Financial Management Assessment - Group Report
Learning Outcomes addressed
1) Explain the goal of financial decisions and the importance of financial information.
2) Examine financial instruments and their valuation.
3) Prepare and develop a working capital management plan.
4) Evaluate the concept of optimal capital structure.
Assessment purpose
The assignment is designed to enhance students' skills in analysing the implication of the time value of money as well as facilitating students' discussion of the role of large diversified banks.
ASSESSMENT DESCRIPTION:
Students are required to work in a group of 2 - 4 students in the performance of this assignment.
Students must register for their group with the lecturer during the first three weeks of the trimester and are not allowed to change group members afterward.
The assignment consists of 2 parts.
Part A: Calculation of the time value of money
Valuing Shares
South Island Valley Industries (SVI) wishes to estimate its cost of capital for use in analysing projects that are similar to those that already exist. The company's current capital structure in terms of market value includes 40%debt, 10% preferred equity, and 50% ordinary shares. The company's debt has an average yield to maturity of 8.3%. Its preferred shares have a $70 par value, an 8% dividend, and are currently selling for $76 per share. SVI's beta is 1.05, the risk-free rate is 4%, and the return on the S & P 500 (the market proxy) is 11.4%. SVI is in the 40% tax bracket.
a. What are SVI's pre-tax costs of debt, preferred shares, and ordinary shares?
b. Calculate SVI's weighted average cost of capital (WACC) on both a pre-tax and after tax basis. Which WACC should SVI use when making investment decisions?
c. SVI is contemplating a major investment that is expected to increase both its operating and financial leverage. Its new capital structure will contain 50% debt, 10% preferred shares, and 40% ordinary shares. As a result of the proposed investment, the company's average yield to maturity on debt is expected to increase to 9%, the market value of preferred shares is expected to fall to their $70 par value, and its beta is expected to rise to 1.15. What effect will this investment have on SVI's WACC? Explain your finding.
Part B: Essay
Discuss the role of financial management in 'not for profit organisations'.
Assessment Criteria:
- Demonstrated knowledge of the key differences of financial management between not for profit organisations and for profit organisations.
- Logical inferences drawn from information presented and appropriate justification of stance taken.
- Overall presentation of the argument is relevant and appropriate.