explain how those risks affect the cost of equity financing for the firm. 5 marks 6. Slender Limited must choose between two asset purchases. The annual rate of return and the related probabilities given in the following table summarise the firm's analysis so far on these alternatives. Project A Rate of Probability Return -10% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% a. For each project, calculate: i. ii. iii. 0.01 0.04 0.05 0.10 0.15 0.30 0.15 0.10 0.05 0.04 0.01 The range of possible returns The expected value of return The standard deviation of the returns Project B Rate of Probability Return 10% 15% 20% 25% 30% 35% 40% 45% 50% b. Construct a bar chart of each distribution of rates of return. 4 marks 0.05 0.10 0.10 0.15 0.20 0.15 0.10 0.10 0.05 6 marks 4 marks c. Which project would you consider to be the least risky? Explain your ans answer. 4 marks Page 4 of 4 a. A telecommunication company has recently launched a new mobile phone network. The project was financed through a series of bank loans arranged by the company's finance manager. Identify two primary activities of the finance manager in this situation and briefly explain how those activities are related to the firm's balance sheet. 6 marks b Finance can be classified into two major areas of study: financial services and managerial finance. Briefly describe the differences between the two. 4 marks c. Suppose you have been offered a job as a financial advisor for a group of risk-averse investors. How would you differentiate risk-averse investors from other types of investors? Briefly explain your answer. Would you recommend a project with a relatively large dispersion of expected returns to more risk-averse investors or to less risk-averse investors? Explain why. 5marks d. What is the principal-agent relationship in the context of a business organisation? Briefly explain how this relationship can lead to the agency problem. 5 marks 2. a. Mr. Mighty has $15,000 to deposit in King Bank today at 5.1% interest compounded annually. i. Determine the balance of his savings account at the end of five years and at the end of ten years, respectively. 2 marks Use your findings in part (i) to calculate the amount of interest eamed in the first five years and the next five years, respectively. Briefly explain why the amounts of interest earned in each succeeding five-year period are similar or different. 4 marks b. You have just started a new job. Based on your salary, you plan to make a deposit of $17,000 at the end of each year in a savings account that pays a fixed interest rate of 8% compounded annually. Suppose you are able to buy a small apartment at the end of six years for a guaranteed price of $129,000. Determine whether you will have enough money to buy the apartment at the end of six-year period. Briefly explain your answer. 5 marks c. You have just agreed to sell your car to your friend. You are given an option of either receiving a total of $75,000 today or being paid $13,000 at the end of each year for the next 8 years. If you can earn 9% interest rate compounded annually from your bank, which option should you take? Briefly explain your answer. 5 marks d. BVO Manufacturing Company has the option of making an investment in a new machine that will cost $150,000 today. It is estimated that this investment will provide the net cash inflows to the company over the next four years as shown in the following table. End of Year 1 2 3 Should the company make this investment if it requires a minimum annual rate of return of 11% compounded annually? Show your workings. Initial Investment Year 1 2 4 3. Alberta Limited is considering two mutually exclusive projects. The relevant cash flows for each project are shown in the table below. Project Ajax 3 4 Net Cash Inflows $35,000 $50,000 $40,000 $60,000 $55,000 Project Eden Net Cash Inflows $22,000 $22,000 $22,000 $22,000 $60,000 $35,000 $25,000 $20,000 $15,000 a. Define the terms "mutually exclusive projects" and "independent projects". Page 2 of 4 b. Determine the payback period of each project. If the company has the maximum acceptable payback period of three years, which project(s) should the company invest in? Explain why. 7 marks c. Suppose the company has a cost of capital of 12%. Determine the Net Present Value (NPV) of each project. Which project is preferred in this situation and why? 7 marks d. The finance manager at Alberta Limited is considering using the following equation to determine the risk-adjusted discount rate for each project. (RADR;) (RADR;) R; +[b, x (k-R)] Where: 4 marks RF b k Risk-free rate of return Beta for project j = Cost of capital. = Suppose the risk-free rate (R) observed in the market is 8% and the market rate of return (km) is 14%. The beta (b), which is a measure of risk, for project Ajax is 0.75 and the beta for project Eden is 2.0. Determine the risk-adjusted net present value for each project. Which project is preferred in this situation and why? 8 marks e. Compare your investment decision made in part (c) to that made in part (d). Briefly explain why they are similar or different. 4 marks 4. Serco Industries is concerned about managing cash in an efficient manner. The average age of inventories is 75 days and accounts receivable are collected in 45 days. Accounts payable are paid approximately 30 days after they arise. All calculations are based on a 365-day year. The firm spends $40 million on operating cycle investments each year, at a constant rate. a. Determine the firm's operating cycle, cash conversion cycle and the amount of financing required to support the firm's cash conversion cycle. 6 marks b. Explain why a financial manager must pay attention to the firm's cash conversion cycle. Discuss how the firm's financial manager might be able to efficiently manage the firm's cash conversion cycle. Page 3 of 4 5. Ordinary shareholders are suppliers of long-term capital for the firm. What risks do ordinary shareholders take that other suppliers of long-term capital do not? Explain how those risks affect the cost of equity financing for the firm. 5 marks 6. Slender Limited must choose between two asset purchases. The annual rate of return and the related probabilities given in the following table summarise the firm's analysis so far on these alternatives. Project A Rate of Probability Return -10% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% a. For each project, calculate: i. ii. iii. 0.01 0.04 0.05 0.10 0.15 0.30 0.15 0.10 0.05 0.04 0.01 The range of possible returns The expected value of return The standard deviation of the returns Project B Rate of Probability Return 10% 15% 20% 25% 30% 35% 40% 45% 50% b. Construct a bar chart of each distribution of rates of return. 4 marks 0.05 0.10 0.10 0.15 0.20 0.15 0.10 0.10 0.05 6 marks 4 marks c. Which project would you consider to be the least risky? Explain your ans answer. 4 marks Page 4 of 4

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Answer 1 Primary Activities of the Finance Manager 1 Arranging Bank Loans The finance manager is responsible for arranging bank loans to finance the companys new mobile phone network project This invo... View the full answer