Outline

You should solve the following ten questions showing your full workings and explanations in brief form. Each question is worth one mark. You must have the correct answer and show your working and correct explanation to get one mark (very brief or one to two line of answers are not acceptable). As well as solving the problems manually using the appropriate formulas you must also solve the problems using Excel functions/calculations. An incorrect answer or an answer without the working will be given zero. Normally no part marks are awarded. For questions where two or more answers are requested you must get all parts correct to guarantee the one mark. Include cash flow maps or tables wherever possible. Avoid rounding error.

Read the questions carefully, do not assume that they are exactly the same as other questions you have covered in the unit.

Question 1

Now that they have accumulated a deposit of $40,000 Ed and his partner Susie wish to take out a housing loan to purchase a home. The house costs $525,000. The loan is to be repaid in equal monthly instalments over a term of 30 years. The interest rate quoted by the bank is a monthly rate of 0.4075%. Ed has misplaced the paperwork showing the annual nominal rate (j12) with monthly compounding.

i. How much is the monthly repayment?

ii. How much interest will be paid in the fourth year?

iii. How much do Ed and Susie owe the bank immediately before making the 200th repayment?

(Answers should be accurate to the nearest dollar)

Question 2

Karine Levin and Arlo Somers are trying to establish a University Fund for their daughter Amelia, who turns 3 today. They plan for Amelia to withdraw $10,000 on her 18th birthday and $11,000, $12,000 and $15,000 on her subsequent birthdays (19th, 20th and 21st). They wish to fund these withdrawals with a 10-year annuity, with the first deposit to occur one year from today, and expect to earn an average annual return of 8%.

i. How much will Karine and Arlo have to contribute each year to achieve their goal?

ii. Create a schedule showing the cash inflows (including interest) and outflows of this fund. How much will be in the fund on Amelia’s 16th birthday?

(Your answers should be accurate to the nearest dollar)

Question 3

Sam Smith has just been hired as the new corporate finance analyst at Infinities Investments and has received his first assignment. Sam is to take the $25 million in cash received from a recent divestiture and use part of these proceeds to retire an outstanding $10 million bond issue and the remainder to repurchase common stock in the company. However, the bond issue cannot be retired for another two years. If Sam can place the funds necessary to retire the $10 million debt into an account earning 6% p.a., compounded monthly, then how much of the $25 million remains to repurchase stock?

(Your answers should be accurate to the nearest dollar)

Question 4

In exchange for a lump sum payment now, Polysuper offers an annual pension over twenty five years beginning with a payment of $62,000 at the end of the first year. There are twenty payments in total and the payments will increase at an annual rate of 2.5%pa. The appropriate opportunity cost of funds is j2 = 9%pa what is the amount of the lump sum needed today to purchase the pension?

(Accurate to the nearest dollar)

Question 5

Arial Enterprises is examining four possible suppliers of an important raw material used in its production process, both offering different credit terms. The products offered by each supplier are virtually identical. Supplier A is offering Credit Terms of 1/10 net 40; and Supplier B is offering 2/20 net 90; Supplier C 1/20 net 60 and Supplier D 3/10 net 75.

a) Calculate the interest rate associated with not taking the discount from each supplier.

b) If the firm needs short-term funds (currently available from its bank at 11%) and if each of the suppliers is viewed separately, then which, if any, of the suppliers’ cash discounts should the firm not take. Explain why.

c) Suppose that the firm could stretch its accounts payable to supplier A (net period only) by 20 days. How would this change your answer to Part b)?

(Rates as a percentage accurate to one basis point and prices accurate to two decimal places)

Question 6

Polycorp Treasury a company in the land of Zanadu is holding a parcel of Zanadu Government Bonds with a face value of $4,500,000. The bonds were issued five years and nine months ago and still have four years and three months to maturity. They pay a coupon rate of interest of 7.5% pa, with interest being paid semi-annually. Currently the market yield quoted for Zanadu bonds is 6.52% pa. The convention in Zanadu financial markets is that the market yield and coupon rate are quoted as annual nominal rates. What is the current market value of the bonds?

