FINM1416 2022 Semester 2

Final Exam

Question 1 (5 marks)
Jared and Xingjin are planning to start a soup delivery business for small businesses around town.
The business will start out small, with Jared in charge of finding customers and Xingjin composing
the recipes and managing relationships with local farmers. They have 7 potential customers and aim
to grow their business slowly while they are still working in their current jobs. Neither Jared or
Xingjin has any significant assets outside of the business. What form of business organisation would
you recommend to Jared and Xingjin, and why?

Best option: Partnership or corporation (1 marks)

Justify choice 2 marks:

e.g. a corporation gives limited liability, and is not limited to life of owners (it is easily transferable) (1
mark each, max of 2 marks). (should not use easy access to capital to grow because they don’t want
to grow quickly)

e.g. a partnership could be best to maintain ownership (as opposed to a corporation) and they don’t
aim to grow quickly so don’t require raising capital (1 mark each, max of 2 marks).

State why not the other options (2 marks): e.g. A sole proprietorship is not possible because there is
more than one member, and a partnership would incur personal liabilities (1 mark each).

(any well-argued answer including why the other forms may not be appropriate should attract full
marks)

Question 2 (5 marks)

Imagine you are an UQ alumni and would like to set up a WomensEducation Fund at UQ. The fund
would give scholarships to women from economically disadvantaged backgrounds. You would like
the fund to be able to pay four scholarships a year of $[value],000 each. If your investment fund pays
[return]% per year, how much do you need to deposit now so you can withdraw the money for the
scholarships every year? Enter your answer to the nearest cent (two decimal places).

See excel solutions.

Question 3 (10 marks)

Sarah is 25 years old and has just commenced her first job. She expects her employer to pay
superannuation into a superannuation account throughout her working life. However, she would like
to retire 10 years early, at 55 instead of 65. She doesn't need to live a lavish lifestyle and she wants
to have saved enough money on her 55th birthday to withdraw $2000 every fortnight until she turns
65. How much does she need to save every fortnight, with the first deposit occurring 2 weeks after
her 25th birthday, if her account earns [rate]% per year, compounded fortnightly? Enter your answer
to the nearest cent (two decimal places).
Part 1: Money needed at 55 - Present value of 2000 per fortnight received over 10 years

( )
1
1−
(1+r )n
PVA=C∗
r

Correct formula (1 mark)

Correct C =2000 (1 mark)
Correct n= 10*26 (1 mark)
Correct r = rate (1 mark)
Correct answer (1 mark)

Part 2: Need to save extra to receive the money needed for Part 1 – DO NOT DEDUCT FOR ANY
carry over from Part 1 – solve for C.

FV∗r
C=
( ( 1+r )n−1 )

Correct formula (1 mark)

Correct n = 30*26 (1 mark)
Correct r =rate(1 mark)
Correct FV – (note this was PV in Part 1)(1 mark) (do not deduct for carry-over)
Correct answer (1 mark) (do not deduct for carry-over)

Give part marks for any time-lines or correct thought processes.

See excel solutions as well

Question 4 (7 marks)

Bosion Ltd is raising debt capital and has asked you for advice on two options they have identified:

1. A 15-year zero coupon bond. Bosion Central will receive $10,000,000 today and will repay
$18,468,924 in exactly 15 years.
2. A 15-year bank loan with monthly payments. The bank rate on this loan is 4.0% p.a. compounded
monthly.

Both options have the same upfront fees.

Provide a recommendation for Bosion on which option is financially most attractive and an
explanation (calculations can be provided in your workings at the end of the test).

See excel solutions.

Question 5 (4 marks)

Zizizi Inc has never paid dividends. They plan to pay their first dividend of $0.15 per share in exactly a
year. If investors expect the dividend to perpetually grow by [growth]% per year, and require a 20%
return on investment, what price are investors willing to pay for a Zizizi share? Enter your answer in
dollars to 2 decimal places.

D1
Po=
r −g

Correct formula (1 mark)

Correct D1=$0.15 (1 mark, 0 marks if using it as D0 and adding growth to get D1)
Correct r =0.2 (0.5 marks)
Correct g = growth (0.5 mark)
Correct answer (1 mark, do not give this mark if using D0 as D1)

Question 6 (4 marks)

Refer to the previous question: comment on the assumptions made, are they likely to remain the
same over time? Why or why not? What impact would this have on the share price?

2 marks per assumption - identification (0.5) and explanation (1) and what impact it would have on
share price (0.5)

Examples:
- Required return remains at 20%, this is very high. If the company exists for longer this
usually goes down. This will cause the share price to increase.
- Growth rate to remain constant at x%. Businesses go through different stages and won’t
always be exactly this high. If the growth rate goes down, this will have a negative impact on
the share price.

QUESTION 7 (12 Marks)

UQ is considering developing a solar farm in Warwick to enable the university to have 100%
renewable electricity. Terrain solar led the project's initial study, which cost $200,000. You have
been asked to provide a financial analysis for the project based on this study. The project's initial
costs include land, $25 million, and solar panels, $100 million. The project's operating cost are $
[value1] million per year, but saves the university $[value2] million in electricity costs every year. The
current electricity costs are $25 million. The project is also expected to increase UQ's reputation and
attract more students, estimating an additional $[value 3] million net revenue a year. 
The land depreciation is zero, but the solar panels' cost are depreciated using the straight-line
method over 25 years with an ending book value of 5 million. UQ plans to sell the farm in 10 years
and develop another farm with a new technology. You estimate the land and solar panels will sell for
$30 million and $50 million respectively in 10 years.   
The required rate of return for this project is [value4]% and the tax rate is 30%, what is the expected
NPV? Round your answer to two decimals. 

