FIN1101 Major Assignment Task Sheet
The data (prices,
interest rates, bond maturities etc.) for this assignment are real. So this
gives you a chance to do some real-world tasks. We have also tried to make the
experience more realistic by portraying the 2-hour window that you have to
complete the question set as a ‘meeting’ with executives during which you answer
questions. This is supposed to be both authentic and fun. The unrealistic bit
is that all the questions are multiple choice! Do not worry! It is not
difficult and everyone who puts in a genuine effort should do well. I expect
the average score for this assignment will be very high. And it is good exam
practice too.
This assignment refers
to the task detailed below. Some parts can be calculated in advance while other
parts will need to be calculated once you access the assignment question set.
Read the task below and prepare as much as you can in Excel (or longhand) and
then log in once the assignment question set opens to answer a series of
questions.
The online question
set, which works just like a quiz, must be completed by midnight (USQ time) May
XXXXXXXXXXIt will become available on May 18 at 9.00 a.m. The link to the
question set is at the top of the course homepage (right under the link to the
quiz). This question set will close at midnight on May XXXXXXXXXXand grades will
be released once the deadline passes. In accordance with USQ policy, no
attempts will be allowed once the deadline passes and the correct answers are
available. USQ policy allows extensions to be granted, in compelling
circumstances, if the application is received before the due date.
Task Details
You work in funds
management at BlackRock. The company manages almost $6 trillion worldwide. Your
position is within the group managing the BlackRock balanced fund in Australia.
You are scheduled to answer questions from senior executives on matters
relevant to the fund and its performance. Based on the agenda that has been
circulated, you can undertake a number of preliminary calculations in
preparation but there will be some problems and scenarios that you will have to
deal with ‘on the run’ during the 2-hour meeting. Fortunately, you have an
excellent mentor who has experience with these types of meetings and she has
provided some guidance as to what you might expect (in addition to having to
provide the results of your preliminary calculations).
Agenda Item 1. With Reference to the Fund’s
Investment in Telstra Corp. Shares
From early March 2017
to February 2018, Telstra’s share price fell from almost $5.00 per share to
$3.50 per share. Telstra has 12 billion shares on issue. The executive team
have been monitoring this fall and want you to tell them whether or not Telstra
Corp represents value at the current share price. You have data on Telstra’s
free cash flow. In the last financial year, Telstra generated $2.7 billion in
free cash flow. An appropriate discount rate for Telstra is 16 percent. The executive team wants to know whether $3.50
per share represents good value if free cash flow remains constant in every
year from now on.
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Your mentor’s guidance: In addition to answering this question, be
prepared for a question about the value Telstra represents if free cash flow grows at some constant rate.
You should be extra prepared by finding out
what constant growth rate would be necessary to ensure that Telstra’s value
exceeds its market price (you can do this in a few steps by trial and error).
Agenda Item 2. The Fund’s Investment in
Australian Government Treasury Bonds
The fund holds 40,000
Australian government treasury bonds. The bonds expire in 2035 (that is, 17
years from now). The coupon rate is 2.75% p.a. paid semi-annually. The face
value of the bonds is $1,000. The yield to maturity is 2.50%. The executive team want to know what the
current price of these bonds is and how much the fund’s total investment is
worth.
The executive team has
noted that there are other issues of Australian government treasury bonds (i.e.
with different maturity dates) in which the fund might invest. In particular,
they note the issue that expires in 2026 (that is, 8 years from now). The coupon
rate for these is 4.75% p.a. paid semi-annually. The face value is $1,000. The
yield to maturity is 2.85%. The executive
team want to know the current price of bonds in this issue and how many bonds
could be purchased if the currently held issue was sold and the money invested
in this issue instead.
Your mentor’s guidance: You should also know the factors that might
need to be considered if the fund was to switch from the bond issue it holds
now to this issue. The executive team might ask, for example, which bond issue
is more sensitive to interest rates. The team might also ask you to calculate how
much the total investment value would rise (fall) if interest rates fell
(increased) by some amount.
