a. Share valuation

You are considering buying shares in Fortescue today. The company has strong earnings growth forecasts for the next three (3) years, which is expected to be 18% p.a. in the first year, 15% p.a. in the second year and 10% p.a. in the third year. After that, the company expects its growth rate to drop to 7.5% p.a. forever. Assume that Fortescue pays dividend once every year at the end of the year, and it just paid a dividend of $1.5 per share, yesterday. The dividend payout ratio is expected to be constant. You believe the required rate of return for this stock is 13% p.a. What is your estimate of Fortescue's share price?

b. Bank bills

Andy bought a 180-day bank bill priced at a yield of 9 per cent per annum. 45 days later, the RBA announced that it had reduced the target cash rate by 0.5 per cent per annum. As a result, short-term interest rates and bill yields rapidly adjusted downwards and the bill's yield fell to 8.5 per cent per annum. Andy sold the bill on the same day, after the RBA announcement. Calculate theeffectiveannual interest rate he earned or lost. Assume the face value of the bill is $1 million.