Unit: FNCE2004 – Introductory Business Financial Modelling Semester 2, 2018

Location: Enter Your Campus Location

Assessment: Group assignment
Assessment value: 25%
Due date: To be submitted by 1pm on Friday 19 October 2018 (week 12 as per unit outline)

IMPORTANT INSTRUCTIONS:
·         This group assignment is due at the date and time stated above.
·         Form a group between 2 and 3 group members.
·         Show all working to demonstrate you have understood how to solve each problem.
·         Please present your answers in at least 2 decimal points.
·         Students are to submit their assignments onto Blackboard. The assignment must be submitted as a MS Excel docume
·         Answer all sections.

Your assignment should meet the following requirements

ÿ        A copy of the assignment has been retained by each of the group member
ÿ        Declaration below is complete

Declaration
Except where I have indicated, the work I am submitting in this assignment is my own work and has not been submitted fo
contributed among the group members is adequately fair. I warrant that any diskettes and/or computer files submitted as
clean.

Student ID Family Name Given Name Signature of student

1
2
3

All form of plagiarism, cheating and unauthorised collusion are regarded seriously by the University and could result in penalties including failure in th
your lecturer, unit coordinator or your course coordinator.
 In cell C6 you must enter your campus location as follows:
Bentley
Malaysia
Mauritius
Online

must be submitted as a MS Excel document - *.xlsm or *.xlsx.

own work and has not been submitted for assessment in another unit or course. I admit that the work
kettes and/or computer files submitted as part of this assignment have been checked for viruses and reported

Name of your tutor

y and could result in penalties including failure in the course and possible exclusion from the University. If you are in doubt, please contact
Question 1 (25 marks)
Design an Excel financial model that can help to answer the following parts (part 1 - 3). 5 marks will be allocated for the pr
arrangement for input cells, appropriate use of colors, have some degree of flexibility, generate warning messages for wro

Part 1 (8 marks)
Suppose you receive $850 at the end of each year for the next four years.

a. (2 marks)
If the interest rate is 6% per annum (interest paid annually), what is the present value of these cash flows?

b. (2 marks)
What is the future value in four years of the present value you computed in part (a)?

c. (2 marks)
Assume that no withdrawals are made from the savings account until the end of the fourth year. What is the interest com

d. (2 marks)
Compute the effective 4 years rate (total interest over 4 years). Hint: EFFECT function is not appropriate for this part as it
interest rate.

Part 2 (6 marks)
Your uncle has just announced that he is going to give you $8,000 per year at the end of each of the next 4 years.

a. (2 marks)
If the relevant interest rate is 8%, what is the value today of this promise?

b. (2 marks)
If the interest rate changes to 7%, what is the value today of this promise?

c. (2 marks)
Explain how interest rates influence the value of the promise in parts (a) and (b).

Part 3 (6 marks)
James borrowed $150,000 to refit his fishing trawler. The loan requires monthly repayments over 10 years. When he borr
later the bank increased the interest rate to 13% per annum, in line with market rates. The bank tells James he can increa
date) or he can extend the term of loan (and keep making the same monthly repayment). Calculate:

a. (4 marks)
The new monthly repayment if James accepts the first option.

b. (2 marks)
The extra period added to the loan term if James accepts the second option.
ks will be allocated for the presentation and clarity of your model (e.g., if there are clear headings, clear
te warning messages for wrong user inputs, etc.).

e cash flows?

ear. What is the interest component?

ppropriate for this part as it is often used to compute an effective annual interest rate from a nominal

of the next 4 years.

over 10 years. When he borrowed the money the interest rate was 11.5% per annum, but 18 months
ank tells James he can increase his monthly repayment (so as to pay off the loan by the originally agreed
culate:
Part 1
(A)
PMT $ 850.00
Rate 6%
Time 4
TYPE End

PV $ 2,945.34
(B)

PV $ 2,945.34
Rate 6%
Time 4

FV $ 3,718.42

(C)
Savings $ 3,400.00
Total Interest $ 318.42

(D)
Rate 6%
Time 4
Using Effective
Periodic rate
formula
〖 (1+𝑟)^ 〗26.25%
Total Interest
^(𝑡−1)

Part 2
(A)

PMT $ 8,000.00
Rate 8%
Time 4
TYPE End

PV $ 26,497.01
(B)

