All questions carry equal marks of 12.5 each. Answer all the questions
1. What is the agency problem? What are the remedies for the agency problem? Explain.
2. What is the importance of Ethics in Business? Explain.
3. You are considering the purchase of a house in Sydney for $750,000. You have available deposit of $100,000. ANZ bank will lend you money at the rate of 6 per cent per annum compounded monthly over a period of up to 25 years. If you borrow the required funds over 25 years, what are the monthly repayments? After 10 years, how much do you still owe the bank?
4. You are celebrating your 25th birthday today and want to start saving for your anticipated retirement at the age of 65. You want to be able to withdraw $3,000 from your saving account each month for 20 years following your retirement; the first withdrawal will be at the end of the month on your 65th birthday. You intend to invest your money in the local saving bank, which offer 6 per cent interest per year compounded monthly. You want to make equal, monthly payment in a new savings account you will establish for your retirement fund.
a. If you start making these deposits on your 25th birthday and continuous to make deposit until you are 65, what amount must you deposit monthly to be able to make the desired withdrawals on retirement?
b. Suppose you just inherited a large sum of money. Rather than making monthly equal payments you decide to make one Lump-sum payment on your 25th birthday to cover your retirement needs, what amount would you have to deposit?
5. Australian government issued a series of 20 years bonds with the face value of $1,000 and coupon rate of 10% p.a., payable yearly. The yield to maturity is 12% p.a. compounded annually.
a. Calculate the current price of these bonds.
b. What is the current price of these bonds if interest is compounded semi-annually?
c. What will be the market value of these bonds 5 years after issue if interest is compounded annually?
6. Alborz Ltd. Jus paid a dividend of $4 per share, these dividends are expected to grow at the rate of 5% p.a., for the following 3 years. After that the growth rate in dividends will be 2% per year indefinitely. Required return of return is 12% p.a.
a. Find the current value of Alborz Ltd.’s shares.
b. What will be the capital gain yield, dividend yield and the total return on Alborz shares?
c. What will be the market value of Alborz shares in year 4?
7. You are evaluating two different projects. Project A costs $60,000, has a 3 years life, and cash inflow of $30,000 per year for 3 years. Project B costs $9,000, has a 5 years life, and a cash inflow of $25,000 per year for 5 years. The relevant discount rate is 6% p.a. Compute the Annual Equivalent Benefit (AEB) for each project. Which project is preferred?
8. The chief executive officer of Corona Beer (Adam) is considering the acquisition of a new project known as Budweiser. Adam needs your advice as a chief financial officer (CFO) on the new acquisition using net present value analysis.
A feasibility study has been undertaken at the cost of $3 million which has indicated that the project is technically feasible. Budweiser is priced at $12 million, would require $3 million in transportation and installation cost. Budweiser has a useful life of 6 years and will be depreciated to zero book value using straight-line depreciation over the 6-years. It is expected to have a salvage value of $500,000 at the end of 6 years and it would require a $1 million in net working capital (time zero). Budweiser would increase revenue by $7.5 million and increase operating cost by $2 million a year for the next 6 years. The marginal tax rate is 30 percent and the project’s cost of capital if 10 percent.
a. Would you go ahead with the new acquisition using NPV analysis? Explain.
b. What is the Payback period for this project?
What is the PI of this project?