FIN303: Prudence has just Finished her course on financial Management and Would like to Apply what she has Learnt for her Retirement Planning: Financial Management Homework, SUSS, Singapore

Question 1
Prudence has just finished her course on financial management and would like to apply what she has learnt for her retirement planning. She would like to retire 30 years from today. She estimates she will need $50,000 a year to live comfortably, with the first retirement funds to be withdrawn a year from the day she retires until the 20th year postretirement. Prudence estimates that she can earn 5% per year on her funds for retirement.

Her financial planner, Anthony, would like her to consider a regular savings plan to help her to achieve her retirement goals. The savings plan requires Prudence to deposit monthly into an account with a quoted rate of 5%, compounded monthly. Prudence will only look at this after she has done her own calculations.

(a) Compute the amount that Prudence must deposit in her account today so that she will have enough funds for her retirement.

(b) Calculate the amount that Prudence must deposit in her account each year,
starting one year from today, so that she will have enough funds for her
retirement.

(c) Examine the savings plan proposed by Anthony and discuss whether Prudence should take up her planner’s suggestion.

Question 2
You are the manager of a portfolio of stocks as shown below. Stock Invested amount Beta The expected return on the market is 10%. The risk-free rate is 4%.

(a) Calculate the beta of stock C if the portfolio has a beta that is similar to the market.

(b) Without calculating, infer the expected return of the portfolio.

(c) Propose one (1) possible method to rebalance the portfolio if you expect the stock markets to fall in the next 6 months. Discuss your rationale.

Question 3
You are the chief investment officer of Alpha Finance Pte Ltd. One of your team
members has just submitted an update on GekCo bonds and shares for your review.

GekCo Bonds

• Current traded price: $1,050
• Par value: $1,000
• Coupon: 5%
• Tenor: 3 years to maturity

GekCo Ordinary Shares

• Current traded price: $9.80 per share
• Dividend (just paid): $1
• Dividends are expected to grow at 4% per annum
• Required return: 15%

At the same time, the board of directors asked you to review the company’s capital budgeting policy. The current evaluation criteria are that the company will only invest in projects that achieve IRRs of at least 12%.

(a) Without calculating, infer if the yield to maturity of GekCo bond is higher or
lower than its coupon of 5%.

(b) Using the dividend growth model (DGM), evaluate if you should buy GekCo
shares.

(c) Shortly after you have submitted your recommendation as required in part (b), GekCo announces that it will be suspending its dividend payments for the
upcoming year to conserve cash because of the uncertain market environment. Propose an alternative method (other than DGM) to evaluate whether to buy GekCo shares.

(d) Discuss two (2) limitations of using IRR for project evaluation

Question 4
BagelChat Limited (“BCL”) is listed on the stock exchange with 10 million shares in issuance. Its current share price is $8. The company’s beta is 1.4. BCL has also issued 20,000, 4% coupon bonds outstanding with par value of $1,000. The bonds are currently trading at par. The corporate tax rate is 20

In addition, the following information has been obtained:
• The expected market return is 10%.
• The current 10-year Treasury bond yield is 4%.
• The current AAA-rated bond yield is 4.5%.

BCL is considering whether to issue an additional $10 million of bonds at par.
(a) Compute the current weighted average cost of capital for BCL.

(b) Based on Modigliani and Miller’s Propositions, calculate the value of the firm and the cost of equity of the company if it has no debt.

(c) Based on Modigliani and Miller’s Propositions, appraise the value of the firm and the cost of equity of BCL if the company decides to issue an additional $10
million of debt.

(d) Without calculating, infer if BCL’s weighted average cost of capital has increased or decreased with the additional issuance of $10 million of debt.

(e) Discuss the impact on the value of the firm if BCL should continue to increase its leverage.

Question 5

BBT Pte Ltd is a manufacturing company. The sales forecasts for the following quarters are provided below as at 31 December 2019.

BBT collects 60% of revenue in cash within the quarter and the remaining credit sales are collected in the next quarter. Purchases are 50% of the following quarter’s sales. 50% of these purchases are settled by cash and the remaining credit purchases are settled in the next quarter. Overheads of $5 million per quarter are paid as incurred.

Outstanding trade receivables and trade payables as at 31 December 2019 are $10 million and $8 million respectively. These are expected to be fully collected or settled by the end of Q1 2020

BBT expects to purchase new equipment in Q2 2020 for $20 million. Depreciation expense is $2 million per quarter. BBT will also commence paying quarterly dividends of $10 million beginning from Q3 2020.

The cash balance as of 1 January 2020 is $5 million.
(a) Prepare and construct a cash budget for Q1 to Q4 of 2020.

(b) Mid-way through Q1 2020, a sudden global market event occurs which disrupts BBT’s existing business. As a result, the sales team has revised their estimates and highlight that they will only be able to meet 25% of their initial sales forecasts for the rest of the year in 2020.

Assess and recommend three (3) options to improve the short-term liquidity
the situation for BBT.