EFN406: MANAGERIAL FINANCE 2016, 1

Assignment: Part A, Financial Mathematics and Security Valuation

See Blackboard for due date:

General Information

1. Marks: 10 – ten questions each worth one mark. You must have the correct answer and a correct explanation plus working to gain the marks allocated to each question. Include cash flow maps and/or tables wherever possible. Avoid rounding error. Providing a formula and the answer is not enough. Some questions have more than one part, where this is the case you must get all parts correct to gain your one mark. Part marks are not normally awarded.

2. Weight: 10%.

3. Format: Calculation and brief working or short answer with explanation as well as the calculation solved in an Excel spreadsheet. For each calculation you must provide a manual solution and a solution using excel. If you have two files you should embed your excel file into your word document and submit only one file. Typing straight into excel without doing the calculations in excel does not qualify as solving in excel.

4. Word Limit: A few pages (500 words as a very rough guide; mostly calculations)

5. Due: see Blackboard

6. The assignment must be done in excel and must be your own work (scanned documents are not acceptable). You can type your explanations in Word if you wish but with an embedded excel file or do it all in in excel. Under no circumstances should you use Assignment Minder or submit a hard copy.

7. Make sure to highlight or underline your final answer/s in some way. (e.g. Answer = $5089)

8. Upload a soft copy of your Word and/or Excel files to Blackboard under Assessment by the due date and time (must be Microsoft compatible). Failure to upload will result in a mark of zero. Keep a copy of your assignment. If you have problems uploading your file/s then send them by email (before due date and time) to j.polichronis@qut.edu.au

9. Assignments submitted after the due date (late assignments) cannot be uploaded to Blackboard. Instead, they need to be emailed directly to John Polichronis (j.polichronis@qut.edu.au).

10. Late submissions will receive a mark of zero. Please be aware that the suggested solution will be released within one day of the submission date, so any assignment submitted after the due date and time will attract a score of zero.

11. Extensions will only be granted in very, very exceptional circumstances and will normally take the form of a different assignment.

12. A hard copy is not required. Under no circumstances should you use assignment minder.

13. Try to be as accurate as possible. Cross-check your answers using excel. Unless otherwise told you should use the following approach:

a. PV and FV accurate to the nearest dollar

b. Prices accurate to two decimal places (to the nearest cent)

c. Rates accurate to one basis point

14. To avoid mixing up assignments, name your assignment using the following format:

• unit code, your last name, your first name, your student number, and assignment number

• for example: EFN406 last name first name n1234567 Assignment Part A.docx

15. Finally, this cover sheet will form the first page of the document you submit. By submitting this document you are agreeing to the declarations that appear below:

Student to complete and attach to the assignment:

Student Name: Student Number:

Assignment Number: Part A Title: Assignment Part A

Tutor’s Name:

Due Date: Day and Time of Class:

DECLARATION: By submitting this assignment I declare that:

• This work is entirely my own, and no part of it has been copied from any other person’s work, words or ideas, except as specifically acknowledged through the use of inverted commas and in-text references;

• No part of this assignment has been written for me by any other person except where such collaboration has been authorised by the Unit Coordinator concerned; I understand my assignment may be scanned as part of the assessment process, and that plagiarism detection software may be utlilised;

• This assignment has not been submitted for any other unit at QUT or any other institution, unless authorised by the relevant Unit Coordinator;

• I have read and abided by all of the requirements set down for this assignment.

• If the above declaration is found to be false, you may receive reduced or zero marks for this assignment, and you will be dealt with under QUT’s Student Rule No. 29 - Academic Dishonesty, and the associated procedures for Academic Dishonesty which are available at:

http://www.qut.edu.au/admin/mopp/Appendix/append01cst.html#Rule29 and http://www.qut.edu.au/admin/mopp/C/C_09_07.html

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 this unit.

Question 1

Now that they have accumulated a deposit of $40,000 Ed and his partner Susie wish to use the deposit and take out a housing loan to purchase a home. The house costs $625,000. The loan is to be repaid in equal monthly instalments over a term of 25 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).

i. How much is the monthly repayment?

