Explain why shareholder wealth maximisation (SWM) is an important concept in the field of finance. In your answer, contrast the SWM concept with the notion of maximisation of profit. In your answer also discuss and critically analyse the notion of shareholder primacy as implied by the SWM model.

Where possible, illustrate with an appropriate example in your answer. You must support your discussion with appropriate references.

Question 2 (20 marks, 5 marks each)

a. Heather will receive $15,000 at the end of every year for the next 15 years as a payment for a new song she has written. If a 10 % return is applicable, should she be willing to sell out her future rights now for$120,000? (Show all calculations supporting your decision).

b. A mail order business will generate cash flows of $10,000 at the end of each of the next 3 years, $20,000 at the end of year 4, $30,000 at the end of year 5 and $50,000 at the end of year 6. Given that other investments of equal risk earn 6% per annum, calculate the present value and future value of this investment. (Show all calculations supporting your answers).

c. An investment firm Xypex pays 7.5% interest per annum, compounded on a quarterly basis. To remain competitive, the investment manager of another investment firm Zebra Ltd is willing to match the interest rate offered by Xypex, but interest will be compounded on a monthly basis. What nominal rate of interest must firm Zebra offer to its clients? (Show all calculations).

d. While William was a student at Edinburgh University, he borrowed $15,000 in student loan at an annual interest rate of 9%. If he repays $2,000 per year, calculate the period required (to the nearest year) to pay off his debt. (Show all calculations).

3. Retirement Planning (20 marks)

Professor Sandra Laneway received a payment of $500,000 from her grandmothers estate on what is coincidentally her 63rd birthday. Sandra invested the entire inheritance amount today at an interest rate of 8% per annum (compounded monthly) due to mature on her 70th birthday when she plans to retire.

Upon retirement Sandra plans to commute her investments to a monthly pension which she plans to receive until her 90th birthday. During this 20 years of post-retirement Sandra estimates that she will require an annual pension income of $84,000 ($7,000 per month) in order to live in the manner to which she is accustomed. She expects to receive her first monthly pension payment 1 month after her 70th birthday. In addition, Sandra would like to have a remaining balance of $200,000 in her account at the conclusion of her 20-year pension.

Sandra understands that the $500,000 inheritance she has invested will not achieve all of these things and wants to invest an additional monthly amount from her pre-retirement income as a Professor at Sydney University during the next 7 years leading to her planned retirement.

Calculate how much Professor Laneway needs to invest (starting in one months time) in order to achieve her investment goals.

This is a multi-part question that requires careful planning and the development of timelines is recommended (show all workings).