Assignment: 2

Subject Code: ACC515

Subject Name: Financial Management

Page 1 of 8
Part A

(A)

Given:

Annual Rate of Interest = 0.01 + 0.03

Principal Amount = $2, 40,000

Compensating = 20%

Existing Balance $4000

To secure a loan of 2,40,000 compensating balance need to be maintained of 20% on loan

amount and less the actual bank balance(4000).

As 2,40,000 is 80% of loan amount and 20% is compensating balance and less $4000 existing
balance then the value will be as given below

Consider ‘B’ as amount to be borrowed

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 1
𝐴𝑃𝑅 = ×
𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑇𝑖𝑚𝑒

𝐵 − 0.20𝐵 + $4000 = $240,000

$240000 − $4000
𝐵=
1 − 0.20
$2,36,000
𝐵= = $2,95,000
0.8
Amount of interest payable on loan:

3
= $295000 × (0.04) ×
12
= $2950

$2950 1
𝐴𝑃𝑅 = ×
$240000 3
12

1
𝐴𝑃𝑅 = 0.01229 × 0.25 = 0.04916×100 = 4.91%

Page 2 of 8
(B) Discount Rate Method

It is mention that the Bank were to offer lower the rate to RBA cash rate.

Loan amount 2,40,000 less (- 4000) available balance loan amount = 236000

$236000
= 3
1−0.20−0.03×
12

$236000
=
0.7925

= $297,791.8

Interest on Loan = $297,791.8×0.03×3/12 = $ 2233.43

$2233.43 1
𝐴𝑃𝑅 = ×
$240000 3
12
= 3.72%

As the discount rate of interest is lower, hence the acceptance will be beneficial.

Part B

Portfolio Management:

(a) Expected return on portfolio

= (𝑝𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝑝𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑖𝑛 𝑎𝑠𝑠𝑒𝑡 1 × 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑎𝑠𝑠𝑒𝑡 1)

+(𝑝𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝑝𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑖𝑛 𝑎𝑠𝑠𝑒𝑡 2 × 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑎𝑠𝑠𝑒𝑡 2 )

+ ⋯ + (𝑝𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝑝𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑖𝑛 𝑎𝑠𝑠𝑒𝑡 𝑛 × 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑎𝑠𝑠𝑒𝑡 𝑛)

= (0.2 × 0.16) + (0.3 × 0.14) + (0.15 × 0.2) + (0.25 × 0.12) + (0.1 × 0.24) = 0.158

Page 3 of 8
(B) Portfolio Beta

=(𝑝𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝑝𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑖𝑛 𝑎𝑠𝑠𝑒𝑡 1 × 𝐵𝑒𝑡𝑎 𝑓𝑜𝑟 𝑎𝑠𝑠𝑒𝑡 1)

+(𝑝𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝑝𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑖𝑛 𝑎𝑠𝑠𝑒𝑡 2 × 𝐵𝑒𝑡𝑎 𝑓𝑜𝑟 𝑎𝑠𝑠𝑒𝑡 2 )

+ ⋯ + (𝑝𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝑝𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑖𝑛 𝑎𝑠𝑠𝑒𝑡 𝑛 × 𝐵𝑒𝑡𝑎 𝑓𝑜𝑟 𝑎𝑠𝑠𝑒𝑡 𝑛)

=(0.2 × 1.00) + (0.3 × 0.85) + (0.15 × 1.20) + (0.25 × 0.60) + (0.1 × 1.6) = 0.945

C)

Security Market Line

30%

25% 24%
20% 20%
Return

15% 16% 15.5%

14%
10%

5%

0% 0%
0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00
Beta

Expected Return

15.5%

7%
Beta
0 1

Page 4 of 8
D)
Nab and origin energy are the looser as they have less than expected return which is less than
15.5%. Whereas the other 3 (Harvey Norman, Qantas and BHP) are the winner as there
expected return is greater than 15.5%

E)
Due to base on accuracy of the beta the conclusion is less than certain as well as there is
absence of beta of Zero. Which means it is not risk free.