(In dollars accurate to three decimal places)

Question 7

Polycorp has a dividend of $6.00 due in a year’s time and is expected to pay a dividend $6.60 at the end of the second year. Its dividend is expected to grow at 6.5% pa for the following year. Dividends are then expected to grow at 3% pa for another three years, after which they are expected to grow at 2%pa forever. Shareholders required return on equity is 11.25% pa. What is the current price (cum-dividend) of Polycorp shares? D0 is $5.55.

Question 8

• The investor’s required rate of return is 13.5%

• The expected level of earnings at the end of this year (E1) is $6.00 per share

• The retention ratio is 50%

• The return on equity (ROE) is 15% (i.e., the company can earn 15% on reinvested earnings)

• Similar shares sell at multiples of 8.333 times earnings per share

• E1 is next year’s expected earnings

Questions

a) Determine the expected growth rate for dividends: (g) rate (Use formula: g = (1-(D1/E1)) x ROE)

b) Determine the price-earnings ratio (P/E1) (Use formula: P/E = (D1/E1)/rE- g)

c) What is the share price using the P/E ratio valuation method?

d) What is the share price using the dividend discount model?

e) What would happen to the P/E ratio (P/E1) and the share price if the company increased its retention rate to 60% (all things being equal)? What would happen to the P/E ratio (P/E1) and share price if the company paid out all of its earnings in the form of dividends?

(Accurate to the nearest cent)

Question 9

Mooncorp Insurance has quoted you an annual premium to insure your car of $2820. You are offered a 20% discount if you pay the lump sum immediately. They also offer an alternative payment method. You can pay the account in full by making 11 equal end-of-the month payments of $240, rather than the lump sum, with no payment in the first month (ie the first payment is at the end of the second month). What is the effective annual opportunity cost of paying monthly?

You must provide one complete manual trial calculation of the IRR to demonstrate that you understand the process. Also provide an explanation of this opportunity cost. Failure to follow this instruction will attract a mark of zero.

Question 10

Jasper Holdings Ltd has announced a rights offer to raise $84 million for a new operation overseas. One share currently sells for $8.00 and there are 210 million shares outstanding. Answer the following questions:

a) What is the maximum possible subscription price and what is the minimum?

b) If the subscription price is set at $6.00 per share, how many shares must be sold? How many shares will provide the right to one new share?

c) What is the ex-rights price? What is the value of a right?

You should solve the following ten questions showing your full workings and explanations in brief form. Each question is worth one mark. You must have the correct answer and show your working and correct explanation to get one mark (very brief or one to two line of answers are not acceptable). As well as solving the problems manually using the appropriate formulas you must also solve the problems using Excel functions/calculations. An incorrect answer or an answer without the working will be given zero. Normally no part marks are awarded. For questions where two or more answers are requested you must get all parts correct to guarantee the one mark. Include cash flow maps or tables wherever possible. Avoid rounding error.

Read the questions carefully, do not assume that they are exactly the same as other questions you have covered in the unit.

Question 1

Now that they have accumulated a deposit of $40,000 Ed and his partner Susie wish to take out a housing loan to purchase a home. The house costs $525,000. The loan is to be repaid in equal monthly instalments over a term of 30 years. The interest rate quoted by the bank is a monthly rate of 0.4075%. Ed has misplaced the paperwork showing the annual nominal rate (j12) with monthly compounding.

i. How much is the monthly repayment?

ii. How much interest will be paid in the fourth year?

iii. How much do Ed and Susie owe the bank immediately before making the 200th repayment?

(Answers should be accurate to the nearest dollar)

Question 2

Karine Levin and Arlo Somers are trying to establish a University Fund for their daughter Amelia, who turns 3 today. They plan for Amelia to withdraw $10,000 on her 18th birthday and $11,000, $12,000 and $15,000 on her subsequent birthdays (19th, 20th and 21st). They wish to fund these withdrawals with a 10-year annuity, with the first deposit to occur one year from today, and expect to earn an average annual return of 8%.

i. How much will Karine and Arlo have to contribute each year to achieve their goal?

ii. Create a schedule showing the cash inflows (including interest) and outflows of this fund. How much will be in the fund on Amelia’s 16th birthday?

(Your answers should be accurate to the nearest dollar)

Question 3

Sam Smith has just been hired as the new corporate finance analyst at Infinities Investments and has received his first assignment. Sam is to take the $25 million in cash received from a recent divestiture and use part of these proceeds to retire an outstanding $10 million bond issue and the remainder to repurchase common stock in the company. However, the bond issue cannot be retired for another two years. If Sam can place the funds necessary to retire the $10 million debt into an account earning 6% p.a., compounded monthly, then how much of the $25 million remains to repurchase stock?

