• 8 marks
  • If he thinks he can earn 7% annually, which should he choose? (3 marks)
  • If he thinks he can earn 9% annually, which is the best choice? (3 marks)
  • Explain how interest rates influence the award options. (2 mark)

• 7 marks

You borrow $50,000 repayable in monthly instalments over 10 years. The nominal interest rate is 12% per annum. After 3 years have passed, the lender increases the interest rate to 13.5% per annum and you are given the choice of either increasing the monthly repayment or extending the term of the loan.

• What would be the new monthly repayment? (5 marks)
• What would be the new loan term? (2 marks) (Note: students may use the following formula to solve for t)

and

.

• 4 marks

Mickey is planning to save $50,000 per quarter for 10 years. Savings will earn interest at an (nominal) interest rate of 12% per annum. Calculate the present value for this annuity if interest is compounded semi-annually. (Note: students may try to convert the semi-annual rate to an effective annual rate, then to a quarterly rate)

What will be the price of each bond, given the required yield is 10% per annum? What will be the price of each bond, given the required yield is 14% per annum? Explain the price movements in response to interest rate changes as evidenced by parts (i) and (ii). 4 marks

The required rate of return on the shares of Firm C is 15% per annum (discount rate). Current dividend per share in Firm C is 60 cents. The dividend has been growing at 12% per annum in recent years, a rate expected to be maintained for a further 3 years. It is envisaged that the growth rate will then decline to 5% per annum and remain at that level indefinitely. Calculate the current share price of Firm C.

What are the project?s annual cash flows during years 0, 1, 2 and 3? (12 marks)Calculate NPV (6 marks) and advise whether this project should be accepted based on its NPV (2 marks).4 marks

For each stock, show the annual stock returns.

4 marks4 marks4 marks4 marks

Suppose grandfather invests 60% in Rio Tinto and 40% in Cathay Pacific Airlines, calculate the expected return and standard deviation for this portfolio. Is this portfolio perform better than the individual stock?

Question 1 (30 marks) Lecture 2: Time Value of Money and Interest Rates I Lecture 3: Time Value of Money and Interest Rates II Lecture 4: Valuing shares and bonds a) 8 marks Ted just won the lottery, and he must choose among three award options. He can elect to receive a lump sum today of $61m, to receive 10 payments of $9.5 million per year at the end of each year (the first payment occurs one year from now), or to receive 30 payments of $5.5 million per year at the end of each year (the first payment occurs one year from now). i. ii. iii. If he thinks he can earn 7% annually, which should he choose? (3 marks) If he thinks he can earn 9% annually, which is the best choice? (3 marks) Explain how interest rates influence the award options. (2 mark) b) 7 marks You borrow $50,000 repayable in monthly instalments over 10 years. The nominal interest rate is 12% per annum. After 3 years have passed, the lender increases the interest rate to 13.5% per annum and you are given the choice of either increasing the monthly repayment or extending the term of the loan. i. What would be the new monthly repayment? (5 marks) ii. What would be the new loan term? (2 marks) (Note: students may use the following formula to solve for t) C ) CPr log ( 1+ r) log ( t= t=number of period ; C= payment ; P=Present value ; and r=interest rate . c) 4 marks Mickey is planning to save $50,000 per quarter for 10 years. Savings will earn interest at an (nominal) interest rate of 12% per annum. Calculate the present value for this annuity if interest is compounded semi-annually. (Note: students may try to convert the semi-annual rate to an effective annual rate, then to a quarterly rate) Page 1 of 4 d) Consider two 12% (coupon rate) $100 (face value) government bonds that differ only in that one matures in 2 years' time and the other in 5 years' time. Both bonds pay coupon annually. i. What will be the price of each bond, given the required yield is 10% per annum? ii. What will be the price of each bond, given the required yield is 14% per annum? iii. Explain the price movements in response to interest rate changes as evidenced by parts (i) and (ii). e) 4 marks The required rate of return on the shares of Firm C is 15% per annum (discount rate). Current dividend per share in Firm C is 60 cents. The dividend has been growing at 12% per annum in recent years, a rate expected to be maintained for a further 3 years. It is envisaged that the growth rate will then decline to 5% per annum and remain at that level indefinitely. Calculate the current share price of Firm C. Page 2 of 4 Question 2 (20 marks) Lecture 5: Net present value and other investment criteria Lecture 6: Capital Budgeting You are evaluating a proposal to buy a new machine. The base price is $108,000, and shipping and installation costs would add another $12,500. The machine is depreciated using prime cost method (3 years useful life), and it would be sold after 3 years for $60,000. The machine would require a $5,500 increase in net operating working capital (in year 0) and this will be returned at the end of year 3. The pre-tax labour costs would decline by $44,000 per year. The marginal tax rate is 35% and the WACC is 12%. i. ii. What are the project's annual cash flows during years 0, 1, 2 and 3? (12 marks) Calculate NPV (6 marks) and advise whether this project should be accepted based on its NPV (2 marks). Page 3 of 4 Risk and Return Your grandfather is planning to invest $25,000 into the following stocks: Rio Tinto Ltd Cathay Pacific Airlines The table below shows the closing prices between 2008 and 2014. December 2008 December 2009 December 2010 December 2011 December 2012 December 2013 December 2014 Rio Tinto Ltd (RIO.AX) $29.97 $74.89 $85.47 $60.3 $66.01 $68.18 $58 Cathay Pacific Airlines (0293.HK) $8.72 $14.48 $21.45 $13.32 $14.22 $16.4 $16.9 The monthly data is collected from Yahoo Finance on 1st of November 2015. a) 4 marks For each stock, show the annual stock returns. b) 4 marks Based on the annual stock returns, calculate the average stock returns and standard deviation for each stock. c) 4 marks Calculate the covariance and correlation of annual stock returns between these stocks. d) 4 marks The risk-free rate is 2.06% per annum. Calculate the Sharpe ratio for Rio Tinto Ltd and Cathay Pacific Airlines. Which stock is performing better? Explain your answer. e) 4 marks Suppose grandfather invests 60% in Rio Tinto and 40% in Cathay Pacific Airlines, calculate the expected return and standard deviation for this portfolio. Is this portfolio perform better than the individual stock? Page 4 of 4