Answer question 1 & 2

Question 1 You recently went to work for Jurong Parts Limited, a company listed on Catalist, which supplies auto repair parts used in the after-market automobiles like Nissan, Honda and Mitsubishi. Chief Financial Officer of Jurong Port is concerned with which methods should be used to evaluate projects: payback period, net present value or internal rate of return.

(a) Explain the major drawback of using payback period method (including discounted payback period method) and give an example which can provide false decision when mutually exclusive projects are considered. (6 marks) (b) Appraise the main reason why net present value is the most appropriate method to be used in evaluating a project. (4 marks) (c) Jurong Port is considering two mutually exclusive projects with the following details: Project A Project B Life 3 years 3 years Investment $5 million $5 million NPV $836,000 $750,000 IRR 11% 12% Opportunity cost 8% 8% Since NPV method and IRR method show different decisions, explain how the difference can be reconciled.

Question 2 (a) Capital Asset Pricing Model (CAPM) is often used to calculate the cost of equity. In deciding the risk-free rate of return, you have the following information on Treasuries: Maturity Yield 1 year 2% 10 years 4% 15 years 5% The market risk premium is always assumed to be positive. However, in practice, it is often seen that in some years the market return is negative showing premium to be negative and some years the market return is unusually high as market returns are based on the expectation of how the economy will move. Given this information, explain why CAPM using 10-year Treasury rate as risk-free rate and using a positive risk premium is appropriate in calculating the cost of equity. (6 marks) (b) Jurong Port plans to finance a new project through issue of new bonds for $10 million. Since debt is used to finance the project, the accounts manager argues that the interest paid for the bond should become part of the expenses in calculating the projects free cash flows and these cash flows should be discounted at the after-tax cost of debt. Prepare a statement refuting the observations of the account manager. (8 marks) (c) Net Present Value Method is used as the main criteria to evaluate the projects. Analyse the issues that the management should consider in using net present value and explain how these issues can be resolved. (10 marks)

FIN309 Finance Assignment 1 - Individual Assignment/TMA01 January 2017 Presentation FIN309 Assignment 1 Individual Assignment This assignment is worth 25% of the final mark for FIN309 Finance. The cut-off date for this assignment is 15 February 2017, 2355hrs. In this assignment, you are expected to: Evaluate investment proposals. Apply knowledge to decide appropriate financing plan and dividend policy. Demonstrate proficiency in writing. ___________________________________________________________________________ Question 1 You recently went to work for Jurong Parts Limited, a company listed on Catalist, which supplies auto repair parts used in the after-market automobiles like Nissan, Honda and Mitsubishi. Chief Financial Officer of Jurong Port is concerned with which methods should be used to evaluate projects: payback period, net present value or internal rate of return. (a) Explain the major drawback of using payback period method (including discounted payback period method) and give an example which can provide false decision when mutually exclusive projects are considered. (6 marks) (b) Appraise the main reason why net present value is the most appropriate method to be used in evaluating a project. (4 marks) (c) Jurong Port is considering two mutually exclusive projects with the following details: Life Investment NPV IRR Opportunity cost Project A 3 years $5 million $836,000 11% 8% Project B 3 years $5 million $750,000 12% 8% Since NPV method and IRR method show different decisions, explain how the difference can be reconciled. (6 marks) SIM UNIVERSITY Assignment 1 - Page 2 of 4 FIN309 Assignment 1 Question 2 (a) Capital Asset Pricing Model (CAPM) is often used to calculate the cost of equity. In deciding the risk-free rate of return, you have the following information on Treasuries: Maturity 1 year 10 years 15 years Yield 2% 4% 5% The market risk premium is always assumed to be positive. However, in practice, it is often seen that in some years the market return is negative showing premium to be negative and some years the market return is unusually high as market returns are based on the expectation of how the economy will move. Given this information, explain why CAPM using 10-year Treasury rate as risk-free rate and using a positive risk premium is appropriate in calculating the cost of equity. (6 marks) (b) Jurong Port plans to finance a new project through issue of new bonds for $10 million. Since debt is used to finance the project, the accounts manager argues that the interest paid for the bond should become part of the expenses in calculating the project's free cash flows and these cash flows should be discounted at the after-tax cost of debt. Prepare a statement refuting the observations of the account manager. (8 marks) (c) Net Present Value Method is used as the main criteria to evaluate the projects. Analyse the issues that the management should consider in using net present value and explain how these issues can be resolved. (10 marks) Question 3 The current share price of Jurong Parts is $8.00 and last