Part C

Annexure

Monthly holding period return on Shares Newcrest Mining Limited and Orica Limited:

Monthly Holding Period Return

40.0%

30.0% 34.4%

20.0%
19.8%
10.0% 15.8% 15.3%
10.2%
0.0%
-0.7% -1.9% -0.6%
-2.8%
-10.0% -5.8%
-10.9%
-12.6%
-20.0%
12 11 10 9 8 7 6 5 4 3 2 1
New crest 19.8% -2.8% 10.2% -5.8% 34.4% -0.7% 15.8% -10.9% -1.9% 15.3% -0.6% -12.6%
Orica 3.1% 4.5% 15.0% -8.6% -9.9% 0.6% 8.2% -0.3% -8.3% -1.6% -4.9% 9.3%

Page 5 of 8
Based on the most recent result of Newcrest and Orica Limited Capital Asset pricing has
been calculated.

CAPM:

(
Risk free rate of return + Beta for Asset j Expected return on the market portfolio – risk

free rate of return )

R j = R f + ß j (R m – R f)

CAPM Calculation for Newcrest Limited and Orica Limited:

Estimate of the risk free rate, current yield to a maturity of a Ten year 10 yr Treasury Bills
considered as 4%/ or 0.04

Share Date Open Close Beta Expected

Return
Newcrest 30/06/2016 23.53 23.00 -0.18 -0.02
LTD
Orica LTD 30/09/2016 15.06 15.20 1 0.01

CAPM for Newcrest

R j = R f + ß j (R m – R f)

R j = 0.04+-0.18(-0.02-0.04)

R j= 0.050 or 5%

CAPM for Orica

R j = R f + ß j (R m – R f)

R j = 0.04+ 1(0.01-0.04)

R j= 0.01 or 1%

Page 6 of 8
Recommendation:

Based on the market Research and calculating the monthly holding return of NEWCREST
MINING LIMITED for the period (01/Jul/2015 to 30/June/2016) and ORICA LIMITED for
the period (01/Oct/2015 to 30/Sep/2016) it has been come to the result that Newcrest mining
Limited is good performer where as the Orica Limited is under performing, the monthly
holding return is higher in Newcrest mining limited than compare to Orica Limited.
It is also find that the beta of Newcrest is less than Zero which is -2% which means it is risk
free where as the beta of Orica limited is 1.
Based on Capital Asset pricing model considering the risk free return of 4% and using the
appropriate provided beta, it has been analysed that the Newcrest share will give a return of
5% on investment where as from Orica limited the return is 1%.

After considering the Overall comparison of both the company’s shares performance it is
advisable that the Newcrest mining limited will be a good performing company share for
long-term higher returns on investment which have a growth in value of shares.

Page 7 of 8
Reference:

(Sheridian, 2016)
(University, 2017)
(yahoo finance, 2017)
(Reutures, 2017)
(Newcrest mining limited, 2017)
(Orica, 2017)
(ASX, 2017)

Bibliography
ASX. (2017). Retrieved from asx.com.au: http://www.asx.com.au/

Newcrest mining limited. (2017). Retrieved from newcrest.com.au: http://www.newcrest.com.au/

Orica. (2017). Retrieved from orica.com: http://www.orica.com/

Reutures. (2017). Retrieved from reuters.com/finance/markets:

http://www.reuters.com/finance/markets

Sheridian, T. (2016). Financial Management (7 ed.). Pearson Australia Group. Retrieved April 2017

University, C. S. (2017, April). Student Resources. Retrieved from Interact2.csu.edu.au:

https://interact2.csu.edu.au/webapps/blackboard/content/listContent.jsp?course_id=_2312
5_1&content_id=_1346861_1&mode=reset

yahoo finance. (2017, April). Retrieved from au.finance.yahoo.com: https://au.finance.yahoo.com/

Page 8 of 8