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

iii. How much do Ed and Susie owe the bank immediately before making the 140th repayment?

A repayment schedule might assist your answer.

(Answers should be accurate to the nearest dollar)

Question 2

Karine and Arlo are trying to establish a University Fund for their daughter Amelia, who turns 4 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, the first deposit to occur one year from today, and expect to earn an average return of 7%.

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

Stanley has just been advised of a bequest of a lump sum of 110,500 from his Aunt’s will, but it is not due to be available for him for sixteen years (t = 16). Stanley wants to receive some cash earlier than this. He is investigating the purchase of a deferred annuity with the first annual cash flow of the annuity is to be paid at the beginning of year 3 (fifteen cash flows). Assume that the annuity and the lump sum are of equivalent risk and that j12 = 6.24% pa is the appropriate interest rate (opportunity cost of funds for Stanley). How much is the annual cash flow associated with the annuity?

(Accurate to the nearest dollar)

Question 4

In exchange for a lump sum payment now, Polysuper offers an annual pension over twenty 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%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

a) A ninety day bank bill with 90 days to maturity has a price of $98078. What is the effective annual yield implied by this price and maturity? What is the annual nominal yield? Face value is $100,000. Make sure your answers are clearly labelled.

b) The All Ordinaries price index opened the year at 4578 and had reached 5013 by the end of the year. What was the rate of return on the index?

c) Using the approach covered in your textbook calculate the geometric average annual rate of return over four years given the following annual rates, year 1 = 4.24%, year 2 = 5.39%, year 3 = 6.75%, year 4 = 5.13%.

d) Polycorp dividends per share have increased from $6.50 to $13.10 over a five year period. Calculate the annual compounded growth rate over that period.

(Rates as a percentage accurate to one basis point)

Question 6

Polycorp Treasury a company in the land of Zanadu is holding a parcel of Zanadu Government Bonds with a face value of $2,000,000. The bonds were issued seven years and nine months ago and still have two years and three months to maturity. They pay a coupon rate of interest of 6% pa, with interest being paid semi-annually. Currently the market yield quoted for Zanadu bonds is 5.12% 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 two year. Dividends are then expected to grow at 3% pa for another two years, after which they are expected to grow at 2%pa forever. Shareholders required return on equity is 10.35% pa. What is the current price (ex-dividend) of Polycorp shares? D0 is $5.55.

(In dollars and cents accurate to the nearest cent)

Question 8

The required rate of return on the shares in the companies identified below is 11% pa. Calculate the current share price in each case.

(a) The current earnings per share of Alpha Ltd are $4.60. The company does not reinvest any of its earnings. Earnings are expected to remain constant.

(b) Beta Ltd’s current dividend is $2.75 and dividends are expected to grow at 3% pa indefinitely.

(c) Gamma Ltd is not expecting to pay dividends for four years, at the end of year five a dividend of $2.30 is planned and dividends are expected to grow at 4% pa forever after that.

(d) Delta limited plans to pay dividends of 1.50, 2.00, and 3.00 at the end of years 3, 4, 5 respectively followed by a dividend of 4.10 pa in perpetuity after that.

(Accurate to the nearest cent)

Question 9

You wish to insure your Ferrari. Mooncorp Insurance has quoted you an annual premium to insure your car of $12815. You are offered a 10% 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 $1165, rather than the lump sum, with no payment in the first month (ie the first payment is at the end of the second month followed by ten further monthly payments). 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.

(Accurate to one basis point)

Question 10

Jasper Holdings Ltd has announced a rights offer to raise $120 million for a new operation. One share currently sells for $10.00 and there are 240 million shares outstanding. Answer the following questions:

a) If the subscription price is set at $8.00 per share, how many shares must be sold?

b) How many shares will provide the right to one new share? (to the nearest share)

c) What is the ex-rights price?

d) What is the value of a right?

Use Australian Market Conventions.