PMT $ 8,000.00
Rate 7%
Time 4
 TYPE END

PV $ 27,097.69

(C) It can be elucidated that interest rate and PV has an indirect relationship which connotes that a rise

Part 3
(A)
PV of money borrowed $ 150,000.00
Time 10
Monthly 120
1st Yearly Interest Rate 11.50%
1st Monthly Interest Rate 0.96%
First Month Payment $ 2,108.93 1
Last Payment ? 18
Last Payment with first
interest $ 13,122.43
Amount Remaining on
Loan $ 136,877.57

(A) (B)
PV $ 136,877.57 PV
Time 102 PMT
Second Interest Rate Second Interest
13% Rate
Second Monthly Interest Second Monthly
Rate 1.08% Interest Rate

PMT $ 2,223.77 Time

Extra Months
ect relationship which connotes that a rise in interest rate will decrease the value of PV and vice versa.

$ 136,877.57
$ 2,108.93

13%

1.08%

112.70832929166 Months
10.708329291655 Months
Question 2 (40 marks)

The Horace Newtech Company is considering the introduction of a new product. Generally, the company's products have a lif
of products that the company sells. The new product requires the purchase of new equipment costing $9,500,000, including f
is 5 years, with an estimated resale of equipment of $2,750,000 at the end of that period. The equipment will be fully depreci

The new product will be manufactured in a factory already owned by the company. This factory is currently being rented to a
and provides for an annual rental of $190,000. Under the lease agreement, the Horace Newtech Company can cancel the leas
to 1 year's rental payment.

It is expected that the product will involve the company in market research expenditures that will amount to $750,000 during
assets (net working capital) will require $310,000 at the commencement of the project and are assumed to be fully recoverab

The new product is expected to generate sales revenue as follows:

Year 1: $3,250,000
Year 2: $3,750,000
Year 3: $3,500,000
Year 4: $3,250,000
Year 5: $1,750,000

It is assumed that all cash flows are received at the end of each year. The corporate tax rate is 25%.

Horace Newtech Company has an equity beta of 0.5. Its capital structure consists of equal amounts of equity and debt. The r
expected rate of return on the market index is 18%.

Using the inputs suggested in the proposed investment, design an Excel financial model that can help to evaluate the project.
the project and forecast the net cash flows. 5 marks will be allocated for the presentation and clarity of your model (e.g., if t
appropriate use of colors, have some degree of flexibility, generate warning messages for wrong user inputs, etc.).

Answer the following questions using your Excel financial model:

a. (5 marks)
What is Horace Newtech Company ’s weighted average cost of capital (WACC)?

b. (15 marks)
Estimate the free cash flows of the project.

c. (7 marks)
What is the net present value (NPV) and internal rate of return (IRR) of the project? Should Horace Newtech Company undert
and IRR lead to the same decision?

d. (8 marks)
Draw a line graph to explain the sensitivity of the NPV to changes in WACC? The graph should have a chart title, as well as x- a
mpany's products have a life of about 5 years, after which they are deleted from the range
ting $9,500,000, including freight and installation charges. The useful life of the equipment
pment will be fully depreciated to zero value using the straight line (prime cost) method.

currently being rented to another company under a lease agreement that has 5 years to run
ompany can cancel the lease by immediately (year 0) paying the lessee compensation equal

mount to $750,000 during the first year the product is on the market. Additions to current
umed to be fully recoverable at the end of the fifth year.

s of equity and debt. The risk free rate is 5%. The debt has a pre-tax yield of 9% and the

elp to evaluate the project. The model should enable Horace Newtech Company to consider
rity of your model (e.g., if there are clear headings, clear arrangement for input cells,
er inputs, etc.).

Newtech Company undertake the project based on NPV? How about IRR? Do both NPV

a chart title, as well as x- and y-axis labels.

