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BUACC5936 – FINANCIAL MANAGEMENT

Semester 2 2017

Assignment (25 marks)

Students are to complete this assignment in groups of three (3). It consists of three (3) parts, all of which must be attempted. (If it is unavoidable, groups of two may be considered). Students should concentrate on the following for Part three (3):

• Introduction,

• Content,

• Expression,

• Presentation,

• Conclusion, and

• Reference List.

Note:

• While the above items are attributes of a good assignment, they are not necessarily sections.

• Work that fails to show adequate acknowledgement of sources will not receive a mark.

• Essays must have academic references in the reference list and the referencing must follow good academic format. Students are strongly urged to read reviewed academic journal articles.

• The link to the library website for more information is: http://www.federation.edu.au/library/assignment-and-research-help/referencing

• Penalty for late submissions: 10 per cent of your earned marks will be deducted for each day after the due date, unless prior arrangements are made with the lecturer and are consistent with the School rules and Practices.

A high level of scrutiny will be conducted to detect plagiarism. Students are strongly advised to use Turnitin.

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Part 1

a) Betty Smith, a 25-year old graduate, wishes to retire at age 65. To supplement other source of retirement income, she can deposit $2000 each year into an individual retirement fund. The fund will be invested to earn an annual return of 10%, which is assumed to be attainable over the next 40 years.

a. If Betty makes annual end-of-year $2000 deposits into the fund, how much will she have accumulated by the end of her 65th year?

b. If Betty decides to wait until age 35 to begin making annual end-of-year $2000 deposits into the fund, how much will she have accumulated by the end of her 65th year?

c. Using your findings in parts a and b, discuss the impact of delaying making deposits into the fund for 10 years (age 25 to age 35) on the amount accumulated by the end of Betty’s 65th year.

d. Rework parts a and b, assuming that Betty makes all deposits at the beginning, rather than the end, of each year. Discuss the effect of beginning-of-year deposits on the future value accumulated by the end of Betty’s 65th year.

(1 X 4 = 4 Marks)

b) K-mart is considering the purchase of one of two security cameras – V or Z. Both should provide benefits over a 10-year period, and each requires an initial investment of $4000. Management has constructed the following table of estimates of probabilities and rates of return for pessimistic, most likely and optimistic results:

Camera 1

Camera 2

Amount

Probability

Amount

Probability

Initial Investment

$4000

1.00

$4000

1.00

Annual rate of return

Pessimistic

20%

0.25

15%

0.20

Most likely

25%

0.50

25%

0.55

Optimistic

30%

0.25

35%

0.25

a) Determine the range for the rate of return for each of the two cameras.

b) Determine the expected rate of return for each camera. Which camera is more risky? Why? (1 X 1 = 2 Marks)

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c) You have been given the following return data on three (3) assets – A, B and C over the period 2011-2014

Expected return %

Year

Asset A

Asset B

Asset C

2011

16

17

14

2012

17

16

15

2013

18

15

16

2014

19

14

17

Using these assets, you have isolated three investment alternatives:

Alternative

Investment

1

100% of asset A

2

50% of asset A and 50% of asset B

3

50% of asset A and 50% of asset C

a) Calculate the expected return over the four-year period for each of the three alternatives.

b) Calculate the standard deviation of returns over the four-year for each of the three alternatives.

c) Use your findings in parts a and b to calculate the coefficient of variation for each of the three alternatives. Based on your findings above, which of the three investment alternatives would you recommend? Why?

(1 X 3 = 3 Marks)

Part 2

a) Olivia Stevens is trying to value Wonderland’s shares, which are not growing at all. Wonderland declared and paid a $5 dividend last year. The required rate of return for its industry is 11%, but Olivia is unsure about the financial reporting integrity of Wonderland’s finance team, which has short-term focus. She decides to add an extra 1% ‘credibility’ risk premium to the required return as part of her valuation analysis.

a) What is the value of Wonderland’s shares, assuming that the financials are trustworthy?

b) What is the value of Wonderland’s shares, assuming that Olivia includes the extra 1% ‘credibility’ risk premium?

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c) What is the difference between the values found in parts a and b, and how might one interpret that difference?

d) What are the key issues for valuation when the finance team adopts a short-term focus? (1 X 4 = 4 Marks)

b) Consider the mixed streams of cash flows shown in the following table.

Cash flow stream

Year

A

B

1

$50 000

$10 000

2

40 000

20 000

3

30 000

30 000

4

20 000

40 000

5

10 000

50 000

Totals

$150 000

$150 000

a) Calculate the present value of each stream using a 15% discount rate.

b) Compare the calculated present values and discuss them in light of the fact that the undiscounted cash flows total $150 000 in each case.

(1 X 2 = 2 Marks)

Part 3 (Word Limit: 1500+/-100) (10 Marks)

Note: students are strongly urged to read reviewed academic journal articles and provide at least three academic journal articles in the reference.

Carefully consider the following two quotations:

“Stakeholder engagement has been defined as practices that the organisation undertakes to involve stakeholders in a positive manner in organisational activities. In defining stakeholder engagement in this manner, it is manifest that many areas of organisational activity involve stakeholder engagement. Stakeholder engagement is not the exclusive domain of socially responsible firms, nor is it the exclusive domain of socially responsibility activities within firms” (Greenwood 2007: p.317-318).

The above quotation is taken from: Greenwood, M. (2007), ‘Stakeholder engagement: beyond the myth of corporate responsibility’. Journal of Business Ethics, 74, pp.315-327.

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“Stakeholder theorists have challenged traditional views that lie at the nexus of modern economic and management theory. Among these challenged views is the special privileged of the goal of stakeholder return, as well as the emphasis on the increasingly sophisticated tools devised to achieve it. No well-known writer on stakeholder theory has questioned the importance of stakeholder value, but many have written that theory and practice should at times balance the importance of the value of money with that of the other values.” (Donaldson, 2002: p.108).

The above section is taken from: Donaldson, T. (2002). ‘The stakeholder revolution and the Clarkson principles’. Business Ethics Quarterly, 12, pp.107-111.

Required: You are asked to examine the concept of stakeholder engagement and its importance to corporate governance.

NB: 1) Understanding the notions of stakeholder engagement and corporate governance is

more important than an enlargement with the advanced maths in many articles.

2) Do not plagiarise articles content-instead cite, or better yet, paraphrase it and

always give full references. This shows that your opinions are informed opinions.

Plagiarism, Cheating & Collusion

Plagiarism, cheating or collusion is regarded as a serious breach of the University’s academic standards.

RULES WILL BE STRICTLY ENFORCED.