(Prices accurate to the nearest cent)

Assignment: Part A, Financial Mathematics and Security Valuation

See Blackboard for due date:

General Information

1. Marks: 10 – ten questions each worth one mark. You must have the correct answer and a correct explanation plus working to gain the marks allocated to each question. Include cash flow maps and/or tables wherever possible. Avoid rounding error. Providing a formula and the answer is not enough. Some questions have more than one part, where this is the case you must get all parts correct to gain your one mark. Part marks are not normally awarded.

2. Weight: 10%.

3. Format: Calculation and brief working or short answer with explanation as well as the calculation solved in an Excel spreadsheet. For each calculation you must provide a manual solution and a solution using excel. If you have two files you should embed your excel file into your word document and submit only one file. Typing straight into excel without doing the calculations in excel does not qualify as solving in excel.

4. Word Limit: A few pages (500 words as a very rough guide; mostly calculations)

5. Due: see Blackboard

6. The assignment must be done in excel and must be your own work (scanned documents are not acceptable). You can type your explanations in Word if you wish but with an embedded excel file or do it all in in excel. Under no circumstances should you use Assignment Minder or submit a hard copy.

7. Make sure to highlight or underline your final answer/s in some way. (e.g. Answer = $5089)

8. Upload a soft copy of your Word and/or Excel files to Blackboard under Assessment by the due date and time (must be Microsoft compatible). Failure to upload will result in a mark of zero. Keep a copy of your assignment. If you have problems uploading your file/s then send them by email (before due date and time) to j.polichronis@qut.edu.au

9. Assignments submitted after the due date (late assignments) cannot be uploaded to Blackboard. Instead, they need to be emailed directly to John Polichronis (j.polichronis@qut.edu.au).

10. Late submissions will receive a mark of zero. Please be aware that the suggested solution will be released within one day of the submission date, so any assignment submitted after the due date and time will attract a score of zero.

11. Extensions will only be granted in very, very exceptional circumstances and will normally take the form of a different assignment.

12. A hard copy is not required. Under no circumstances should you use assignment minder.

13. Try to be as accurate as possible. Cross-check your answers using excel. Unless otherwise told you should use the following approach:

a. PV and FV accurate to the nearest dollar

b. Prices accurate to two decimal places (to the nearest cent)

c. Rates accurate to one basis point

14. To avoid mixing up assignments, name your assignment using the following format:

• unit code, your last name, your first name, your student number, and assignment number

• for example: EFN406 last name first name n1234567 Assignment Part A.docx

15. Finally, this cover sheet will form the first page of the document you submit. By submitting this document you are agreeing to the declarations that appear below:

Student to complete and attach to the assignment:

Student Name: Student Number:

Assignment Number: Part A Title: Assignment Part A

Tutor’s Name:

Due Date: Day and Time of Class:

DECLARATION: By submitting this assignment I declare that:

• This work is entirely my own, and no part of it has been copied from any other person’s work, words or ideas, except as specifically acknowledged through the use of inverted commas and in-text references;

• No part of this assignment has been written for me by any other person except where such collaboration has been authorised by the Unit Coordinator concerned; I understand my assignment may be scanned as part of the assessment process, and that plagiarism detection software may be utlilised;

• This assignment has not been submitted for any other unit at QUT or any other institution, unless authorised by the relevant Unit Coordinator;

• I have read and abided by all of the requirements set down for this assignment.

• If the above declaration is found to be false, you may receive reduced or zero marks for this assignment, and you will be dealt with under QUT’s Student Rule No. 29 - Academic Dishonesty, and the associated procedures for Academic Dishonesty which are available at:

http://www.qut.edu.au/admin/mopp/Appendix/append01cst.html#Rule29 and http://www.qut.edu.au/admin/mopp/C/C_09_07.html

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 this unit.

Question 1

Now that they have accumulated a deposit of $40,000 Ed and his partner Susie wish to use the deposit and take out a housing loan to purchase a home. The house costs $625,000. The loan is to be repaid in equal monthly instalments over a term of 25 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).

i. How much is the monthly repayment?

