Question: Part A: You are the owner and operator of Grains Plus located at Bathurst NSW. The rain during the spring have been the best in a decade and you are expecting a bumper wheat crop. This has prompted you to rethink your current financing sources.
According to your past experience, you believe there is a need for additional $240,000 for the three months' period ending with the close of the harvest season. After meeting with your business banker, you are bit puzzled over what the additional financing will actually cost. The banker has quoted you an annual interest rate of 1% over Reserve Bank of Australia cash rate (let's assume it's currently 3% p.a.) and has also requested that the firm increase its current bank balance of $4,000 up to 20% of the loan.
(a) If interest and principle are all repaid at the end of the three-month loan term, what is the annual percentage rate on the loan offer make by the bank?
(b) If the bank were to offer to lower the rate to the Reserve Bank of Australia cash rate if interest is discounted, should you accept this alternative?
Part B: You own a portfolio of the following shares :
|
SHARE
|
PERCENTAGE OF PORTFOLIO
|
BETA
|
EXPECTED RETURN
|
|
HARVEY NORMAN HOLDINGS LIMITED
|
20%
|
1.00
|
16%
|
|
NATIONAL AUSTRALIA BANK LTD
|
30%
|
0.85
|
14%
|
|
QANTAS AIRWAYS LIMITED
|
15%
|
1.20
|
20%
|
|
ORIGIN ENERGY LTD
|
25%
|
0.60
|
12%
|
|
BHP BILLITON LIMITED
|
10%
|
1.60
|
24%
|
The risk-free rate is 7%. Also, the expected return on the market portfolio is 15.5%.
(a) Calculate the expected return on you portfolio.
(b) Calulate the portfolio beta.
(c) Given the information above, plot the security market line and plot the shares from your portfolio on the graph.
(d) From your plot in the part (c), which shares appear to be the winners and which ones appear to be the losers?
(e) Why should you consider your conclusion in part (d) to be less than certain?
Part C: An overseas investor has approached your investment advisory firm seeking to invest AUD 120 million in one of the two mining company's ordinary shares. Your Chief Investment Officer has done some preliminary research on several listed mining companies financial returns and current financial position that has helped her to narrow the choice to two companies.
You have been given the assignment to analyse and prepare a report as to which of the two mining company's ordinary shares are better value for investment.
Based on your market research (qualitative and quantitative) on NEWCREST MINING LIMITED and ORICA LIMITED, you are required to prepare a recommendation report to the Chief Investment Officer as to the shares of which company provide better value for investment. The overseas investor requires high returns on investment as well as growth in value of shares. The investor is looking to park their funds for long term i.e. 10 years. In your report, include all the calculation and market information on which your recommendation is based.
For this assignment you may use the information provided in the below websites and any other sources you feel will assist you to come up with your recommendation.
Orica Limited https://www.orica.com/
Newcrest Mining Limited https://www.newcrest.com.au/
Australian Stock Exchange https://www.asx.com.au/
Yahoo Finance https://au.finance.yahoo.com/
Reuters https://www.reuters.com/finance/markets
As a minimum calculate the following to help you come up with a recommendation:
• The required rate of return on ordinary shares of the above two mining companies using Capital Asset Pricing Model.
• Ordinary share valuation - Constant dividend growth model.
• Find the monthly holding period return (%) for the period 01 July 2015 to 30 June 2016 for Newcrest Mining Limited and from 01 October 2015 to 30 September 2016 for Orica Limited. The monthly holding period return is the percentage return you would receive if you bought an asset on the first day of the month (opening price) and sold it on the last day of the month (closing price). Graph your results on one graph with returns on the y axis and time on the x axis. (Use ‘Close' rather than ‘Adjusted Close' for the selling price and ignore any dividends.
Guidelines: Base your calculation on the most recent financial results i.e. 30/06/2016 for Newcrest Mining and 30/09/2016 for Orica Limited.
Show all your calculation on the annexure.
Limit your recommendation report to the Chief Investment Officer between to 300 to 400 words using financials theories and concepts.