Question 2

(A)
Equity Beta 0.5 After Tax Cost
Weight of Debt 0.5 Debt 6.75%
Weight of Equity 0.5 Equity 11.50%
Risk Free Rate 5%
Pre-Tax Yield 9%
Market Return 18%
Tax Rate 25%

WACC
Formula 𝑤𝐷∗𝑟𝐷+𝑤𝐸∗𝑟𝐸
WACC 9.13%

(B)

Cost of New
Equipment $ 9,500,000.00
Working Capital $ 310,000.00
Resale of Equipment $ 2,750,000.00
Life 5
Depreciation
(Straight Line
Method)
$ 1,900,000.00
Market Research
expenditure $ 750,000.00
Rent per annum $ 190,000.00
No Lease $ 190,000.00
Corporate Tax rate 25%
After-Tax rate 75%

Sales Revenue
Year 1 $ 3,250,000.00
Year 2 $ 3,750,000.00
Year 3 $ 3,500,000.00
Year 4 $ 3,250,000.00
Year 5 $ 1,750,000.00

( C)
Without Lease
NPV 2,041,849.08
IRR 16%
Should you accept
the project? Yes

For a project to be accepted, it should be atleast equal to 0. Since NPV is greater than 0, we should accept the project. Howev
NPV and IRR does induce the same decision but can be differing in some cases since IRR uses only one discount rate compared

(D)
WACC NPV
9.13% $ 2,041,849.08
1.00%
2.00%
3.00% Sensitivity Line Gra
4.00% $12.00
5.00%
$10.00
6.00%
7.00% $8.00
8.00%
9.00% $6.00
10.00%
$4.00
11.00%
12.00% $2.00
13.00%
14.00% $-
1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00
 Workings:
Equity
Using CAPM
Formula 𝑟_𝑓+𝛽(𝑟_𝑚−𝑟_𝑓)

11.50%

YEAR 0 1 2 3
Cost $ (9,500,000.00)
Depreciation Tax savings $ 475,000.00 $ 475,000.00 $ 475,000.00
Resale of equipment
Tax on Sale
Sales Revenue (After Tax) $ 2,437,500.00 $ 2,812,500.00 $ 2,625,000.00
Without Lease $ (190,000.00)
Market Research
Expenditure $ (562,500.00)
Working Capital $ (310,000.00)
Net Cash Flows $ (10,000,000.00) $ 2,350,000.00 $ 3,287,500.00 $ 3,100,000.00
han 0, we should accept the project. However as IRR is greater than WACC, we should reject the project.
e IRR uses only one discount rate compared to NPV.

Sensitivity Line Graph

% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 10.00 11.00 12.00 13.00 14.00
% % % % %
 4 5

$ 475,000.00 $ 475,000.00
$ 2,750,000.00
$ (687,500.00)
$ 2,437,500.00 $ 1,312,500.00

$ 310,000.00
$ 2,912,500.00 $ 4,160,000.00
Question 3 (35 marks)

You are planning to invest in the following stocks:

Rows 8 to 78 show the monthly closing prices of three stocks between 2012 and 2018. The data
were collected from Yahoo Finance. When answering these questions, ignore dividends and
assume all prices are in the same currency.