year's dividend was $0.20. It also issued preferred shares several years ago, which pays a dividend of $0.33 per share and currently trades at $4.50 per share. Security analysts are projecting that the ordinary dividends will grow at a rate of 5% a year. The firm also issued 10-year 6% coupon (semi-annual) bonds two years ago. The face value is $1,000 and the last traded price was $990. The market risk premium is 6%, the risk-free rate is 3%, and Jurong Parts beta is 0.8. The firm uses a target capital structure with 45% debt, 5% preferred shares and 50% ordinary shares. The firm's marginal tax rate is 17%. SIM UNIVERSITY Assignment 1 - Page 3 of 4 FIN309 Assignment 1 (a) Calculate the cost of equity by applying both the capital asset pricing model (CAPM) and Gordon growth model, also known as the dividend discount model (DDM). (10 marks) (b) Calculate the cost of preference share and cost of debt. (10 marks) (c) Calculate the weighted average cost of capital (WACC). In doing so, use the average cost of equity derived in part (a). (8 marks) Question 4 You have been asked by the president of Jurong Parts to evaluate the proposed acquisition of a Computer Numeric Control (CNC) machine to manufacture a new type of alternator, ALT375. A feasibility study was commissioned three months ago at a cost of $65,000 to evaluate this opportunity. The equipment's basic price is $700,000, and it would cost another $50,000 to modify it for special use by your firm. Based on findings from the feasibility study, Jurong Parts expects to sell 2,000 alternators in the first year. Demand is expected to increase by 400 units each year for the next three years. Thereafter, demand will fall by half. No sales are expected from year six onwards because cars using this part will all be scrapped. Selling price is $250 per unit and not expected to fluctuate over the project life. The firm anticipates to earn a gross profit margin of 35%. Fixed operating costs in the first year is estimated to be $50,000 in year one and this will increase by inflation rate of 3%. Based on past experience, net working capital required, namely spare parts inventory, will be 10% of sales. The CNC machine would depreciated equally over 3 years to zero net book value. However, it can be sold for $35,000 at the end of the project life. The firm's marginal tax rate is 17% and the appropriate discount rate is 12%. (a) Calculate the free cash flow from Year 0 to 5 relating to the proposed manufacturing of ALT375. (28 marks) (b) Calculate the net present value (NPV) of this opportunity and determine whether Jurong Parts should proceed with this project. (4 marks) ---- END OF ASSIGNMENT ---- SIM UNIVERSITY Assignment 1 - Page 4 of 4 FIN309 Finance Study Guide (5CU) Course Development Team Head of Programme : Dr Ding Ding Course Developer(s) : A/P Sundaram Janakiramanan Production : Educational Technology & Production Team 2017 SIM University. All rights reserved. No part of this material may be reproduced in any form or by any means without permission in writing from the Educational Technology & Production, SIM University. Educational Technology & Production SIM University 461 Clementi Road Singapore 599491 Release V1.4 CONTENTS SECTION 1: COURSE GUIDE 1.1 Introduction .....................................................................................................1 1.2 Course Description and Aims .......................................................................2 1.3 Learning Outcomes ........................................................................................2 1.4 Overall Assessment ........................................................................................3 1.5 Learning Materials ..........................................................................................4 SECTION 2: STUDY UNITS STUDY UNIT 1 Chapter 1: Finance - Overview SU1-C1-1 Chapter 2: Capital Budgeting - Project Selection SU1-C2-1 STUDY UNIT 2 Chapter 3: Capital Budgeting - Forecasting Cash Flows SU2-C3-1 STUDY UNIT 3 Chapter 4: Capital Budgeting - Cost of Capital SU3-C4-1 STUDY UNIT 4 Chapter 5: Capital Budgeting - Risk Analysis and Project Evaluation SU4-C5-1 STUDY UNIT 5 Chapter 6: Financial Forecasting and Planning SU5-C6-1 Chapter 7: Working Capital Management SU5-C7-1 STUDY UNIT 6 Chapter 8: Capital Structure Policy SU6-C8-1 Chapter 9: Dividend Policy SU6-C9-1 FIN309 Finance COURSE GUIDE FIN309 COURSE GUIDE SECTION 1: COURSE GUIDE 1.1 Introduction Welcome to your study of FIN309 Finance, a 5 credit unit (CU) course. This Study Guide is divided into two sections - the Course Guide and Study Units. The Course Guide provides a structure for the entire course. As the phrase implies, the Course Guide aims to guide you through the learning experience. In other words, it may be seen as a roadmap through which you are introduced to the different topics within the broader subject. This Guide has been prepared to help you understand the aim[s] and learning outcomes of the course. In addition, it explains how the various materials and resources are organised and how they may be used, how your learning will be assessed, and how to get help if you need it. Course Schedule To help monitor your study progress, you should pay special attention to your Course Schedule. It contains study unit related activities including Assignment, self-evaluations, and examinations. Please refer to the Course Timetable in the Student Portal for the updated Course Schedule. NOTE: You should always make it