Posted: December 27th, 2022

FNCE5008 – Financial Principles and Analysis

FNCE5008 – Financial Principles and Analysis
Financial principles are the fundamental concepts that underlie financial decision-making and analysis. Some key financial principles include:

Time value of money: The time value of money refers to the idea that money has a higher value in the present than in the future, due to the potential for it to earn interest or be invested.

Risk and return: Risk and return are closely related in finance, with higher levels of risk generally associated with higher potential returns. Investors must balance their appetite for risk against their need for return, and consider the trade-offs between the two.

Opportunity cost: Opportunity cost is the value of the next best alternative that is given up in order to pursue a particular course of action. In finance, opportunity cost is often considered when making investment decisions, as it represents the potential returns that could be earned by investing in a different asset.

Diversification: Diversification is the practice of spreading investments across a variety of asset classes or industries, in order to reduce risk and increase the chances of earning a positive return.

Financial analysis is the process of evaluating the financial performance and position of an individual or organization, using tools such as financial statements, ratio analysis, and cash flow analysis. Financial analysis can be used to inform a variety of decisions, such as whether to invest in a company, how to allocate resources, and how to improve financial performance.
CASE STUDY ASSIGNMENT
Due Date: 10.00 am on Wednesday 11th May, 2022
Total marks: 71
Weight: 25%
Lyntel Elec is a mid-sized electronics manufacturer located in Western Australia. The company president is
Rossmoyne Scout, who inherited the company. When it was founded over 70 years ago, the company originally
repaired radios and other household appliances. Over the years, the company expanded into manufacturing and
is now a reputable manufacturer of various electronic items. Daniel McCanless, a recent graduate, has been
hired by the company’s finance department. One of the major revenue-producing items manufactured by Lyntel
Elec is a personal digital Helpant (PDA). Lyntel Elec currently has one PDA model on the market, and sales have
been excellent. The PDA is a unique item in that it comes in a variety of tropical colours and is pre-programmed
to play reggae music.
However, as with any electronic item, technology changes rapidly, and the current PDA has limited features in
comparison with newer models. Lyntel Elec spent $750 000 to develop a prototype for a new PDA that has all
the features of the existing PDA but adds new features such as mobile phone capability. The company has spent
a further $200 000 for a marketing study to determine the expected sales figures for the new PDA. Lyntel Elec
can manufacture the new PDA for $155 each in variable costs. Fixed costs for the operation are estimated to run
$4.7 million per year. The estimated sales volume is 74 000, 95 000, 125 000, 105 000, and 80 000 per each year
for the next five years, respectively. The unit price of the new PDA will be $360. The necessary equipment can
be purchased for $21.5 million and will be depreciated over seven years at prime cost. It is believed the value of
the equipment in five years will be $4.1 million. As previously stated, Lyntel Elec currently manufactures a PDA.
Production of the existing model is expected to be terminated in two years. If Lyntel Elec does not introduce the
new PDA, sales will be 80 000 units and 60 000 units for the next two years, respectively. The price of the existing
PDA is $290 per unit, with variable costs of $120 each and fixed costs of $1 800 000 per year. If Lyntel Elec does
introduce the new PDA, sales of the existing PDA will fall by 15 000 units per year, and the price of the existing
units will have to be lowered to $255 each. Net working capital for the PDAs will be 20 per cent of sales and will
occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC, but changes
in NWC will first occur in year 1 with the first year’s sales. Lyntel Elec has a 30 per cent corporate tax rate.
However, Rossmoyne does not know the required rate of return for this project yet. Rossmoyne suggested to
use the cost of Technology One Ltd (TNE.AX) common stock as the required rate of return. Technology One
Limited develops, markets, sells, implements, and supports integrated enterprise business software solutions in
Australia, New Zealand, the United Kingdom, and Malaysia. The company also provides custom software
development services for large scale, purpose built applications. Technology One Limited was founded in 1987
and is headquartered in Fortitude Valley, Australia.
Rossmoyne has asked Daniel to prepare a report that answers the following questions.

