Corporate Finance Assignment

1. Since 1 Sept 2010, Cathy's investment policy has been to lodge fixed (term) deposits at her local bank. The bank pays interest on the maturity date of a deposit and the interest rate is expressed as an annual simple interest rate. When a deposit matures, Cathy's policy is to re-lodge the whole sum (principal and interest) immediately for a further period. She chooses the term of each deposit according to her assessment of the interest rates available at that time. Cathy's decisions to date are as follows:

1 Sept 2010                 6-month deposit at 9% per annum

1 March 2011             8-month deposit at 9.15% per annum

1 November 2011     10-month deposit at 8.75% per annum

Calculate, as at 1 Sept 2014, the effective annual interest rate Cathy has earned since she began this policy. (Assume that all months are of equal length.) Briefly explain each step.
                                                                                                                                                        Order Now

2. The Three-Dot Mining Company has constructed a town at Big Bore. The town will be abandoned when mining operations cease after an estimated 5-year period. The following estimates of investment costs, sales and operating expenses relate to a project to supply Big Bore with meat and agricultural produce over the 5-year period by developing nearby land.

• Investment in land is $8 million, farm buildings $2 000 000 and farm equipment $3 000 000. The land is expected to have a realisable value of $4 000 000 in 5 years' time. The residual value of the buildings after 5 years is expected to be $400 000. The farm equipment has an estimated life of 5 years and a zero residual value.

• Investment of $2 300 000 in current assets will be recovered at the termination of the venture.

• Annual cash sales are estimated to be $21million.

• Annual cash operating costs are estimated to be $18 million.

Is the project profitable, given that the required rate of return is 10 per cent per annum?

3. Using the following data, calculate the:

• Accounting rate of return

• Payback period

• Internal rate of return

• Net present value

Project cost:	$150 000
Estimated life:	4 years
Estimated residual value:	$30 000
Annual net cash flow:	$40 000
Required rate of return:	9%

How would your answers differ if the net cash flows were as follows?

Year 1	$50 000
Year 2	$30 000
Year 3	$60 000
Year 4	$80 000

4. The standard deviations of returns on assets A and B are 12 per cent and 6 per cent, respectively. A portfolio is constructed consisting of 30 per cent in Asset A and 70 per cent in Asset B. Calculate the portfolio standard deviation if the correlation of returns between the two assets is:

1. 1

2. 5

3. 0

4. –1