Problem 02.

Precision Design Pty Ltd ('PD') is an innovative industrial design firm providing realistic 3D digital imaging using the latest drafting technology. Emma Janson founded the firm in 1981. She has seen it grow gradually last two decades. It now employs 18 designers and 10 support staff.

Ten years ago, Emma decided that she was spending too much time managing the firm and not enough time designing and interacting with clients. She appointed Rashmi Rajapaksi as the general manager of PD. Rashmi's management style focuses on control. She believes that a business organisation is like a finely tuned machine. Everything must be planned and then executed as planned. There should be no surprises.

Design and drafting technology is advancing quickly. Emma and other senior designers have discussed the feasibility of adopting a 'paper free' policy and introducing 3D printing, but Emma has been reluctant to make the move. 3D printing would enable PD to produce realistic and timely 3D models, which will in turn, facilitate more refined designs through more effective consultations and collaboration with clients. On occasions, designers have conducted design reviews and provided feedback online rather than on paper, but minor glitches in the hardware tend to frustrate their efforts. The move would require significant hardware and software upgrades, as well as more technical support. Allocating the required resources may require reduced spending in other areas such as marketing, training, etc. Emma knows that in the long run, embracing these emerging technologies is essential for operational efficiency and service quality. It is just a matter of finding the funds required. She intends to make a move within the next year.

Rashmi has fine-tuned the budgeting process over the last 7 years. Resources are allocated where they are needed and spending is tightly controlled. If spending on a particular item comes in over budget, the person responsible is reprimanded and their future spending is carefully scrutinised. If spending is under budget, then the allocation is in excess of what is needed and is revised downward for subsequent periods. Rashmi finalises the budget for the current year immediately after receiving the financial reports for the current year. Rashmi uses budget information and variances for employee performance evaluation and bonus allocation.

Cora Mwangi, is responsible for training and IT. Cora planned this year's spending meticulously. But she is having trouble executing her plans. Seven designers were scheduled to receive advanced training on the latest 3D design software in May 2019. Two candidates, and PD's most productive designers, Mary and Martha went on maternity leave

Assessment 2 "Accounting, Behaviour and Organisations"

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Case study

RMIT Classification: Trusted

before the training commenced. Another candidate, Sussan needed the new software for a project that was due in March 2019, so she taught herself how to use the new software by working through the manual. Sussan has since completed four projects using the software. She now has a busy workload and does not want to attend the training in May.

Sunday, 30 June 2019 is the end of the financial year and is fast approaching. Cora is worried that her spending on training may end up being 30% below budget. She was having lunch with one of the software sales reps recently, when he mentioned that he will be attending a seminar on negotiating skills and contract law. The conference will be held in June 2019 at a luxury resort on Bintan Island. Cora asked Susan if she would like to attend. Sussan was delighted. Cora also acquired a new software package for customer relations management (CRM) and stocked up on paper and ink for the printers. She is now on budget and is more confident about her performance appraisal with Rashmi in June.

Another senior designer, Zhang Wei, has just returned from 3 months sick leave. Business was slow during the second half of 2018, but demand for PD's services has recovered in recent months. Emma has projects on the books but does not have enough designers to complete nd deliver the work on time. She may need to outsource some of the work, but the outsourcing may take some time to arrange.

Prepare flexible budget for Precision Design Pty Ltd (PD) for the year ending 30 June 2019. What does flexible budget figures tell us about PD's performance? (Copy and paste your table from excel). Provide a thorough analysis with examples from the case.

Problem 03.

According to a 2014 McKinsey & Co. survey of executives, 36 percent included reputation management-building, maintaining, or improving corporate reputation-among the top three reasons for addressing sustainability and reputation: Explain how the following management strategies can help to enhance both sustainability and reputation:

(a) setting aggressive internal goals for sustainability initiatives.

(b) Adopting a unified sustainability strategy with clearly articulated priorities.

(c) Building a broad leadership coalition in shaping sustainability strategy.

(d) Ensuring that everyone in the organization understands the financial benefits of sustainability.

Problem 05.