See excel solutions.

Question 8 (2 marks)
Should UQ develop the new solar farm based on your financial analysis in the previous question?
Why or why not?

The NPV is negative (positive) so reject (Accept) - 2 marks

Question 9 (6 marks)
When conducting further analysis, you find that the NPV of UQ's project is highly sensitive to the
price of electricity. Therefore, you run a simulation study. You assume that the cost of one MWh of
electricity has a normal probability distribution with a mean of $73 and a standard deviation of $12.
The simulation result shows that NPV has a standard deviation of $8.4 million. Compare this with
your NPV calculation. Explain how you interpret these numbers in terms of the risk of the project
and give your final recommendation, which may include non-financial factors.  

Stating standard deviation represents the deviation (value being higher or lower) from the mean It is
a measure of risk and the higher the value of SD the higher the risk (1)

Interpreting the risk based on the SD  (2)

Nonfinancial factors (2)

Final recommendation based on risk and nonfinancial (1)

Question 10 (10 marks)

You invested your savings in a portfolio of stocks last year. You gained a return on these stocks in the
previous year, but you want to calculate your portfolio's expected return.
You learnt in FINM1416 that the expected return is related to the portfolio's risk. The table below
summaries some information about your investment portfolio as of today: 
Stock name  # Shares in Share Price Holding period Beta  Standard
Portfolio (today)   return  deviation 
Xero Ltd  [xero]  89.64  12% 0.56  13%
Woolworths Group Ltd  [woollies] 35.11  16.3%  1.26  16%
Telstra Corporation Ltd  [telstra] 3.94  13.4%  2.96  27%
The market risk premium based on historical ASX market returns is 8%. The yield of a 10-year
Australian government bond is 1.5%. What is your portfolio's expected return? Enter your answer in
a decimal format to six decimal places (0.123456 not 12.3456%)

See excel.

Question 11 (5 marks)

What would you do to reduce the unsystematic risk of your portfolio? What would you do to reduce
the systematic risk? Explain why you would want to reduce risk.

To reduce unsystematic risk à add stocks to the portfolio (2)

To reduce the systematic risk à more difficult, reduce the beta by adding stocks with lower beta to
the portfolio, or increase holdings in the risk free asset (this is a little advanced…) (1)
Explain why would you want to reduce the risk. E.g control the uncertainty in the future returns (2)

Question 12 (10 marks)

You have started an internship for Flight Centre Travel Group. Your manager asks you to calculate
the appropriate required return for the company's capital budgeting decisions.  
Exploring the company's financial statements, you find that the company has 200 million shares
outstanding. You also find the company has issued 23 million bonds. Bonds have a $100 face value
and coupon rate of 4.8%. Coupons are paid quarterly, and the maturity date of bonds is eight years
from now.  
The market data show that the company's stocks are traded at $20.62 per share and bonds at $98.7
in the ASX market. 
You gather additional information. Yahoo finance estimates the beta of the company to be 1.82. The
market risk premium is 8%, and the yield on a long term government bond is 1.3%. The corporate tax
rate is 30%.  
What is the appropriate required return for the company's projects in the same line of
business? Enter your answer in a decimal format to six decimal places (0.123456 not 12.3456%)

Excel.

Question 13 (5 marks)

The company's manager tells you that the company is considering diversifying into other lines of
business, and they also might use different debt to equity ratios for funding. How do these factors
affect your answer about the required rate of return for new projects? Explain why.  

Another line of business: different rate (1.5) Explanation: it might have different systematic risk an
appropriate rate relevant to the risk of project should be (1.5)
The funding of the project is irrelevant (1) because the rate of return should be related to the
systematic risk not the funding (1)

Question 14 – 15 marks – Leonardo

In the tutorial on Module 12 you listened to a Podcast on Proxy voting. List and explain the
different tools investors have available to them to create change in companies, and which
one was highlighted in the podcast. Provide a summary of the podcast, including recent and
likely future trends, and your own opinion on the role of shareholders in corporate ESG
actions.

Different tools (5 marks):

- negative screening (0.5 for listing, 1 for explanation)
- positive screening (0.5 for listing, 1 for explanation)
- shareholder activism/engagement: highlighted in the podcast (0.5 for listing, 1 for
explanation, 1 for identifying it was highlighted in the podcast)
Summary of the podcast (6 marks):
- Look at the solutions to tutorial 12 – any key point with explanation attracts up to
1.5 marks (total of 3 marks).
- Recent (1.5 marks) and future trends (1.5 marks)
o Recent: increased shareholder resolutions
o Future: “He thinks there will be an acceleration of the role of shareholders.
Even more of an ESG agenda and more resolutions, with more players, e.g.
institutional investors and asset owners, stepping up. “ (tutorial 12 solutions)

Own opinion (4 marks):

- Stating opinion (1 mark)
- Explanation (up to 3 marks)
o Relate to theories in the course or podcast (1.5 per explanation)

We are looking for a rounded discussion. You can assign extra marks for an outstanding
discussion for each of the sections/parts that go beyond what is required.