Question

1). TVM and bond valuation questions (1 mark each): COMPANY IS CSL

a. Your case company has just made a large sale on an instalment contract. The contract requires the customer to pay your case company the amount shown in Table 1 (page 4 of this document) at the end of every month for 4 years. Your case company would like the cash now for an investment and so has asked its bank to discount the instalment contract and pay it the discounted value. The bank will discount the contract at 7% APR, compounded monthly. How much cash will your case company receive from the bank?

b. Your company has annual operating revenue as shown in Table 1. Assume this revenue will grow continuously at the annual rate shown in Table 1. What is your prediction for annual operating revenue in 5 years?

c. Your company needs to borrow funds and has several options available to it, Loans A, B and C. The interest rates (APR) for these options are given in Table 1. What is the EAR of the loan option the company should choose?

d. Your company is buying new property for the amount given in Table 1. To finance this, the company’s bank has offered an amortised loan at 3.8% APR, quarterly compounding, with 10 years of quarterly payments. What quarterly payment will the company have to make on this loan? Assume that the entire property cost is financed and that payments are made at the end of each period.

e. Your company has an issue of $100 par value annual coupon bonds with 8 years remaining until maturity. The annual coupon rate is given in Table 1, along with the current price of the bonds. What is the yield to maturity on the bonds?

f. Your company has an issue of $1,000 par value bonds that offer a 7% coupon rate paid semi-annually. The bonds have 6 years remaining until maturity. The market’s required return on these bonds is given in Table 1. What is the amount of each coupon payment?

Table 1: Case company data (hypothetical except where noted) Boral BLD Cochlear сон MYOB MYO JB HiFi JBH Cheese BGA CSL (CSL) Instalment per $29.1 month (Ś'000s) Annual total revenue $32.9 $26.2 $10.0 $5,731.10 $7,915.30 $1,363.70$6,854.3 $445.2 $1,438.28 millions Annual growth in total revenue 6.6% 15.3% 71% 12.6% 10.1% Loan A (APR, compounding frequenc 6.02%, semi annuall 4.93% monthl 6.48% semi- Semi quarterly monthl annuall annual an 5.50%, semi- annually 5.00% semi- annually 6.45%, 4.25%, quarterly 6.95%, monthl compounding frequenc monthly Loan C (APR 6.52%, semi- annuall 14.91%, 6.97% quarterly 5.95%, quarter 4.24% dail 5.40%, compounding frequenc Property cost $574,000 $211,000 $829,000 $619,000 $420,000 $811,000 8 year bond annual coupon 17.05% rate 6.15% 5.90% 5.60% 3.35% 4.10% 100.50$98.95 $109.50 $92.00 $117.00 95.60 current price 6 year bond required rate of | 5.10% return Data from S&P Capital IQ for the company's most recent financial year 3.20% 3.40% 4.90% 4.80% 4.10% 2Most recent 5 year historical CAGR from S&P Capital IQ Currency shown is USD for this company 4 Assume a 365-day year

Answer 1

1 Answer: a) Installment amount of $ 89 related to CSL will be discounted with the rate of 7% to calculate the expected cash collection from the bank for immediate financing the requirement of the company 3 4 5 6 Particulars Calculation 89 -PV( (7/12%,48,1,0) 8 Installment Amount 9 Present Value of Annui 10 89.00 41.76 Present Value of Total 11 Installment 12 13 Expected Cash collection from Bank is $3716.66 -D9 D10 3716.66 15 16 b) Prediction of Annual operating revenue in 5 years can be calculated 17 by using the growth rate 18 19 20 Given Particulars: Annual revenue ($ in millions) Annual growth in total revenue 7915.3 9.80%

21 Calculation on Annual Revenue 23 Calculation 7915.30*1.098 8691.00 1.098 9542.72*1.098 10477.90 1.098 11504.74*1.098 Amount ($ 8691.00 9542.72 10477.90 11504.74 12632.20 Year st Year 2nd Year 3rd Year 4th Year 5th Year 26 27 28 29 30 31 32 5th year Annual operating revenue will be $12632.20 after considering the growth rate of 9.80% 34 c) effective Annual rate is calculated to find the rate of interest after 35 considering the number of compounding in a year 36 37 Calculation of Effective Annual Rate Effective Annual RateCalculation of EAR Loan APR Frequency 38 39 40 41 EAR 6.11% 6.01% 6.08% ((1+C39/200) 2)-1 -(11040/1200/12-1 ((1+C41/400)A4)-1 Semi-Annuall Monthl Quarterl Loan A Loan B Loan C 6.02 5.85 5.95

43 Company should choose the Loan B Since It is having the leasr 44 Effective Annual rate of 6.01% 45 46 47 d) Quarterly payment will be calculated by diving the loan amount 48 from the present value of annuity computed at the rate 3.8% APR 49 compounded quarterly for the period of 10 years 50 51 52 53 54 Calculation of Equal Quarterly Installment Amount ($ 211000 33.15 Particulars (A) Loan Amount (B) Present Value of Annui Equal Quarterly Installment (A/B) 6365.29 56 57 The Quarterly payment required to be made to the bank will be $ 58 6365.29 59

60 61 e) Calculation of Yield to Maturity 100*3.35% -(100-95.61/8 (100+95.6)/2 Interest Amount Discount Proportion Average Value 3.35 0.55 97.8 63 64 65 Yield to Maturit (D62+D63)/D64 3.99% 67 68 69 70 71 f) 72 73 Yield to maturity is 3.99% Calculation of Each Coupon Payment face Value of Bond Coupon Rate Frequen 1000 796 Semi-Annuall 75 76 Each Coupon Payment (1000*7%/2 35 78 79 80 81 Note: All the solutions above have been calculated for the dataset of Company CSL. Hence Each Coupon Payment for the Bond will be $35