Date Rio Tinto Ltd (RIO.AX) Apple Inc. (AAPL) Cathay Pacific Airlines (0293.HK)
Jul-2012 49.24 87.99 12.64
Aug-2012 53.36 95.11 12.62
Sep-2012 56.94 95.88 14.04
Oct-2012 58.75 85.46 13.62
Nov-2012 66.01 84.81 14.22
Dec-2012 66.36 79.12 15.06
Jan-2013 67.05 65.59 14.48
Feb-2013 57.20 62.57 13.28
Mar-2013 55.80 63.13 13.64
Apr-2013 55.18 63.49 14.48
May-2013 52.37 64.39 13.56
Jun-2013 57.51 57.53 14.36
Jul-2013 58.30 65.11 13.30
Aug-2013 61.74 70.44 15.20
Sep-2013 63.99 68.35 15.38
Oct-2013 66.06 74.86 16.42
Nov-2013 68.18 79.71 16.40
Dec-2013 65.64 79.38 16.10
Jan-2014 66.84 71.80 15.80
Feb-2014 63.55 74.77 14.46
Mar-2014 61.70 76.82 14.64
Apr-2014 59.30 84.57 14.12
May-2014 59.31 90.57 14.48
Jun-2014 66.38 93.52 14.72
Jul-2014 62.63 94.90 14.40
Aug-2014 59.58 103.06 14.30
Sep-2014 60.41 100.59 14.54
Oct-2014 59.10 108.22 17.08
Nov-2014 58.00 118.81 16.90
Dec-2014 57.56 111.39 18.10
Jan-2015 64.41 118.05 17.40
Feb-2015 57.23 129.25 17.94
Mar-2015 57.15 124.82 19.98
Apr-2015 58.20 126.10 19.86
May-2015 53.75 130.28 19.06
Jun-2015 52.86 126.90 18.34
 Jul-2015 50.29 121.50 14.00
Aug-2015 48.60 110.15 14.52
Sep-2015 50.65 109.07 15.44
Oct-2015 45.91 120.80 13.68
Nov-2015 44.71 118.75 13.42
Dec-2015 39.13 102.61 12.18
Jan-2016 40.28 96.47 12.40
Feb-2016 42.69 97.65 13.42
Mar-2016 51.55 108.78 12.40
Apr-2016 44.69 93.97 12.16
May-2016 45.50 99.02 11.32
Jun-2016 49.56 95.49 12.60
Jul-2016 47.60 104.41 11.16
Aug-2016 51.61 106.14 10.80
Sep-2016 54.18 112.71 10.22
Oct-2016 57.75 113.46 10.50
Nov-2016 59.90 110.37 10.24
Dec-2016 66.68 115.80 10.54
Jan-2017 61.99 127.03 11.40
Feb-2017 60.46 137.89 11.28
Mar-2017 60.44 143.71 11.20
Apr-2017 62.81 145.10 11.40
May-2017 63.27 153.17 12.12
Jun-2017 65.79 144.88 12.24
Jul-2017 67.84 149.10 11.62
Aug-2017 66.53 164.80 11.80
Sep-2017 69.45 154.26 13.34
Oct-2017 70.95 169.87 12.00
Nov-2017 75.81 169.95 12.12
Dec-2017 76.85 170.16 12.42
Jan-2018 81.16 167.17 13.26
Feb-2018 72.70 178.54 13.54
Mar-2018 79.86 166.64 12.64
Apr-2018 82.97 166.41 12.78
May-2018 83.44 187.99 12.34

a. (5 marks)
Design an Excel financial model that can help to evaluate this investment plan. Marks will be allocated for the presentation an
arrangement for input cells, appropriate use of colors, have some degree of flexibility, generate warning messages for wrong u
consider the investment plan and answer the following questions:

b. (3 marks)
For each stock, show the monthly stock returns.

c. (3 marks)
Based on the responses in part (b), calculate the average monthly stock returns and standard deviation for each stock.

d. (2 marks)
Calculate the correlation of monthly stock returns between each pair of stocks.

e. (4 marks)
Suppose that you were to invest 65% in Apple Inc., 25% in Rio Tinto Ltd and 10% in Cathay Pacific Airlines. Calculate the portfo
will be allocated for the presentation and clarity of your model (e.g., if there are clear headings, clear
generate warning messages for wrong user inputs, etc.). The Excel financial model should enable you to

andard deviation for each stock.

