BM013-3-3-CFIN

Individual Assignment

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Module Code: BM013-3-3 CFIN

INDIVIDUAL ASSIGNMENT (30% weightage)
Assignment Description
This assignment comprises 30% of your total marks for this module. Please answer all,
Question 1 and Question 2.
Question 1
Sara is the founder and CEO of Deli Restaurants, Inc., a regional company. Sara is
considering opening several new restaurants. Pete Thomas, the companys CFO, has been put
in charge of the capital budgeting analysis. He has examined the potential for the companys
expansion and determined that the success of the new restaurants will depend critically on the
state of the economy over the next few years. Deli Restaurants currently has a bond issue
outstanding with a face value of $34 million that is due in one year. Covenants associated
with this bond issue prohibit the issuance of any additional debt. This restriction means that
the expansion will be entirely financed with equity at a cost of $8.4 million. Pete Thomas has
summarized his analysis in the following table, which shows the value of the company in each
state of the economy next year, both with and without expansion:
Economic Growth

Probability

Without Expansion

With Expansion

Low

0.3

$30,000,000

$33,000,000

Normal

0.5

$35,000,000

$46,000,000

High

0.2

$51,000,000

$64,000,000

a)

Recommend the expected value of the company within one year, with and without
expansion and justify whether the companys stockholders be better off with or
without the expansion.
(20 marks)

b)

Assess the expected value of the companys debt in one year, with and without the
expansion.
(5 marks)

A.P.U Level 3

Asia Pacific University of Technology & Innovation

201608

BM013-3-3-CFIN

c)

Individual Assignment

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Critically analyse the value creation is expected from the expansion within one years
time. Explain how much value creation is expected for stockholders and bondholders
respectively.
(20 marks)

d)

If the company announces that it is not expanding, comment what will happen to the
price of its bonds and vice versa.
(5 marks)

e)

If the company opts not to expand, elaborate the implications for the companys future
borrowing needs and the implications if the company decided to expand.
(5 marks)

f)

Due to the existence of the bond covenant, the expansion would have to be financed
with equity. Appraise how this would affect your answer if the expansion were
financed with cash on hand instead of new equity.
(5 marks)
(Total: 60 marks)

Question 2
In all countries, it appears that some firms have a target debt ratio while others do not have
one. Critically discuss and review the validity of the trade-off theory, pecking order theory,
and market timing theory.
(Total: 40 marks)
(Grand Total:100 marks)
Specification of Assignment:
1.

You should have a minimum of 6 references to substantiate your research and

assignment writing. You are REQUIRED to use Harvard referencing methods for
this assignment.

2.

The assignment should be well-structured and the use of proper paragraphs for topic
separation is encouraged. The assignment should not exceed 2500 words.

4.

The assignment must adhere to standard academic documentation standards:

A.P.U Level 3

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Asia Pacific University of Technology & Innovation

201608

BM013-3-3-CFIN

Individual Assignment

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Marks are awarded based on the following guidelines:

Grade

Description of performance level

Distinction
75-100%

Excellent analysis, application and evaluation

Good understanding of basic concepts and models is
demonstrated.
The candidate is able to evaluate and apply these concepts and
models to answer the question.
Clear understanding of alternative points of view is shown.
Excellent use is made of evidence and/or theoretical analysis to
evaluate the issues/arguments/appropriate models identified and
to support conclusions. A clear final judgement is made.
The answer is very well organised. Descriptions and explanations
are clearly expressed. Appropriate use is made of relevant
terminology.
Where appropriate, varied and up-to-date academic sources of
information for referencing.
Good analysis but limited application and evaluation.
Good understanding of basic concepts and models is
demonstrated.
The candidate is able to apply these concepts and models to
answer the question.
Some appreciation of alternative points of view is shown.
Satisfactory use is made of evidence and/or theoretical analysis to
evaluate the issues/arguments/appropriate models identified and
to support conclusions.
The answer is well organised. Descriptions and explanations are
clearly expressed. Appropriate use is made of relevant
terminology.
Where appropriate, varied and up-to-date academic sources of
information for referencing.

Credit
65-74%

Good Pass
55-64%

A.P.U Level 3

An adequate answer with some correct analysis

but very limited evaluation
The candidate has made a reasonable attempt to apply concepts
and ideas.
A satisfactory understanding of some basic concepts and theories
is demonstrated and there is some evidence that the candidate can
analyse issues.
There will be some attempt to present alternative points of view
and to evaluate the issues, arguments and/or data.
There is some logic and coherence in the organisation of the
answer. Some descriptions and explanations are easy to
understand, but the answer may not be expressed clearly
throughout.
There is some evidence of the correct use of relevant terminology

Asia Pacific University of Technology & Innovation

201608

BM013-3-3-CFIN

Pass
50-54%

Fail
0 to 49%

Individual Assignment

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A poor answer but some understanding is shown

An attempt is made to use basic concepts to answer the question
but the candidates explanation may become confused and
analysis will therefore be very limited.
There may be some attempt to present alternative points of view
but any attempt at evaluation is limited or superficial.
There is some logic and coherence in the organisation of the
answer.
Some use of appropriate terminology is made but this is not
always applied appropriately.
A very weak answer
Few, if any, relevant issues are recognised.
Concepts and principles are not adequately understood or applied
to the question.
No satisfactory analysis or evaluation.
There might be some evidence of organisation in the answer but
generally it fails to answer the question.
Descriptions and explanations lack clarity.
Spelling, punctuation and grammar may be poor. There is little
use of appropriate terminology

Every question should be assessed critically and rationally by displaying a wide range of
corporate finance knowledge learned throughout the subject. References from books,
articles or academic journals are required and marks will be reducing if none of the
conditions apply. Any enquiries in relations to the assignment should be put up one
week before the submission.

Students are required to enroll their assignment in Turnitin by using the followings
information and attach together the screenshot of the result in the assignment.
Class ID: 13083705
Enrollment Password: 1606

A.P.U Level 3

Asia Pacific University of Technology & Innovation

201608