MBA6002 Corporate Finance Assessment Case Study 2 Sample

MBA6002 Corporate Finance Assessment 2

Management – Case Study

Assessment Overview

For the assessment of MBA UNIT 6002, there are the three assessment tasks you have to fulfil in order to complete the MBA 6002 Unit. Details are given in Unit descriptor.

Assessment will be done with the following timetable:

Some clarification on each assessment:

Student Guidelines

Student should investigate financial strength of an organisation or a concept and calculate the most effective solution using formulas. Answers should be written in appropriate business language so that your analysis and discussion have an objective tone. Your writing should be clear and concise and be in your own words. If needed, use headings to guide the reader and include tables or diagrams that make the case clearer.

This assessment will be measuring following unit learning outcomes:

› Explain and utilise concepts associated with the time value of money, extended to an understanding of interest rates, bond and stock valuation

› Correctly model discounted cash flow techniques for investment evaluation, extending to capital budgeting, project analysis and multi-faceted finance criteria.

› Critically analyse key financial statements, with a view to identifying the financial health of an organisation, including how that has changed over time, and from a leadership perspective.

Expectations

This assignment consists of a number of practical exercises and discussion questions, which are covering various topics included in this unit. As the exercises / questions are not related, there is no need for students to prepare an introduction or executive summary for either of the assignments. There is no necessity to waste time in submitting the actual assignment questions provided to you with your assignment – all that is required for this unit is for students to respond
to the assignment questions, not merely rewrite them! Please note that students are expected to be able to prepare and submit all parts of each assignment by
the due date regardless whether or not there are topics scheduled in the unit booklet to be covered after the relevant assignment is due.
Word Limit (1,500 words)

The word limit indicated for questions included in the assignments excludes any calculations that may be made and has been included to ensure that students address each question fully but do not include irrelevant information. The emphasis undertaken by students should be on answering the specific assignment question given, not including everything the student can find on a particular issue. This word limit represents the maximum word count per question within a tolerance of 20%. That is, it is possible to include a slightly greater number of words than the specified limit if it is considered necessary to enhance the relevant discussion.

The word limit should be seen as a guide to the depth to which students are expected to answer the selected questions. It should also be recognised that it is certainly possible to adequately answer many of the questions in less than the specified word limit. The focus on each of the assignments however, should be on the accuracy and completeness of the content provided and this should, to a large extent, override any concerns about the word limit.

Note: Please do not include a word count when sub-mitting the assignments—this would detract from the marker’s assessment of the assignment submissions.

Case Study 1

(Total marks for this question = 20)

Mr. Vinnie Totti is seeking to purchase an apartment for $200,000. The Wakpak Bank is prepared to lend Vinnie 75% of the purchase price with the remaining amount to be funded from personal savings. The loan repayments to Wakpak are to be made monthly (with the first payment due one month after the loan is provided) for a term of 15 years, and the stated annual interest rate quoted by Wakpak is 9.25% p.a. compounded monthly.

A. What will be the amount of Vinnie’s monthly loan repayments? 

B. Immediately after paying the 36th loan repayment, Vinnie wishes to pay out the loan in full. How much will be needed to pay out the loan at this time?

C. (i) Discuss whether there are benefits to Vinnie from changing the frequency of loan repayments from monthly to fortnightly (with each repayment now being 50% of the monthly payment calculated in part a) of this question), as has been suggested by his colleagues at the local produce market where he works on a casual basis as a delivery driver. (Students should write no more than 100 words for this part of the question).

(ii) Would there be any disadvantages to Vinnie arising from increasing the frequency of making loan repayments from monthly to fortnightly as indicated in part c) (i) of this question? (Students should write no more than 100 words for this part of the question).

d. (i) Using the information provided at the start of this question (including the interest rate of 9.25% p.a. compounded monthly), however Vinnie commences to make loan repayments which were now equal to an amount of 50% of the repayment calculated in part  of this question. Also, the loan repayments were now made at the commencement of each fortnight (that is, the first repayment would be made at the date of the loan and fortnightly thereafter). Given this information, over what approximate total term (expressed in years and months) would Vinnie now repay the loan in full?

(ii) Ignoring the amount of the final loan repayment to reduce the loan balance to nil, approximately how much interest would Vinnie save (expressed in nominal dollars) by 3 undertaking the repayment strategy in part d) i) of this question, as compared to making end-of-month loan repayments over a term of 15 years (as calculated in part a) of this question)?

