QUESTION 1

1.1 Suppose you want to have 500000 saved by the time you reach age 30 and suppose that you are 20 years old today. If you can earn 5% on your funds, how much would you have to invest today to reach your goal?

1.2How much would I have to deposit in an account today that pays 12% interest, compounded quarterly, so that I have a balance of R20,000 in the account at the end of 10 years?

1.3 How long does it take for your money to grow to ten times its original value if the interest rate of 5% per year?

1.4 If interest is paid at a rate of 5% per year, compounded quarterly, what is the effective annual rate?

(please use full stops (.) and not commas as a decimal divide) (Also, answerers that are % answerers, just provide the % value, for example: if the answer is 2.3% just write 2.3)

1.5 Consider an annuity consisting of three cash flows of R2,000 each. Assume a 4% interest rate. What is the present value of the annuity if is an annuity due?

1.6 Consider an annuity consisting of three cash flows of R2,000 each. Assume a 4% interest rate. What is the present value of the annuity if it is an ordinary annuity?

1.7 Assume a company in which the cost of debt capital (e.g. bonds) is 6 percent and the cost of equity capital (e.g., common stock) is 10 percent, and in which 30 percent of the total capital is debt and 70 percent is equity. What is the cost of capital? (Provide answers in decimals, for example 1% would be written as 0.01)

(please use full stops (.) and not commas as a decimal divide) (Also, answerers that are % answerers, just provide the % value, for example: if the answer is 2.3% just write 2.3)

1.8 Assume a company in which the cost of debt capital (e.g. bonds) is 20 percent and the cost of equity capital (e.g., common stock) is 34 percent, and in which 80 percent of the total capital is debt and 20 percent is equity. What is the cost of capital?

(please use full stops (.) and not commas as a decimal divide) (Also, answerers that are % answerers, just provide the % value, for example: if the answer is 2.3% just write 2.3

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1.9 Assume a company in which the cost of debt capital (e.g. bonds) is 8 percent. Furthermore, assume that 60 percent of the total capital is debt and 40 percent is equity and the weighted average cost of capital is 9.6%. What is the cost of equity capital?

(please use full stops (.) and not commas as a decimal divide) (Also, answerers that are % answerers, just provide the % value, for example: if the answer is 2.3% just write 2.3)

1.10 The following information relates to the next 10 questions

Mr. Zulu is an asset manager at one of South Africas largest asset management firms. Mr. Zulu receives R100 000 from a client whom wants to invest the funds in an asset that provides an optimal risk/return profile. There are three possible investment options, asset A, B or C. The following three tables depicts the possible returns and the probability associated with each return for each of the three assets. Help Mr. Zulu determine the optimal asset to invest in by calculating the expected return for each asset, the risk (variance) of each asset, and the coefficient of variation of each asset.

What is the value at A? (please use full stops (.) and not commas as a decimal divide) (Also, answerers that are % answerers, just provide the % value, for example: if the answer is 2.3% just write 2.3)

1.11 What is the value at B?

1.12 What is the value at C?

1.13 What is the value at D?

1.14 What is the value at E?

1.15 What is the value at F?

1.16 What is the value at G?

1.17 What is the value at H?

1.18 What is the value at I?

1.19 Based on your results, advise Mr. Zulu on which asset will be optimal to invest in and state why?

Asset A because it has a lower coefficient of variation.

Asset B because it has a higher coefficient of variation.

Asset B because it has a lower coefficient of variation.

Asset A because it has a higher coefficient of variation.