Question 1

What do you understand by the term agency cost? Why does it occur? How can it be controlled?

Question 2

At what rate of interest, an investment of $20,000 now will grow to $40,000 in 4 years? Assume that compounding occurs every two months for that investment. [2 marks]

• Suppose, a bank account provides 5% p.a. interest compounded continuously. If $1000 is deposited now into that account, to what amount the investment will grow to after 5 years? [2 marks]

Question 3

John wishes to buy a house in 4 years. He estimates that the purchase price of the house after 4 years will be $400,000. He, now, already has a deposit of $200,000 in an account at Bank A. This account at Bank A earns 4% p.a. interest, compounded monthly.

John has decided to open another account at Bank B, which provides 5% p.a. interest, compounded annually. John plans to regularly deposit an equal amount of money at the end of every year for the next 4 years in this new account at Bank B.

He expects that, at the end of 4 years, his savings in Bank A account plus the savings in Bank B account will equal the stated purchase price of the house. What should be the regular savings by John into the account at Bank B, such that his expectations are fulfilled?

Question 4

An investor bought a share portfolio for $100,000, 4 years ago. For the first two years since buying the asset (i.e. the share portfolio), the investor did not receive any dividend. However, in the last two years, the asset has provided incomes (i.e., dividend) of $10,000 and $20,000 respectively. The investor expects that the asset can now be sold for $110,000. Considering the stated purchase price, selling price and incomes derived from the asset, determine the assets holding period return. [2 marks]If the risk-free rate of return is 5% and the market risk premium is 10%, what is the beta of an asset for which the expected return is 11%? [2 marks]

Question 5

A company wishes to raise $1m by selling zero-coupon bonds, and another $1m by selling coupon bonds. For both bonds, the maturity period, market rate of interest and face value are respectively 10 years, 8% compounded semi-annually, and $1000. For the coupon bond, coupon rate is 5%. Determine the number of zero-coupon bonds and the number of coupon bonds the company need to sell to raise the stated funds. [4 marks]