a point to check the Student Portal for any announcement and the latest updates. You need to ensure you fully understand the contents of each Study Unit listed in the Course Schedule. You are expected to complete the suggested activities either independently and/or in groups. It is imperative that you read through your Assignment questions and submission instructions before embarking on your Assignment. It is also important you comprehend the Overall Assessment Weighting of your course. This is listed in Section 1.4 of this Guide. Manage your time well so you can meet given deadlines and do regular revisions after completing each unit of study. They will help you retain the knowledge garnered and prepare you for any required formal assessment. If your course requires an end-of-semester examination, do look through the Specimen or Past Year Exam Paper which is available on MyUniSIM. Although flexible learning - learning at your own pace, space and time - is a hallmark at UniSIM, you are encouraged to engage your instructor and fellow students in online discussion forums. A sharing of ideas through meaningful debates will help broaden your learning and crystallise your thinking. 1 FIN309 COURSE GUIDE 1.2 Course Description and Aims All business entities have to address some key questions: What investments should it undertake? How should those investments be financed? How should the business manage its cash? How should it reward shareholders? Finance309 addresses such questions. The course seeks to endow students with the tools and techniques required to address questions pertaining to investment decisions and capital budgeting, financing decisions, dividend decisions, and working capital management. 1.3 Learning Outcomes Knowledge and Understanding (Theory Component) 1 Appraise the metrics used to rank proposed investments. 2 Calculate the cost of capital for the business. 3 Compare various financing alternatives and choose the appropriate financing method. 4 Examine various dividend policies and choose the appropriate dividend policy. 5 Prepare cash budgets. Key Skills (Practical Component) 1 Evaluate investment proposals. 2 Apply knowledge to decide appropriate financing plan and dividend policy. 3 Demonstrate proficiency in writing. * Analyse also implies distinguish, explain, examine, discuss, contrast, interpret, differentiate, describe, calculate, prepare. * Examine also implies explain, discuss, interpret, differentiate, describe, calculate, prepare. 2 FIN309 COURSE GUIDE 1.4 Overall Assessment The overall assessment weighting for this course for the Evening Cohort is as follows: Assessment Description Weight Allocation Assignment 1 Individual Assignment / TMA 1 25% Assignment 2 Individual Assignment / TMA 2 25% Examination Written examination 50 % TOTAL 100% The overall assessment weighting for this course for the Day-time Cohort is as follows: Assessment Examination Description Weight Allocation Class Participation 10% Pre-Course Quiz 10% Individual Assignment / TMA 1 15% Individual Assignment / TMA 2 15% Written examination 50% TOTAL 100% 3 FIN309 COURSE GUIDE UniSIM's assessment strategy consists of two components, Overall Continuous Assessment (OCAS) and Overall Examinable Component (OES) that make up the overall course assessment score. For Example: For SBiz courses, both components will be equally weighted: 50% OCAS and 50% OES. (a) OCAS: The sub-components are reflected in the tables above and are different for the day-time and evening cohort. The continuous assignments are compulsory and are non-substitutable. (b) OES: The Examination is 100% of this component. To be sure of a pass result, you need to achieve scores of 40% in each component. Your overall rank score is the weighted average of both components. 1.5 Learning Materials The following is a list of the required learning materials to complete this course. Required Textbook(s) Author(s) Last name, First name Titman, Keown, Martin Title Year Financial Management: Principles and Applications: Adapted for FIN309 Finance. First Edition. 2014 Publisher Pearson Special Requirement (Optional) Any other requirement(s) needed for the course such as the use of lab equipment. Financial calculators will be useful for the examination 4 FIN309 Finance STUDY UNIT 1 Chapter 1 An Overview FIN301 STUDY UNIT 1 CHAPTER 1 LEARNING OUTCOMES At the end of Chapter 1, you are expected to: Analyse the basic types of financial management decisions Examine various goals and decisions of financial manager Most decisions made by individuals, businesses and governments have financial consequences. Consider a company like Samsung: It produces a range of electronic products from televisions to mobile phones. This company has to make decisions relating to the introduction of new products, opening stores and service outlets, employing suitable people as well as improving productivity. All of these require investment of money and the company makes these investments in the hope that more funds will be generated over the future periods. For an individual, even a decision of whether to attend a graduate school has financial implications. Enrolment in graduate school requires money for paying fees, buying books, etc. If the individual wants to do a full-time study, he or she will be leaving the workforce and potentially be losing salary that could have been earned during the study period. One goes for higher studies in the hope that career prospects would be better after completion of