For each of the below, indicate True or False. No explanation is required.

a) Given: At t = 0 you bought a 3-year, 9% coupon bond with a 7% YTM. You held the position until t = 3. Each coupon that was received prior to t = 3 was reinvested and rolled over at a 7% interest rate. Statement: The realized compound yield on the investment was 7%.

b) Given: At t = 0 you bought a 4-year zero coupon bond with a 9% YTM. Two years later you sold the bond when it was trading at a 12% YTM. Statement: The realized compound yield on your two-year investment was somewhere between 9% and 12%.

c) Given: At t = 0 a 10-year zero coupon bond had an 8% YTM. You bought the bond at t = 2 when it had 8 years left to maturity and was trading at a 7% YTM. You sold the bond 3 years later when its YTM was greater than 7%. Statement: Your realized compound yield from t = 2 to t = 5 was less than 7%.

d) Given: From t = 3 to t = 4 the price of a risk free bond increased, and its YTM also increased. Statement: The coupon rate on this bond must be less than the YTM. (Hint: think of the pull-to-par graph and think of whether the statement would be possible for a bond with a coupon rate greater or equal to its YTM.)

e) As a general rule, if one expects interest rates are going to surprise to the upside, it would be wiser to invest in longer term bonds.

Topic: Bond Pricing and Bond Arbitrage

2) You are given the following information:

- Bond A is a 1-year, 6% coupon bond with face value $8,000 and YTM = 4%

- Bond B is a 2-year, zero coupon bond with face value $30,000 and YTM = 6%

- Bond C is a 3-year, 7% coupon bond with face value $20,000 and YTM = 7%

- Bond D is a 4-year, zero coupon bond with face value $8,000 and YTM = 9%

- Bond E is a 5-year, zero coupon bond with face value $2,000 and YTM = 11%

2

- A financial institution is offering the following product: ? the client pays the financial institution $200,000 at t = 0 and another $100,000 at t = 1 ? the financial institution pays the client $40,000 at t = 2, X at t = 3, and $60,000 at t = 4

a) What would X have to be in order for the product to be fairly priced? (Hint: bootstrap the yield curve and then set PV(client cash flow to bank ) = PV(bank cash flow to client).

b) Suppose a financial institution is offering the above product, but the payment at t = 3 is $100 greater than your answer to part a. You are a Hedge Fund manager. Describe how you would create n arbitrage by buying 1 unit of the product from the financial institution and trading the various bonds listed above at t = 0 (you may not have to trade all of them). Specify how many units of each bond you will buy or sell. Construct the arbitrage so that your profit is realized at t = 0.

c) Based on your strategy in part b, what is the magnitude of the arbitrage profit at t = 0?

d) Repeat part b, but this time construct the arbitrage in such a way that the profit is realized at t = 3. Hint: in this case your inflow = outflow conditions should hold for t = 0, 1, 2 and 4.

e) Based on your strategy in part d, what is the magnitude of the arbitrage profit at t = 3?

f) What is the relationship between your answers to parts c and e?

Part c.

Solve the following questions

Cost of capital Cost of equity KE Weighted average Minimum WACC cost of capital WACC WACC Aftertax cost of debt Ko (1-Te) Debi-to-equity ratio DVE' a. Explain the relationship between the cost of equity, after tax cost of debt, and the debt-to-equity ratio depicted in the graph above. (10 pts.) b. Explain the shape of the weighted average cost of capital (WACC) curve. (5 pts.) c. Explain what is meant by the "interest tax shield." (5 pts.) 5. Using the following market value added (MVA formula), please describe actions management can use to increase the firm's MVA. (20 pts.) MOket value added = (ROIC - WACC) x Invested capital WACC - Constant growth rateFinancial Performance Control and Measurement 1. The Covid-19 pandemic has had global implications for financial markets. As a result, there has been significant volatility in equity returns for the past two months. Your 401(k) investments happen to be more concentrated on low beta stocks. a. What type of risk has been prevalent in the equity markets the past two months? What are the key attributes of that risk? (10 pts.) b. How would you expect your 401(k) investments to react relative to changes in the S&P 500 index over the past two months? (5 pts.) c. Believing there will be an economic recovery that will commence later this year, what type of stocks would you select for your 401 (k) portfolio? (5 pts.) 2. The Capital Asset Pricing Model (CAPM) is expressed as the following: Ri = [Rf + ((Rm - Rf) x Bi)] a. Please define and explain the following components: (10 pts.) Ri Rf (Rm - Rf) Bi b. What does the CAPM tell us about the required return on a risky investment? (10 pts.) 3. Market Enterprises, Inc. has 1.0 million shares of stock outstanding. The stock currently sells for $25 per share. The firm's debt is publicly traded and its market value was recently quoted at 102% of face value. It has a total face value of $7 million, and it is currently priced to yield 7 percent. The risk-free rate is 6%, and the market risk premium is 7%. You've estimated that Market Enterprises has a beta of 95. If the corporate tax rate is 34%, what is the weighted average cost of capital of Market Enterprises, Inc.? (20 pis.) 4. The following graph depicts the cost of capital as a function of the debt-to-equity ratio in the presence of corporate taxes and financial distress costs