(iii) Given the new loan repayment strategy in part d) i) of this question, what would be the amount of the final repayment required to reduce the loan balance to nil? Assume 4 that the final repayment will be made 1 fortnight after the last regular fortnightly repayment amount.

Case Study 2

Sales for the Australian trading company Rooney Enterprises Ltd. during the last financial year (2008) amounted to $3.5 million. The company has a 5-year contract to provide the plastic studs that are screwed into the bottom of football boots to all government primary schools in Australia.

The direct costs of Rooney Enterprises Ltd. operations were $2.5 million and other operating expenses totalled $700,000. In addition, the company also earned Australian sourced interest income from investments of $45,000 and incurred interest expenses on borrowings of $30,000.

Dividends paid to shareholders in the 2008 financial year (arising from profits earned in financial years prior to the 2008 year) totalled $87,000. There is also a loan of $395,000 currently owing to the bank as at the end of the 2008 financial year. The company tax rate is 30%.

Case Study 3

Mr. R.I.P. Cobain is offered the following alternatives for a lottery winning:

Option 1: A lump sum payment of $10,000, 12 years from now, or

Option 2:  A lump sum payment of $25,000, 25 years from now, or

Option 3:  $3,500 today.

Solution

Case Study 1:

Part A:

If Vinnie is required to make monthly installment payment for the loaned amount of $150000 with an applicable annual interest rate of 9.25% then the monthly payment will be $1543.79

As per the MBA Assignment Expert Overview, 

Part B:

Here, if Vinnie is willing to make repayment of the entire loan amount outstanding after making the 36th payment, which corresponds to 3 years. In that case Vinnie will be required to pay $133991 towards the principal amount. 

Part C (I)

If Vinnie chooses to make fortnightly payments is that making two payments in a month or making a total of 26 payments biweekly then in such case, he will be required to make a total payment of 390 times for a 15 years period when the applicable interest rate is 0.356% per fortnight. Here Vinnie will be required to make $711.84 fortnightly payment for 390 times in order to repay the total loan amount of $150000 including the interest.

Part C (ii) 

If Vinnie chooses to increase in the number of frequencies for making the loan requirement from monthly to fortnightly basis it will have the following issues.

●  At first the income will be generated at a certain point of time even if Vinnie engaged in the business activities. Hence making fortnightly payment will impact the overall repay and capacity and if there are any missed installment then additional penalties will be imposed. 

● Secondly making regular payment will be impacting the cash flow position for Vinnie hence it will be impacting the performance and personal finance management. 

Part d (I)

Although the frequency of loan repayments has increased the amount of installment payment is getting decreased for which Vinnie will be required to wait for 15 years and will be required to make a payment of Al 390 installments in order to repay the entire amount of loan taken for the purchase of the house. Hence the total term for the loan re payment will take 15 years or 180 months.  

Part d (ii)

If the final loan repayment is reduced, Vinnie will be making a total interest payment of $127881 If the loan is repaid on fortnightly basis, the total interest repayments would be $127616. Hence by switching the payment Vinnie can save $265.55.

Part d (iii)

Since Vinnie is repaying the loan in consistent installment amounts therefore Vinnie will be required to pay $71184; as last installment to bring the outstanding loan amount to zero. 

Case study 2

Part A (I):

The corporate tax rate is 30%, given a taxable income of $315,000 then Rooney will be required to pay income taxes for $94500. Refer to Appendix 2: related to case Study 2 question.  

Part A (ii):

Here the profit recorded by the business in the previous financial year for $85000 is not considered for the taxation purpose because it is assumed that the company Rooney enterprise limited has already paid the taxes for the same in previous financial. Additionally, dividends are a portion of the income distributed to shareholders by the business. The dividend will not be considered as an income because it is considered as the distribution of the profit to the owner of the business. 

Part B:

The company can distribute its entire post-tax profit from 2008 as dividends. Hence the maximum dividend that can be distributed by the business will be $220500. 

Part C:

The input tax credit or the imputation available on the dividend distribution will include the amount of taxes paid by Rooney to the Australian Taxation Office (ATO) (Xuerui & Tran,  2019). If the company distributes its entire post-tax net profit as dividends, the associated imputation credits available to shareholders would be $94,500. 

