Meg Lanning has sole income from a trust fund which will pay her $40,000 now, $30,000 in one year and $60,000 in two years time. Meg wishes to consume $32,000 now and $42,000 in one year. If the capital market offers an interest rate of 5% per year, calculate how much can she consume in two years time.

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QUESTION 2 (5 marks)

Would an investment be worth more if it were an ordinary annuity or an annuity due? Explain with appropriate examples.

QUESTION 3 (8 marks)

Jasper Jones is a farmer and he needs to buy a farm machine that costs $75,000. He can take a 7 year loan from Suncorp Bank that has a 7.2% per annum interest compounded quarterly, and requires equal quarterly repayments, commencing 3 months after the loan is drawn, with each payment consisting of interest and principal components.

a. Calculate what would be Jaspers quarterly repayment. (3 marks)

b. If Jasper wants to pay $3,867 a quarter instead, how long will it take him to pay off the loan? (5 marks)

QUESTION 4 (16 marks)

You are a Financial Planner. During your interview with your new client is Shadman Saunders you found the following information:

Shadman has just turned 34 and he plans to retire when he is 67 year old.

Shadman owns a diversified share portfolio which is valued today at $47,000. It is expected that this portfolio will earn (on average) 7% per annum, compounded annually, in future years.

Shadman also has a superannuation account with a balance of $78,000 to which he is currently contributing $1,000 per month, with the next contribution due in one months time. The superannuation account is expected to continue to earn 8% per annum, compounded monthly.

At his retirement Shadman plans to consolidate his financial holdings and use the total funds to purchase a monthly annuity at age 67 to fund his planned lifestyle in retirement. Shadman believes he will need to self-fund his retirement until he reaches the age of 85, at which time the annuity payments will cease. He would like to have $120,000 remaining in the annuity fund, which he can access as required to meet any costs not covered by the Government Age Pension, which he believes he will then be eligible to receive.

a. Calculate the total value of Shadmans financial assets when he retires at age 67? Present all calculations to support your answer. (9 marks)

b. If you think after retirement Shadman can earn a return of 5% per annum, compounded monthly, on his annuity by using a balanced investment strategy, what will be the monthly pension amount that Shadman will receive on his retirement, with payments commencing one month after his 67^th birthday, ceasing after last payment on his 85^th birthday, and also retaining $120,000 in the annuity fund at age 85? Present all calculations to support your answer. (7 marks)

QUESTION 5 (8 marks)

Just Kids Limited, a childrens toy manufacturing company, is planning to issue 8-year bonds with a coupon rate of 10% with semi-annual coupon payments and face value of $1,000 each.

a. If the yield on the bonds of similar risk is 11.28%, compounded half-yearly, calculate the price of the bond. (4 marks)

b. The company intends to raise $2.8 million for a capital investment. How many bonds will need to be sold to raise the required capital? (2 marks)

c. If the company wants to issue at par bonds, what should be the coupon rate and in that case how many bonds will need to be sold to raise the required capital? (2 marks)

QUESTION 6 (8 marks)

It is January 2020 and Natural Company has just paid an annual dividend of $0.55 a share. The dividend is expected to increase by 27% in January 2021, 22% in January 2022, 15% in January 2023 and thereafter by 4% a year forever from January 2024 onwards. Investors require a 12% per annum return on Natural Company shares.

a. What would a share in Natural Company be expected to sell for today (January 2020)? (5 marks)

b. Draw a timeline showing all the expected cash flows. (3 marks)

QUESTION 7 (38 marks)

After conducting a market research that cost $15,000, Book Printing Company (BPC) is considering the purchase of a new printing machine which will allow them to print signage and posters. The machine will cost $440,000 and BPC will need to spend another $10,000 to install the machine. BPC will fully finance the purchase with a four year interest only loan from NAB that charges 8.75% per annum, with the principal repaid at the end of 4 years.

BPC will install the printing machine in an existing building, which is currently being rented out for $30,000 a year under a 10 year lease agreement signed 6 years ago. The next lease payment is due at the end of one year. Under the lease agreement, BPC can cancel the lease today by paying the tenant compensation equal to one years rental payment plus 10%, but this amount is not deductible for income tax purposes.

The new printing machine will increase BPCs revenue by $250,000 per year but the variable costs will also increase by $60,000 per year. The machine will be depreciated on a straight-line basis to zero salvage value over the 4 years life of the project. BPC believes it can sell the machine at the end of 4 years for $20,000. The company will require additions to current assets of $35,000 at the beginning of the project, which will be fully recoverable at the end of the fourth year.

BPC requires a 10.25% per annum required rate of return and the tax rate is 30%. Tax is paid in the year in which net earnings are received.

a. Calculate the incremental cash flows for each year (Y₀ to Y₄ inclusive). (15 marks)

b. Calculate the payback period of the project. (2 marks)

c. Calculate the net present value, that is, the net benefit or net loss in present value terms of the project. (5 marks)

d. Calculate the present value index of the project. (2 marks)

e. Calculate the discounted payback period of the project. (3 marks)

f. Calculate the internal rate of return of the project. (6 marks)

g. Identify and explain what other factors BPC should consider. Explain if the company should accept the project or not. (5 marks)

END OF ASSIGNMENT QUESTIONS

Marking Rubric

Student Names & Numbers........................................................................................................................................................................................

Criteria	Fail (0 49%)	Pass (50 64%)	Credit (65 74%)	Distinction (75 84%)	High Distinction (85 100%)
Calculations Value 80% Mark awarded:	Incomplete or few accurate calculations. Many errors.	Tentative or incomplete calculations reflect limited knowledge & understanding. Most workings shown. Some errors.	Mostly accurate calculations, at least in several key areas. Most workings shown. Minor errors.	Mostly accurate calculations made and all workings shown. Few errors.	Accurate calculations made to solve problem. All workings shown. Nil or minimal errors.
Recommendations / Explanations / Conclusions (Q2 + Q7g = 5 + 5 =10 marks) Value 10% Mark awarded:	Did not make relevant and correct explanations, conclusions or recommendations.	Explanations, conclusions and recommendations not adequately linked to calculations or generally satisfactory explanations, etc. linked to incorrect calculations.	Based on calculations, made sound conclusions and recommendations. Explanations required more in depth analysis.	Based on calculations, made sound and relevant explanations, conclusions & recommendations.	Based on calculations, made in depth, relevant and correct explanations, conclusions and recommendations.
Presentation Value 10% Mark awarded	Presentation is poor / lacks professionalism / incorrect. Calculations are inaccurate/ absent/ not applicable. Little or no source referencing.	Acceptable presentation but with obvious calculation errors demonstrating lack of attention to detail. Basic attempt. Some attempt at referencing but obvious errors.	Good presentation overall but some obvious errors. Satisfactory layout and mostly correct calculations. Referencing is mainly accurate.	Professional presentation with minor errors in some elements. Good layout and mostly sound calculations. Correct referencing throughout.	Highly professional presentation that satisfies all presentation elements. Excellent layout and good calculations. Correct referencing throughout.
Total Mark for the assignment: ...................../ 100% Assessment Mark (to nearer whole number) / 30%	COMMENTS: Signed by Marking Tutor: Date