hay Pacific Airlines. Calculate the portfolio expected return, variance and standard deviation.
Question 3 (A)
Stock Prices
DATE Rio Tinto Ltd (RIO.AX)Apple Inc. (AAPL) Cathay Pacific Airlines (0293.HK)
Jul-2012 49.24 87.99 12.64
Aug-2012 53.36 95.11 12.62
Sep-2012 56.94 95.88 14.04
Oct-2012 58.75 85.46 13.62
Nov-2012 66.01 84.81 14.22
Dec-2012 66.36 79.12 15.06
Jan-2013 67.05 65.59 14.48
Feb-2013 57.20 62.57 13.28
Mar-2013 55.80 63.13 13.64
Apr-2013 55.18 63.49 14.48
May-2013 52.37 64.39 13.56
Jun-2013 57.51 57.53 14.36
Jul-2013 58.30 65.11 13.30
Aug-2013 61.74 70.44 15.20
Sep-2013 63.99 68.35 15.38
Oct-2013 66.06 74.86 16.42
Nov-2013 68.18 79.71 16.40
Dec-2013 65.64 79.38 16.10
Jan-2014 66.84 71.80 15.80
Feb-2014 63.55 74.77 14.46
Mar-2014 61.70 76.82 14.64
Apr-2014 59.30 84.57 14.12
May-2014 59.31 90.57 14.48
Jun-2014 66.38 93.52 14.72
Jul-2014 62.63 94.90 14.40
Aug-2014 59.58 103.06 14.30
Sep-2014 60.41 100.59 14.54
Oct-2014 59.10 108.22 17.08
Nov-2014 58.00 118.81 16.90
Dec-2014 57.56 111.39 18.10
Jan-2015 64.41 118.05 17.40
Feb-2015 57.23 129.25 17.94
Mar-2015 57.15 124.82 19.98
Apr-2015 58.20 126.10 19.86
May-2015 53.75 130.28 19.06
Jun-2015 52.86 126.90 18.34
Jul-2015 50.29 121.50 14.00
Aug-2015 48.60 110.15 14.52
Sep-2015 50.65 109.07 15.44
Oct-2015 45.91 120.80 13.68
Nov-2015 44.71 118.75 13.42
Dec-2015 39.13 102.61 12.18
 Jan-2016 40.28 96.47 12.40
Feb-2016 42.69 97.65 13.42
Mar-2016 51.55 108.78 12.40
Apr-2016 44.69 93.97 12.16
May-2016 45.50 99.02 11.32
Jun-2016 49.56 95.49 12.60
Jul-2016 47.60 104.41 11.16
Aug-2016 51.61 106.14 10.80
Sep-2016 54.18 112.71 10.22
Oct-2016 57.75 113.46 10.50
Nov-2016 59.90 110.37 10.24
Dec-2016 66.68 115.80 10.54
Jan-2017 61.99 127.03 11.40
Feb-2017 60.46 137.89 11.28
Mar-2017 60.44 143.71 11.20
Apr-2017 62.81 145.10 11.40
May-2017 63.27 153.17 12.12
Jun-2017 65.79 144.88 12.24
Jul-2017 67.84 149.10 11.62
Aug-2017 66.53 164.80 11.80
Sep-2017 69.45 154.26 13.34
Oct-2017 70.95 169.87 12.00
Nov-2017 75.81 169.95 12.12
Dec-2017 76.85 170.16 12.42
Jan-2018 81.16 167.17 13.26
Feb-2018 72.70 178.54 13.54
Mar-2018 79.86 166.64 12.64
Apr-2018 82.97 166.41 12.78
May-2018 83.44 187.99 12.34

(C ) Average Stock Returns Standard Deviation

RIO.AX 0.97% 6.54%
AAPL 1.33% 6.93%
0293.HK 0.199% 6.77%

(D) Correlation
Corr(RIO.AX,0293.HK) 0.241974147543012
Corr(RIO.AX,AAPL) 0.031870679069025
Corr(AAPL,0293.HK) -0.054323064680308

(E ) Weight
RIO.AX 25%
AAPL 65%
0293.HK 10% 100%
 Portfolio Returns 1.13%
Portfolio Variance 0.24%
Standard Deviation 4.91%

(F) Weight
RIO.AX 20%
AAPL 25%
0293.HK 55%

Portfolio Returns 0.64% Portfolio Variance

Standard Deviation 4.51%

The change in weights has lead to a fall in both portfolio return from 1.13% to 0.64% and standard deviation from

(G) Weight
RIO.AX 31%
AAPL 37%
0293.HK 32%

(H)
Standard Deviation Monthly returns
(E ) 4.91% 1.13%
(F) 4.51% 0.64%
(G) 4.15% 0.85%

(I) Risk free rate

Standard Deviation Monthly returns
(E ) 4.91% 1.129%
(F) 4.51% 0.637%
(G) 4.15% 0.853%
(B)
Monthly Stock Returns
Rio Tinto Ltd (RIO.AX) Apple Inc. (AAPL)