(Your answers should be accurate to the nearest dollar)

Question 4

In exchange for a lump sum payment now, Polysuper offers an annual pension over twenty five years beginning with a payment of $62,000 at the end of the first year. There are twenty payments in total and the payments will increase at an annual rate of 2.5%pa. The appropriate opportunity cost of funds is j2 = 9%pa what is the amount of the lump sum needed today to purchase the pension?

(Accurate to the nearest dollar)

Question 5

Arial Enterprises is examining four possible suppliers of an important raw material used in its production process, both offering different credit terms. The products offered by each supplier are virtually identical. Supplier A is offering Credit Terms of 1/10 net 40; and Supplier B is offering 2/20 net 90; Supplier C 1/20 net 60 and Supplier D 3/10 net 75.

a) Calculate the interest rate associated with not taking the discount from each supplier.

b) If the firm needs short-term funds (currently available from its bank at 11%) and if each of the suppliers is viewed separately, then which, if any, of the suppliers’ cash discounts should the firm not take. Explain why.

c) Suppose that the firm could stretch its accounts payable to supplier A (net period only) by 20 days. How would this change your answer to Part b)?

(Rates as a percentage accurate to one basis point and prices accurate to two decimal places)

Question 6

Polycorp Treasury a company in the land of Zanadu is holding a parcel of Zanadu Government Bonds with a face value of $4,500,000. The bonds were issued five years and nine months ago and still have four years and three months to maturity. They pay a coupon rate of interest of 7.5% pa, with interest being paid semi-annually. Currently the market yield quoted for Zanadu bonds is 6.52% pa. The convention in Zanadu financial markets is that the market yield and coupon rate are quoted as annual nominal rates. What is the current market value of the bonds?

(In dollars accurate to three decimal places)

Question 7

Polycorp has a dividend of $6.00 due in a year’s time and is expected to pay a dividend $6.60 at the end of the second year. Its dividend is expected to grow at 6.5% pa for the following year. Dividends are then expected to grow at 3% pa for another three years, after which they are expected to grow at 2%pa forever. Shareholders required return on equity is 11.25% pa. What is the current price (cum-dividend) of Polycorp shares? D0 is $5.55.

Question 8

• The investor’s required rate of return is 13.5%

• The expected level of earnings at the end of this year (E1) is $6.00 per share

• The retention ratio is 50%

• The return on equity (ROE) is 15% (i.e., the company can earn 15% on reinvested earnings)

• Similar shares sell at multiples of 8.333 times earnings per share

• E1 is next year’s expected earnings

Questions

a) Determine the expected growth rate for dividends: (g) rate (Use formula: g = (1-(D1/E1)) x ROE)

b) Determine the price-earnings ratio (P/E1) (Use formula: P/E = (D1/E1)/rE- g)

c) What is the share price using the P/E ratio valuation method?

d) What is the share price using the dividend discount model?

e) What would happen to the P/E ratio (P/E1) and the share price if the company increased its retention rate to 60% (all things being equal)? What would happen to the P/E ratio (P/E1) and share price if the company paid out all of its earnings in the form of dividends?

(Accurate to the nearest cent)

Question 9

Mooncorp Insurance has quoted you an annual premium to insure your car of $2820. You are offered a 20% discount if you pay the lump sum immediately. They also offer an alternative payment method. You can pay the account in full by making 11 equal end-of-the month payments of $240, rather than the lump sum, with no payment in the first month (ie the first payment is at the end of the second month). What is the effective annual opportunity cost of paying monthly?

You must provide one complete manual trial calculation of the IRR to demonstrate that you understand the process. Also provide an explanation of this opportunity cost. Failure to follow this instruction will attract a mark of zero.

Question 10

Jasper Holdings Ltd has announced a rights offer to raise $84 million for a new operation overseas. One share currently sells for $8.00 and there are 210 million shares outstanding. Answer the following questions:

a) What is the maximum possible subscription price and what is the minimum?

b) If the subscription price is set at $6.00 per share, how many shares must be sold? How many shares will provide the right to one new share?

c) What is the ex-rights price? What is the value of a right?

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