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

iii. How much do Ed and Susie owe the bank immediately before making the 140th repayment?

A repayment schedule might assist your answer.

(Answers should be accurate to the nearest dollar)

Question 2

Karine and Arlo are trying to establish a University Fund for their daughter Amelia, who turns 4 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, the first deposit to occur one year from today, and expect to earn an average return of 7%.

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

Stanley has just been advised of a bequest of a lump sum of 110,500 from his Aunt’s will, but it is not due to be available for him for sixteen years (t = 16). Stanley wants to receive some cash earlier than this. He is investigating the purchase of a deferred annuity with the first annual cash flow of the annuity is to be paid at the beginning of year 3 (fifteen cash flows). Assume that the annuity and the lump sum are of equivalent risk and that j12 = 6.24% pa is the appropriate interest rate (opportunity cost of funds for Stanley). How much is the annual cash flow associated with the annuity?

(Accurate to the nearest dollar)

Question 4

In exchange for a lump sum payment now, Polysuper offers an annual pension over twenty 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%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

a) A ninety day bank bill with 90 days to maturity has a price of $98078. What is the effective annual yield implied by this price and maturity? What is the annual nominal yield? Face value is $100,000. Make sure your answers are clearly labelled.

b) The All Ordinaries price index opened the year at 4578 and had reached 5013 by the end of the year. What was the rate of return on the index?

c) Using the approach covered in your textbook calculate the geometric average annual rate of return over four years given the following annual rates, year 1 = 4.24%, year 2 = 5.39%, year 3 = 6.75%, year 4 = 5.13%.

d) Polycorp dividends per share have increased from $6.50 to $13.10 over a five year period. Calculate the annual compounded growth rate over that period.

(Rates as a percentage accurate to one basis point)

Question 6

Polycorp Treasury a company in the land of Zanadu is holding a parcel of Zanadu Government Bonds with a face value of $2,000,000. The bonds were issued seven years and nine months ago and still have two years and three months to maturity. They pay a coupon rate of interest of 6% pa, with interest being paid semi-annually. Currently the market yield quoted for Zanadu bonds is 5.12% 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 two year. Dividends are then expected to grow at 3% pa for another two years, after which they are expected to grow at 2%pa forever. Shareholders required return on equity is 10.35% pa. What is the current price (ex-dividend) of Polycorp shares? D0 is $5.55.

(In dollars and cents accurate to the nearest cent)

Question 8

The required rate of return on the shares in the companies identified below is 11% pa. Calculate the current share price in each case.

(a) The current earnings per share of Alpha Ltd are $4.60. The company does not reinvest any of its earnings. Earnings are expected to remain constant.

(b) Beta Ltd’s current dividend is $2.75 and dividends are expected to grow at 3% pa indefinitely.

(c) Gamma Ltd is not expecting to pay dividends for four years, at the end of year five a dividend of $2.30 is planned and dividends are expected to grow at 4% pa forever after that.

(d) Delta limited plans to pay dividends of 1.50, 2.00, and 3.00 at the end of years 3, 4, 5 respectively followed by a dividend of 4.10 pa in perpetuity after that.

(Accurate to the nearest cent)

Question 9

You wish to insure your Ferrari. Mooncorp Insurance has quoted you an annual premium to insure your car of $12815. You are offered a 10% 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 $1165, rather than the lump sum, with no payment in the first month (ie the first payment is at the end of the second month followed by ten further monthly payments). 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.

(Accurate to one basis point)

Question 10

Jasper Holdings Ltd has announced a rights offer to raise $120 million for a new operation. One share currently sells for $10.00 and there are 240 million shares outstanding. Answer the following questions:

a) If the subscription price is set at $8.00 per share, how many shares must be sold?

b) How many shares will provide the right to one new share? (to the nearest share)

c) What is the ex-rights price?

d) What is the value of a right?

Use Australian Market Conventions.

(Prices accurate to the nearest cent)

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