FIN6003 Real Estate Ltd is considering investing in property development, which requires an initial investment of £130,000: Financial Management Assignment, AU, UK

Question 1

Real Estate Ltd is considering investing in property development, which requires an initial investment of £130,000. The annual cash inflows during years 1-3 are expected to be £40,000 for year 1; £45,000 for year 2 and £52,000 for year 3. The company’s money cost of capital is
6% and inflation is expected to be 3% during the life of the project.

Required:
a) Calculate the ARR of the project, taking inflation into account.

b) Calculate the (Undiscounted) Payback Period of the project, taking inflation into account. 

c) Calculate the NPV of the project using the money cost of capital as the discount rate, and state clearly whether the project should be undertaken.

d) Calculate the NPV of the project using the real rate of return as the discount rate (round up to 2 decimal places), and state clearly whether the project should be undertaken.

e) Discuss the likely impact of your results in parts c) and d) above on Real Estate Ltd. (4 marks)

More Same code FIN6003 Assessment Tasks

Tutors have set other Same code FIN6003 tasks on this module too. They are listed below so you can see every version of the brief on one page.

FIN6003 Discuss the key differences between the operation of a currency forward market and a futures market: Financial Management Assignment, AU, UK

Question 4
a) Discuss the key differences between the operation of a currency forward market and a futures market.

b) Assume that the current (indirect for the UK) spot exchange rate of one pound to the dollar is $1.60/£ and that the corresponding three-month forward exchange rate is $1.59/£. Also, assume that the annualised 3-month interest rate on the pound is currently 4.00% and that the corresponding interest rate on the US dollar is 2.50%.

Required:
(i) Based on the above information, use relevant computations as a basis for explaining whether you are likely to invest in the pound, or borrow the pound.
(ii) Using detailed workings, calculate the amount of profit that you will realise on each pound that you borrow, or invest.

FIN6003 Delta Ltd wishes to calculate its current cost of capital for use as a discount rate in investment appraisal: Financial Management Assignment, AU, UK

Question 3
Delta Ltd wishes to calculate its current cost of capital for use as a discount rate in investment appraisal. The following financial information relates to Delta Ltd:

Financial Position statement extracts as of 31 December 2022

The ordinary shares of Delta Ltd have an ex-div market value of £4.70 per share and an ordinary dividend of £0.36 per share has just been paid. Ordinary dividends are expected to grow in the future by 4% per year.

The preference shares of Delta Ltd are not redeemable and have an ex-div market value of £0.40 per share.

The 7% bonds are redeemable at a 5% premium to their nominal value of £100 per bond and have an ex-interest market value of £104.50 per bond.
The bank loan has a variable interest rate that has averaged 4% per year in recent years.

Delta Ltd pays profit tax at an annual rate of 19% per year.

Required:
a) Calculate the market value Weighted Average Cost of Capital (WACC) of Delta Ltd.

b) Discuss the pros and cons of using the WACC as a discount rate to evaluate capital budgeting projects.

c) Explain the impact of tax on the WACC according to the modified Modigliani & Miller (M&M II, 1963) capital structure model.

FIN6003 Assume a US bond with a face value of $1000 that bears a 5% annual coupon and has 10 years to maturity: Financial Management Assignment, AU, UK

Question 2
a) Assume a US bond with a face value of $1000 that bears a 5% annual coupon and has 10 years to maturity.

Required:
i) Determine the current price of the bond, given that its current Yield to Maturity (YTM) is 6%.
ii) if the YTM falls to 4%, what would the price of the bond be?
iii) What do the above results indicate about the relationship between the price of a bond and its YTM?

b) Assume a bond that promises eight annual coupon payments of $70 and will repay its face value of $1000 at the end of the eight-year period. Assuming that you are offered the bond for a price of $1035.94, use detailed workings to compute the implied YTM.

c) As a Financial Analyst, you have been approached by an investor seeking to understand the extent to which stock prices reflect all available information and how quickly they adjust to new information. Identify the three forms of the (informational) Efficient Market Hypothesis and discuss the differences between them.