graduate school so that the earnings will be much more than what it would be if one did not attend graduate school. Since almost all decisions have financial implications, it is important that the decisionmaker understands the situation and makes the most appropriate decisions. In addition to deciding whether a particular action is needed, it is also important to decide how to raise the funds needed to undertake the activity. All sources of funds and cost of obtaining these funds should be considered while making the financing decision. In this course, we will discuss the various financial decisions that a finance manager needs to make in a business situation and apply various models and techniques that can be used to aid in making these decisions. What is Finance? Finance studies how businesses evaluate the various investment alternatives available to them and how the funding needs of these investments are met. The investment may be done such that the benefits of investment accrue for only the short-term or for the long-term. Similarly, funding needs can be met through raising money for the short-term or for the long-term period. SU1-CI-1 FIN301 STUDY UNIT 1 CHAPTER 1 The three basic questions that will be addressed in the study of finance are: a) Which of the long-term investment alternatives should the business or firm undertake? This decision is referred to as \"capital budgeting or investment\" decision. b) Which of the funding alternatives should the firm undertake? This decision is referred to as \"capital structure or financing\" decision. c) How does the firm manage its day-to-day operations and decide on short-term investment needs? These decisions are referred to as \"working capital\" decisions. Interaction of Finance with other Aspects of Business The finance function in any business organization is a support function. Managers in all other parts of the business require knowledge of finance as any decision made by these managers has financial implications. A marketing manager will have to make decisions on pricing and advertising. Since the decision on pricing can have an impact on sales revenue, the marketing manager should consider financial implications of deciding the price. A production manager needs to be aware of the cost of producing goods or services as well as financial implications of inventory control and supply chain management. The strategic decision makers need to understand the financial implications of various strategies under consideration while deciding the best strategy under the given circumstances. The strategy team would also require an analysis of how well the company is performing and managing its assets while creating profits. In short, all decisions made in a business organization have financial implications and therefore all managers need to understand the basics of finance. Types of Business Organizations Three legal forms of business organizations are recognized: sole proprietorship, partnership and corporation. It is important to understand the difference between these forms of organizations and the implications of financial decisions on the firm. The financial decisions have different impact on each of these organizations. Sole Proprietorship It is a business owned by a single individual. This owner is entitled to receive all the profits earned by the firm. At the same time, the owner is responsible for all the debt the firm undertakes. In case the value of assets held by the firm is not sufficient to pay SU1-CI-2 FIN301 STUDY UNIT 1 CHAPTER 1 all the debt, the owner needs to pay the debt from his other assets. Thus, in a sole proprietorship, there is no legal difference between the firm and the owner. The business does not operate as a separate entity and all legal contracts are between the owner and other parties. Sole proprietorship is used in the early stages of a firm's life. It is easy to create a sole proprietorship. It just requires that the business be registered with Accounting and Corporate Regulatory Authority (ACRA) in Singapore. The major disadvantages of sole proprietorship are: It is very difficult to raise funds for the operation of the business as the creditworthiness of the owner and the assets that the owner can offer as collateral will be used in processing the request for funds. i.) ii.) iii.) Financing can be obtained only from banks on a personal basis, which can be quite costly. The profits earned by the firm are added to the income of the owner and is taxed at the personal tax rate of the owner, which would be higher than the corporate tax rate. In case the owner dies, the firm needs to wind up and hence there is no continuity of operation for a long time. Partnership A general partnership is formed when two or more people enter into a contract to coown the business. The contract usually specifies the role of the partners and how the profits of the company will be divided among the owners. General partnership is similar to sole proprietorship, except that there are more owners. The owners are personally responsible for all the debt undertaken by the firm. The profits allocated to the partners will be taxed at the personal tax rate. The business will cease to exist upon the death of any one partner or when any of the partners wants to get out of the business. Fund raising for the business is also limited as the main source of funds is loan from banks assessed on the credit worthiness of the partners. There are some partnerships called \"limited partnerships\