Part I – Estimate the required rate of returns:
1. (TOTAL: 18 marks) Go to finance.yahoo.com and download the ending monthly stock prices for
Technology One Ltd (TNE.AX) in the list for the last 60 months. Use the adjusted closing price, which adjusts
for dividend payments and stock splits. Next, download the ending monthly value of the S&P/ASX All
Ordinaries Index (ASX Code ^AORD) over the same period. For the historical risk-free rate, go to the RBA
FNCE5008 – Financial Principles and Analysis
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website and find the 90-day Bank Accepted Bills (BABs) rate
(www.rba.gov.au/statistics/tables/xls/f01hist.xls). Present the downloaded data for the stock, the 90-day
BABs and the S&P/ASX All Ordinaries Index for this period.
(3 marks)
Calculate:
a) The monthly returns for the stock, the 90-day BABs and the S&P/ASX All Ordinaries Index for this
period?
(6 marks)
b) The average monthly returns for the stock, the 90-day BABs and the S&P/ASX All Ordinaries Index for
this period?
(3 marks)
c) Annualize the monthly returns for the stock, the 90-day BABs and the S&P/ASX All Ordinaries Index
for this period?
(3 marks)
d) The standard deviations for the stock, the 90-day BABs and the S&P/ASX All Ordinaries Index for this
period? (3 marks)
2. (Total: 14 marks ) Beta is often estimated by linear regression. A model often used is called the CAPM,
which is:
𝑅𝑡 – 𝑅𝑓𝑡 = 𝛼𝑖 + 𝛽𝑖[𝑅𝑀𝑡 – 𝑅𝑓𝑡] + 𝜀𝑡
In this regression, ‘Rt’ is the return on the assigned stock and ‘Rft’ is the risk-free rate for the same period.
‘RMt’ is the return on a stock market index such as the S&P/ASX All Ordinaries Index. The symbol ‘αi’ is the
regression intercept, and ‘βi’ is the slope (and the stock’s estimated beta). The symbol ‘𝜀𝑡’ represents the
residuals for the regression.
Using the data returns in Question 1, do the following tasks:
a) Use the CAPM to estimate the beta for the assigned stock. (6 marks)
You should use the regression procedure in Excel to do this. You will need to enable Data Analysis
function in Excel first (see this link to know how to enable it: http://www.addictivetips.com/windows
tips/excel-2010-data-analysis/. Then you can use regression procedure in Excel to estimate beta for
the assigned stock following the instruction in this website: http://www.addictivetips.com/windows
tips/excel-2010-regression-analysis/ .
b) What is the financial interpretation of the beta found in Question 2a? (2 marks)
c) Present a scatterplot of the monthly excess returns on the stock against the monthly excess returns
on the index and also show the fitted line. (2 marks)
d) What does the fitted line in Question 2c) capture? (2 marks)
e) What type of risk do the deviations from the fitted line in Question 2d) represent? (2 marks)
FNCE5008 – Financial Principles and Analysis
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3. Estimate the cost of equity capital of Technology One Ltd using the CAPM. (3 marks)
Part II- Project Assessment (TOTAL: 36 marks)
4. Calculate the NPV of the project. (TOTAL: 24 marks)
5. Should Rossmoyne invest into this project? Explain your suggested decision. (2 mark)
6. Assess the reliability of the NPV estimation in Question 5 where the cost of Technology One Ltd equity
capital is used as the required rate of returns for the project. (5 mark)
7. What is your recommendation for Rossmoyne to mitigate the potential forecasting risk in this project
Assessment? Explain your answers. (5 marks)
Important Notes:
1) Today is 14th April 2022. At this moment, the most recent 90-day BABs rate is March 2022. Therefore, the
last monthly data for the assigned stock, the 90-day BABs and S&P/ASX All Ordinaries Index used in this
assignment must be March 2022.
2) If stock returns, S&P/ASX All Ordinaries returns and standard deviations are expressed in decimal forms, 4
decimals are required. If these numbers are expressed in percentage form, 2 decimals are required. For riskfree rates, it is required to use 5 decimals in decimal forms or 3 decimals in percentage forms.
FNCE5008 – Financial Principles and Analysis
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Presentation Guidelines:
You are expected to write this assignment in Word or PDF format in a clear and logical manner and should
include a cover page (indicating ALL group member’s names and student numbers).
You are required to show your working out in all questions; present tables of your analysis in your assignment
and describe each step of the calculation. All tables and data must be included in ONE submitted Word or PDF
file. Only ONE file is allowed for submission.
Assignments must be typed. Please, keep a copy of your assignment as well.
You must use size 12 font Times New Roman, 1.5 line spacing, 1-inch margins and 1-inch top/bottom margins.
Tables can be single-spaced and the font size should not be smaller than 8pt; and tables must be numbered
sequentially using Arabic numerals. Any illustrations used must be very clear and easy to understand.
Reference Guidelines:
Citation in text: Please ensure that every reference cited in the text is also present in the reference list (and vice
versa). Unpublished results and personal communications are not recommended in the reference list.
Web references: As a minimum, the full URL should be given and the date when the reference was last accessed.
Any further information, if known (DOI, author names, dates, reference to a source publication, etc.), should
also be given.
You must provide full references to sources used in your assignment. You are recommended to use the Harvard
referencing system.
Submissions guidelines:
Your assignment must be submitted electronically via the “Case Study Assignment Submission” link on
Blackboard. The electronic copy should be lodged via MyLO no later than 10.00 am (Perth, AWST time) on
Wednesday 11th May, 2022. ONLY ONE file is allowed in the submission. If you submit multiple documents for
the Case Study Assignment, only one of the submitted documents will be marked. This one document will be
selected randomly from the submitted documents by myself.
To Dubai students: The due time for the submission is 6.00am Dubai time, Wednesday 11th May 2022.
The submitted filename must be “SID_Surname” in which SID is the student number of the first group member
listed on the cover page of the assignment; Surname is the student surname of the first group member listed on
the cover page of the assignment. Only one submission per group is permitted.
If you have problems submitting your assignment, you MUST contact your lecturer AND your unit
coordinator immediately explaining the situation by email AND attach your assignment in the email before the
due time. In your email, you must clearly identify in the title of your email that you experiencing a problem in
FNCE5008. In the body of the email, explain the specific problem.
The late assessment and Extension Policy applies. Please refer to this policy in the Unit Outline.

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