8.367181154% 8.091828617%
6.709145427% 0.809588897%
3.178784686% -10.867751356%
12.357446809% -0.760589750%
0.530222694% -6.709114491%
1.039783002% -17.100606673%
-14.690529456% -4.604360421%
-2.447552448% 0.894997603%
-1.111111111% 0.570251861%
-5.092424792% 1.417546070%
9.814779454% -10.653828234%
1.373674144% 13.175734399%
5.900514580% 8.186146521%
3.644314869% -2.967064168%
3.234880450% 9.524506218%
3.209203754% 6.478760353%
-3.725432678% -0.414000753%
1.828153565% -9.549004787%
-4.922202274% 4.136490251%
-2.911093627% 2.741741340%
-3.889789303% 10.088518615%
0.016863406% 7.094714438%
11.920418142% 3.257149166%
-5.649291955% 1.475620188%
-4.869870669% 8.598524763%
1.393084928% -2.396662139%
-2.168515146% 7.585247042%
-1.861252115% 9.785621881%
-0.758620690% -6.245265550%
11.900625434% 5.978992728%
-11.147337370% 9.487505294%
-0.139786825% -3.427466151%
1.837270341% 1.025476686%
-7.646048110% 3.314829500%
-1.655813953% -2.594412036%
-4.861899357% -4.255319149%
-3.360509048% -9.341563786%
4.218106996% -0.980481162%
-9.358341560% 10.754561291%
-2.613809628% -1.697019868%
-12.480429434% -13.591578947%
 2.938921544% -5.983822240%
5.983118173% 1.223178190%
20.754275006% 11.397849462%
-13.307468477% -13.614635043%
1.812486015% 5.374055550%
8.923076923% -3.564936376%
-3.954802260% 9.341292282%
8.424369748% 1.656929413%
4.979655106% 6.189937818%
6.589147287% 0.665424541%
3.722943723% -2.723426758%
11.318864775% 4.919815167%
-7.033593281% 9.697754750%
-2.468140023% 8.549161615%
-0.033079722% 4.220755675%
3.921244209% 0.967225663%
0.732367457% 5.561681599%
3.982930299% -5.412287001%
3.115975072% 2.912755384%
-1.931014151% 10.529845741%
4.388997445% -6.395631068%
2.159827214% 10.119279139%
6.849894292% 0.047094837%
1.371850679% 0.123565755%
5.608327912% -1.757169723%
-10.423854115% 6.801459592%
9.848693260% -6.665173070%
3.894315051% -0.138022084%
0.566469808% 12.967970675%

Covariance
Cov(RIO.AX,0293.HK) 0.001071293094438
Cov(RIO.AX,AAPL) 0.000144455827589
Cov(AAPL,0293.HK) -0.000254832967931

rp  w1 * r1  w2 * r2
 rp  w1 * r1  w2 * r2

  w12 *  12  w22 * 22  2* w1w2 1,2

0.2037%

13% to 0.64% and standard deviation from 4.91% to 4.51%.

Portfolio Returns 0.85%

Portfolio Variance 0.17%
Standard Deviation 4.15%

Scatter Diagram
1.20%

1.10%

1.00%

0.90%

0.80%

0.70%

0.60%

0.50%
4.10% 4.20% 4.30% 4.40% 4.50% 4.60% 4.70% 4.80% 4.90% 5.00%

Column D

0.12%
Sharpe Ratio
0.205518429622723
0.114551685617662
0.176646610719421
Cathay Pacific Airlines (0293.HK)

-0.158227848%
11.251980983%
-2.991452991%
4.405286344%
5.907172996%
-3.851261620%
-8.287292818%
2.710843373%
6.158357771%
-6.353591160%
5.899705015%
-7.381615599%
14.285714286%
1.184210526%
6.762028609%
-0.121802680%
-1.829268293%
-1.863354037%
-8.481012658%
1.244813278%
-3.551912568%
2.549575071%
1.657458564%
-2.173913043%
-0.694444444%
1.678321678%
17.469050894%
-1.053864169%
7.100591716%
-3.867403315%
3.103448276%
11.371237458%
-0.600600601%
-4.028197382%
-3.777544596%
-23.664122137%
3.714285714%
6.336088154%
-11.398963731%
-1.900584795%
-9.239940387%
 1.806239737%
8.225806452%
-7.600596125%
-1.935483871%
-6.907894737%
11.307420495%
-11.428571429%
-3.225806452%
-5.370370370%
2.739726027%
-2.476190476%
2.929687500%
8.159392789%
-1.052631579%
-0.709219858%
1.785714286%
6.315789474%
0.990099010%
-5.065359477%
1.549053356%
13.050847458%
-10.044977511%
1.000000000%
2.475247525%
6.763285024%
2.111613876%
-6.646971935%
1.107594937%
-3.442879499%
m

4.70% 4.80% 4.90% 5.00%