Agenda Item 3. Investment Opportunities
The executive team
notes that the current risk free rate of return is 2.50% and the expected
return of the share market is 8%. They have a list of five companies along with
each company’s current rate of return and its beta. The executive team wants to know whether any of these companies
represents an attractive investment.
|
Company
|
Current Rate of Return
|
Beta
|
|
Flight Centre
|
4.88%
|
1.30
|
|
Aristocrat Leisure
|
3.94%
|
0.80
|
|
Webjet
|
6.31%
|
1.09
|
|
Amcor
|
9.05%
|
1.95
|
|
ANZ
|
7.80%
|
0.95
|
Mentor’s guidance: use the capital asset pricing model (CAPM) to calculate
expected returns. Compare the actual returns to the expected returns in order to
address the executive team’s enquiry. This is really easy!
Agenda Item 4. CSL’s Acquisition of Calimmune
for $91 Million
The fund currently
holds an investment in CSL, one of Australia’s largest pharmaceutical biotech
firms. In late 2017, CSL announced that it had purchased Calimmune for $91
million. Over an 8 year life, this acquisition is expected to be characterised
in each year by: sales revenues of $70,000,000, cost of goods sold of
$6,000,000 and depreciation of $2,000,000. The taxation rate is 30%. The cost
of capital in this relatively high-risk business is 21%. CSL also invested
$3,000,000 in working capital. The investment took place in 2017 (year 0) and
runs from 2018 (year 1) until 2025 (year 8). All working capital is returned at
the end. For obvious reasons, the
executive team want to know whether this acquisition will create market value
for CSL’s shareholders.
Mentor’s guidance: compute the NPV and IRR for this acquisition project.
Also, be prepared for questions about how the NPV and IRR will change if the
sales revenue increases or decreases by some amount. You should set this up in
a spreadsheet so that you can change the sales data and get your answer
immediately.
Agenda Item 5. Portfolio Management.
The executive team have
identified the potential for the fund to invest in two different commercial
properties in Sydney. Both are very viable business propositions. Based on your
calculations, Property A has an expected return of 12 percent and a standard
deviation of 9 percent. Property B has an expected return of 15 percent and a
standard deviation of 14 percent. The covariance of the returns generated by
the two properties is – XXXXXXXXXXThe fund can invest in the following
proportions: 50% in A, 50% in B; 80% in A, 20% in B; 60% in A, 40% in B. The executive team wants to know the
expected return and risk (standard deviation) of each of these combinations.
Mentor’s guidance: Over time, the property market’s dynamics change. At the
moment, these properties are occupied by quite different commercial tenants.
However, it might be the case that one of the tenants will vacate and be
replaced by a tenant who is in the same field of business as the tenant
occupying the other property. The cash flows (rent) will then be much more
positively correlated (the covariance of returns will be higher and positive).
Make sure you set up you calculations in Excel so that you can change the covariance
and immediately see the impact on portfolio risk.
END OF TASK DETAILS
You should approach this assignment as follows:
- Cover the necessary material (up to
chapter 10).
- Prepare your calculations and organise
your results.
- Prepare for the ‘open’ questions by either
practicing the calculations or carefully preparing your spreadsheets so
that inputs can be changed and new results determined easily.
- The question set will become available a
few days before the due date. Once you are ready, click on the link and
start your attempt.
- Like a quiz, the attempt must be completed
once you start. The time limit is 2 hours. This should be more than enough
time to answer the questions.
- The question set will close at midnight on
the due date. Students must complete before that time. Grades will be
released once the question set closes.
The questions are all multiple
choice. There will be 20 questions. From the task, it is fairly clear what
will be asked. For many of the 20 questions, you will already have the answers
because they can be calculated ahead of time. For some questions, as explained
above, you will have to be prepared to do some calculations during the 2 hour
window. This is easier than a quiz because for a quiz you have to do all your
calculations during the 2 hour window and you have no real idea what the
questions will be. Again, do not worry. Everyone who is prepared should do
well. Very well.