CLASS / COURSE: Basic Principles of Finance
Basic Principles of Finance
You may consult annual reports, information provided as part of investor briefings and other publicly available information in preparing your answers for questions 1, 2 and 3. It may also be useful for you to watch a webcast of an AGM of your chosen firm from the website of the chosen company. Please note webcasts of AGMs are not available for all companies and that you may require a broadband connection to access those that are available.
To answer questions 1 to 3, students need to select two firms (one banking or financial firm and another one from the retail or manufacturing). Once companies are chosen relevant information needs to be collected from companies' websites and other sources such as business periodicals.
Based on the information collected, students need to examine the organization structure of the companies specifically examining the board of directors and the board committees. Students are expected to comment on the role played by board members in safeguarding the interests of not just shareholders but also employees, customers, suppliers, local communities in terms of social, economic and environmental impacts.
Question 2 requires students to analyse cash flow statements of chosen companies for the last two years and identify factors that influence major changes. Students may need to review topic 2 and apply the principles learned in addressing this question.
Question 3 requires students to estimate the free cash flow for the chosen firms and comment on if the free cash flow is excessive / optimum / sub-optimal. This question requires that students consult articles written on the issue of free cash flow issue.
Select 2 firms – one from banking sector and one from retail or manufacturing sector - listed on the ASX. Identify the organizational structure and board committees of the firms chosen. Comment on the independence of the board and state in your view how well the interests of stakeholders are looked after. Examine the shareholding of directors and comment on their incentive structures. (4 Marks).
Examine the cash flow statements of firms chosen in question 1 for the latest 2 years and comment on their net operating cash flows, net investing cash flows and net financing cash flows. What in your view are the major changes in cash flows over the 2 years and what do you think are the factors influencing these changes? (3 Marks).
Estimate the free cash flow for the 2 selected firms. Comment on the appropriate level of free cash flow and discuss what might happen if a particular firm has a large amount of free cash flow. Please cite at least 5 references in your explanation and provide a list of references at the end of your answer to this question. (3 Marks).
Your uncle has agreed to loan you $6,000 so you can go on holiday today. Because you are his favourite nephew, he has agreed to loan you the money at a below market interest rate of 6 percent per year. He has also agreed to a grace period of 3 years during which time no payments will be due. Your first payment is due exactly 4 years from today and you will have to make payments at the end of each year to repay the loan. The payments are all equal. What is the size of each payment? (2 Marks)
Your aunt heard that you are studying corporate finance this semester. She has asked your advice on the dilemma she is facing. Your task is to consider her situation and provide her a financial advice. Your aunt’s situation: She has just celebrated her 40th birthday. She has two children. One will to university overseas 10 years from now and requires four beginning-of-year payments for university expenses of $10,000, $11,000, $12,000 and $13,000. The second child will go to another overseas university in 15 years from now and require four beginning-of-year payments for university expenses of $15,000, $16,000, $17,000 and $18,000. In addition, your aunt plans to retire in 20 years. She wants to be able to withdraw $50,000 per year (at the end of each year) from an account throughout her retirement. She expects to live 30 years beyond retirement. The first withdrawal will occur on her 61st birthday.
What equal, annual, end-of-year amount must your aunt save for each of the next years to meet these goals, if all savings earn a 12 percent annual rate of return? What if your aunt expects to receive a lump sum gift cheque on her 61st birthday for $400,000? (3 Marks)
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SUBJECTS / CATEGORIES:
2. Financial Management
3. Corporate Finance
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