WEEK 10 - part A

Critical Thinking

7.1 - Why can the market price of a security differ from its true value?

7.7 - Explain why preference shares are considered to be a hybrid of equity and debt securities.

Questions and Problems

7.5 - Zero growth: The current share price of Coral Pty Ltd is $41.45. If the required rate of return is 18 per cent, what is the dividend paid by this company, which is not expected to grow in the near future?

7.9 - Constant growth: Lavfield Pty Ltd is expected to grow at a constant rate of 8.25 per cent. If the company's next dividend is $1.83 and its current price is $22.35, what is the required rate of return on this share?

7.15 - Constant growth: The required rate of return is 23 per cent. Gnangara Pty Ltd has just paid a dividend of $3.12 and expects to grow at a constant rate of 5 per cent. What is the expected price of the share 3 years from now?

7.27 - Parri Holdings Pty Ltd declared a dividend of $2.50 yesterday. You are interested in investing in this company, which has forecast a constant growth rate of 7 per cent for the next several years. The required rate of return is 18 per cent.

1. Calculate the expected dividends D1, D2, D3and D4.
2. Find the present value of these four dividends.
3. What is the price of the share 4 years from now (P4)?
4. Calculate the present value of P4. Add the answer you got in part b. What is the price of the share today?
5. Use the equation for constant growth (equation 7.4) and calculate the price of the share today.

Additional Questions

1. Supersonic Company Limited is expected to grow at a constant rate of 6 percent. If the company's next dividend is $1.7 and its current price is $17.3, what is the required rate of return on this share? (round to 2.dp)
2. Peter Rabbit Company Ltd is expected to pay a dividend of $1.32 next year. The forecast for the share price a year from now is $21.50. If the required rate of return is 10.5 per cent, what is the current share price? Assume constant growth. (round to 2 dp)

WEEK 10 - part B

Professional Application Questions

9.3 - What type of credit facility best suits Justine's needs? (Financial planning 1sted, p.363)

9.7 - As a result of past unethical behaviour, financial institutions asking for guarantees must now obtain certification that the guarantor has accessed independent legal advice . Why is this necessary?

9.9 - If a person finds themselves in severe financial difficulties what are the alternatives to bankruptcy?

Professional Application Exercises

9.13 - Max has 100,000 to invest. The ABC Bank is offering a 1 year term deposit which pays a simple annual rate of interest of 8%. Interest is compounded monthly. (from Q9.12)

Then, Max has decided to shop around for the best investment for his $100,000. The XYZ Bank is offering a 1 year term deposit which pays a simple annual rate of interest of 8%. Interest is compounded weekly.

a) What is the effective rate of interest? b) How much will Max have in his account at the end of one year assuming he makes no withdrawals? c) All other things being equal should Max deposit his money into ABC or XYZ? d) When depositing money into an interest bearing account, does the investor prefer more or less frequent compounding?

9.18 - Matthew needs a housing loan of $200,000. The ABC Bank quoted an effective annual rate of 8.3% compounded (reduced) monthly for a 20 year loan. An annual effective rate of 8.3% is equivalent to a monthly rate of 0.667%.

a) What will be the monthly repayment? b) What will be the total repayments over the life of the loan?

CASE STUDY 1

1 - Steve and Jenny come to you as their financial adviser. What advice can you give them on how to deal with their situation?

Case study Steve and Jenny come to you as their financial adviser. What advice can you give them on how to deal with their situation? Steve and Jenny earned extra money through overtime in 2004 which aided in meeting their financial responsibilities. This stopped in 2005 but it might be possible for them to find a second job to increase their income. Although they would lose some money on it, they could sell their share portfolio as it would deliver a lump sum to help them meet all their repayments. Remove their children from a private school with higher fees to a public school with minimal fees. Reduce their spending by decreases the amount of retail shopping they do. They could renegotiate their home loan with their lender.