Case Study 3:

Part A:

In the given case scenario, MR RIP can determine that the present value of money for evaluating the best option available. Here there are two options where the money will be received at a future date however the present value for the future lump sum amount receivable by Mr. RIP is required to be calculated by using the discounting process. 

Based on the calculation the present value of the option one is that receiving a lump sum amount of $1000 after 12 years when the fixed rate of interest is 8% Then the present value of option one will $3971.13. Additionally, if MR RIP receives $25000 after 25 years, then the present value of the future income will be $3650.44.  In option three, MR RIP it is going to receive $3500 as of now which is at a present value.

Hence “Option 1 “is required to be selected because it is having the maximum present value

Part B:

There are certain implicit assumptions taken by Mr. Cobain which includes of following 

● Here Mr. Cobain has assumed that it will receive 8% fix rate of earnings over the period of 25 years which is more than the average market interest rate return. Here the risk-free rate of investment for the Australian Government Bonds is having a yield in between 4-5% where as mar Cobain has recorded a fixed earnings interest of 8% which is a very high interest rate, unlikely to sustain in future 

● Another significant assumption made in this case will include that the receiver of the money will leave for at least 25 years from now in order to receive the money. However, if anything happens in between them then the entire money will be wasted.

● Here, based on the information provided for Mr. Cobain it is clearly identified that there are no immediate financial needs, even though it can make the earnings more liquid option 3 is selected where $3500 will be received immediately and it can be invested for the short-term investment options which can create more value in return.   
Discussion Question:

Part 1: 

Multiple factors influence an organization's maximum value. Key among them is enhancing shareholder value by increasing share price over time, achieving positive cash flow, net profit, and more. There are multiple ways for increasing the value of the investors which will include the increase in the earnings position for the, recording growth in the revenue and minimization of the expenses (Dirman, 2020).

However, there are certain things which is discussed in this quote and there is emphasis that the company should focus on the share price maximization for the long term and the short term prospective for the value maximum or it should increase the dividend payment and others. Here management will be required to identify the impact of each of those decisions in order to create value. 

The investor or the shareholder will be required to consider the Efficient market hypothesis for reflecting the true value of the share in its current share prices. Here the business cannot create wealth for the shareholder by increasing the share prices for today or tomorrow or increasing or decreasing the dividend payment rather it should work on efficiently by improving their long-term stability and profitability for the wealth creation. 

Part 2: 

Differentiating between cash flow and the accounting revenue and expenditure

Before discussing about the importance of the cash flow and the accounting revenue and expenditure determination in the financing it will be relevant to identify and understand the meaning of them.

The cash flow is based on the cash income received by the business and the cash expenses paid during a particular period. Hence in simple sentence the cash flow statement can be considered as the Income and expenses recognition for the business using the cash basis of accounting.

On the other hand, in the actual basis of accounting the income and their expenses for the business is recorded in order to determine the profit (Shodiya et al, 2019).

In financing, the cash flow is considered to be more important as compared to the net profit and the income and expenses calculator according to the accrual basis because it will not indicate the actual earnings position for the business which is being realized.   Additionally In the financing aspect the cash flow statement will provide a clear understanding about the investment position, earned and profits recognized.  

For instance, in order to calculate the return on investment, the time value of money is required to be calculated for which the cash flow statement is considered instead of the net profits, as the net profit will be recorded in the books of accounts as per the accrual basis how your day may not be realized by the organization. 

Reference:

Dirman, A. (2020). Financial distress: the impacts of profitability, liquidity, leverage, firm size, and free cash flow. International Journal of Business, Economics and Law, 22(1), 17-25. https://www.ijbel.com/wp-content/uploads/2020/08/IJBEL22_205.pdf

Shodiya, O. A., Sanyaolu, W. A., Ojenike, J. O., & Ogunmefun, G. T. (2019). Shareholder wealth maximization and investment decisions of Nigerian food and beverage companies. Acta Universitatis Sapientiae, Economics and Business, 7(1), 47-63. http://193.16.218.141/acta-econ/C7/econ7-04.pdf

Xuerui, L., & Tran, A. (2019, June). The Australian dividend imputation system and corporate tax avoidance. In Australian Tax Forum (Vol. 34, No. 2, pp. 357-399). Sydney, NSW: Tax Institute. https://search.informit.org/doi/abs/10.3316/informit.515859514099853