Market Efficiency, Risk-Return and Portfolio Evaluation

Part 1. Reflective learning report (13 marks)

  • Topic 4 – Market Efficiency, Risk-Return and Portfolio Evaluation

Reflective leaning report must be based on the topic assigned and selection of a random topic will be graded zero in part 1.

To complete the reflective learning report, answer the following reflective questions:

Question 1: What are the financial concepts you learned in the session? Briefly explain the concepts. (please only explain the financial concepts discussed in the interactive tutorial session, not all the financial concepts discussed in the recorded lecture) (3 marks)

Question 2: What are the important issues your lecturer reminded you to note down and pay special attention to concerning the financial concepts/formulas/calculations/skills/techniques you learned in that session? (5 marks)

Question 3: Discuss the use of above financial

Part 2. Fact finding of the securities market in Australia. (10 marks)

You are required to explore the data and information from ASX(Australia Stock Exchange: www.asx.com.au) and ASIC(Australian Securities and Investment Commission: https://asic.gov.au/) to complete task 1 and 2.

Task 1: Read and briefly summarise the contents of 3 investment options offered (below) by ASX to investors. (3 marks).

1) Benefits and risks of investing in A-REITS at https://www2.asx.com.au/investors/learn-about-our-investment-solutions/a-reits/benefits-and-risks

(2) How to buy an M-fund at https://www2.asx.com.au/investors/learn-about-our-investment-solutions/investing-in-mfund/how-to-invest

(3) Types of bond at https://www2.asx.com.au/investors/learn-about-our-investment-solutions/bonds/types

Task 2:

  1. a) Search information from ASX on securities issuance and answer 2 questions assigned to your group. (3 marks).

  1. What are acceptable securities for debt securities issuing on ASX? https://www2.asx.com.au/issuers/debt-securities/issuing-debt-securities

  2. What are admission requirements and processes for issuing unlisted managed funds: https://www2.asx.com.au/issuers/investment-products/how-to-issue

  1. b) Search information from ASIC Portal for Finance Professional and answer 2 questions assigned to your group. (2 marks)

  1. What are the ongoing credit license obligations? https://asic.gov.au/for-finance-professionals/credit-licensees/your-ongoing-credit-licence-obligations/

  1. Describe the registration process of applying for SMSF auditor registration? https://asic.gov.au/for-finance-professionals/self-managed-superannuation-fund-smsf-auditors/applying-for-smsf-auditor-registration/

  1. c) Search information from ASIC Portal for Businesses and answer 2 questions assigned to your group. (2 marks)

  1. What books and records should a company keep? https://asic.gov.au/for-business/running-a-company/company-officeholder-duties/what-books-and-records-should-my-company-keep/

  1. What are the steps to cancel a business name? https://asic.gov.au/for-business/cancel-your-business-name/steps-to-cancel-your-business-name/

Part 3: Capital Budgeting and Project Evaluation (15 marks)

3.1. Capital Budgeting Decision Making (7 marks)

Case Study: Assume that your group is working in Finance Department of a construction company. Your company is considering to invest in a 5-year project. Two options are recommended:

Option 1: Build a new ocean-view apartment building on the Gold Coast.

Option 2: Build a new residential quarter in the suburban area of Melbourne.

Option 1

Commercial building

Option 2

Residential block

Initial Investment

2,500,000

2,400,000

Cash flow in

Year 1

420,000

410,000

Year 2

560,000

530,000

Year 3

575,000

560,000

Year 4

656,000

645,000

Year 5

700,000

720,000

You are required to write a short report to the BOM in order:

1) To select a relevant method among 6 investment criteria for this project from:

i. Net Present Value (NPV),

ii. Equivalent Annual Cost (EAC),

iii. profitability Index (PI),

iv. Internal Rate of Return (IRR),

v. Simple Payback Period (SPB), and

vi. Discounted Payback Period (DPP)

Assume the given discount rate applied for all projects is 12% (to be provided later) and the company’s benchmark of payback is maximum 2.5 years.

Your recommendations must include your justification why you choose the specific method based on:

a) its pros and cons compared to other methods,

b) the BOM’s concern of efficiency and

c) the financial circumstance of the company. (2 marks)

2) To perform the selected method and present the outcome of your project evaluation and recommendation, should the company choose the Option 1 or 2 for this project?

Your justification must include calculation steps and numerical outcomes. (5 marks)

Students are required to attend tutorial sessions to know how to work on these capital budgeting questions with correct discount rate, terminologies, templates and calculations. Details of explanation will not be provided in tutorial solutions.

3.2. Risk Analysis and Project Evaluation: NPV Sensitivity Analysis (8 marks)

Case Study: Assume that your group is working in the Finance Department of a production company. Your company is considering buying a new assembly line for launching a new product. With the new assembly line, the company expects to sell 7,500 products/ year for an average price of $450 per Unit for 5 years.

The new assembly line has:

  • the initial cost of $1,850,000, and

  • a residual value of $250,000 at the end of the project.

The company will need to add $450 000 in working capital, which is expected to be fully retrieved at the end of the project. Other information is available below:

  • Depreciation method: straight line

  • Variable cost per Unit: $210

  • Cash fixed costs per year: $200,000

  • Corporate marginal tax: 30%

  • Discount rate: 10.5%

Upon the forecast of unstable economic conditions, the BOM requires your Team to prepare a risk analysis for the case where:

  • Unit sales decrease by 15%

  • Price per Unit decreases by 15%

  • Variable cost per Unit increases 15%

  • Cash fixed cost per year increases by 15%

Required: Do an analysis with cash flows of the project to determine the sensitivity of the project NPV with the above estimated changes in the value drivers and provide your results in relevant tables.