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Corporate Finance (603)
1) Major Assignment – due 7 January (100 marks) 25%
The assignment consists of two parts: Part A of the assignment focuses on two Insurance Companies: IAG and QBE Limited. Part B of the assignment focuses on the fundamentals of capital budgeting. Tosuccessfully complete this project, you will use/apply not only theories studied in this TFIN603 but alsoother appropriate resources.
Part A: IAG and QBE. Share Price
Question 1 [30 marks]
- a. What is the current price of ordinary / common shares in IAG Limited and QBE Limited? How has each evolved over the past 5-years? Graph each series and discuss their evolution, noting the salient points. [15 marks]
- b. Define Systematic and unsystematic risk, relative to IAG and QBE. Identify at least one factor (e.g.item of news) that has affected the systematic risk of the institution in the last five years and reflected in the movement its share price. Which share price was more volatile, IAG or QBE.? [15marks]
Part B: Capital Budgeting
Environ Ltd requests you to evaluate two new capital budgeting proposals and provide your recommendations. You are required to submit a report by responding to the under listed questions. In your report, state any assumptions made and clearly show all your steps in the calculations undertaken towards reaching your conclusions.
Instructions are as follows:
Provide an evaluation of two proposed projects: landfill and borehole. The initial outlays are $100,000 and$250, 000, respectively for the landfill and borehole. Environ Ltd has set the required rate of return for both projects to 15%. The expected after-tax cash flows from each project are as presented in the Table 1 below:
Table 1: Cash flow A
| Landfill | Bore hole | |
| Inflow year 1 | $ 160,000 | $ 300,000 |
| Inflow Year 2 | $ 160,000 | $ 300,000 |
| Inflow year 3 | $ 160,000 | $ 300,000 |
| Inflow year 4 | $ 160,000 | |
| Inflow year 5 | $ 160,000 | |
| Inflow Year 6 | $ 160,000 | |
Question 2 [35 marks]
- a. Which project should Environ Ltd accept? Use the net present value (NPV) criterion to evaluate both projects. Explain in detail, including all calculations. Also, clearly state all your assumptions. (15 marks)
- b. Determine the IRR for each project. According to the IRR, which project should be accepted? Explain in detail, including all calculations. (10 marks)
- c. Would your conclusions in parts (a) and (b) change if the required rate of return increased to 14%? Explain in detail, including all calculations. [10 marks]
Table 2: Cash flow 2
| Landfill | Borehole | |
| Inflow year 1 | $ 450,000 | $ 300,000 |
| Inflow year 2 | $ 450,000 | $ 300,000 |
| Inflow year 3 | $ 450,000 | $ 300,000 |
| Inflow year 4 | $ 450,000 | |
| Inflow year 5 | $ 450,000 | |
| Inflow year 6 | -$1500,000 |
Question 3 [20 marks]
Environ Ltd has revised its estimates of expected after-tax cash flows as shown in Table 2. The initial outlays are $800,000 for the landfill and $250, 000 for the borehole. Environ Ltd maintains the required rate of return at 12% for both projects.
- a. Based on the net present value (NPV) criterion, which project should Environ Ltd accept? Explain in detail, including all calculations. Also, clearly state all your assumptions. (10 marks)
- b. Based on the internal rate of return (IRR) criterion, which project should Environ Ltd accept? Explain in detail, with the graph of IRR and all working steps. Also, clearly state all your assumptions. (10 marks)
Question 4 [15 marks]
Some financial mangers prefer capital budgeting models such as internal rate of return (IRR) or non-discounted payback models over the net present value (NPV) the model, which is preferred by academic financial analysts. Why? Briefly discuss. [Word Limit: 200 – 300 words]
