Question 1

Suppose you take out a loan of $10,000, repayable by five equal annual instalments. The interest rate is 10% per year.

(a) How much do you need to repay per year to the nearest cent if payments are due : (i) at the beginning of each year (ii) at the end of each year?

(b) Which loan in part (a) is preferable, (i) or (ii)? Explain your answer.

Question 2

Suppose $1000 is invested at the end of each year in perpetuity. The interest rate is 8% per year.

(a) Calculate the present value (PV) of the investment to the nearest cent after : (i) 1 year (ii) 10 years (iii) 50 years (iv) 100 years.

(b) Do the present values calculated in (a) appear to be approaching a limiting value as the number of years increases? If so, what is this value? Explain your answer.

Question 3

Consider a share investment which has four possible returns : -5%, -2%, 5%, 10%. The probability of each of these returns occurring is respectively : 0.4, 0.1, 0.2, 0.3.

(a) What is the expected return for the investment?

(b) What is the risk of the investment to 2 decimal places?

Question 4

The rate of return for an Australian Commonwealth Government Treasury Bond is given as 4% per annum. The yearly return for the Australian share market is given as 12%. Suppose a listed company has a beta value of 0.5.

(a) Calculate the market premium.

(b) Calculate the investor's required rate of return for the company's shares.

(c) If the expected rate of return for the company's shares was 10% per annum, would you buy shares in the company? Explain your answer.

(d) Explain how the All Ordinaries Index can be used to estimate the market return of the Australian share market.

(e) Explain why Australian Commonwealth Government Treasury Bonds are considered to be risk-free.

(f) In the Budget on May 11, 2010, did the Australian Commonwealth Government announce it had budgeted for a deficit in the 2010-2011 financial year? If it did, how is the Government going to fund the deficit? What is the projected size of this Budget deficit? What is the projected revenue and expenditure? Did the budget have any immediate effect on the Australian share market? Give at least one reference in your references list at the end of your assignment.

(g) The Government of South Australia issues State Government Treasury Bonds using its financing authority, the South Australian Government Financing Authority (SAFA). Explain why these bonds are not considered to be risk-free.

(h) Explain what are bond ratings, and how they affect investor returns.

(i) Explain what are junk bonds.

Question 5

Consider a bond with a par value of $1,000 that will mature in 10 years. You are given that the investors' required rate of return is 5% per annum.

(a) Calculate the price of the bond to the nearest cent if the coupon interest rate is 6% per annum, paid annually.

(b) Calculate the price of the bond to the nearest cent if the coupon interest rate is 6% per annum, paid half-yearly.

(c) Explain why the answers to parts (a) and (b) must be more than the par value of the bond.

Question 6

The dividend payments for a listed company are expected to grow at 2% per year. The current dividend is $1 per share. Suppose the investors' required rate of return is 5% per annum.

(a) Calculate the intrinsic price of the share.

(b) If the market price is $35 per share, would you buy shares in the company? Explain your answer.

Question 7

The market leader on the Australian share market, by market capitalisation, is the company BHP Billiton Limited.

(a) Construct a table showing the daily closing price for the company's shares and the daily closing value of the All Ordinaries Index from May 3, 2010, to May 21, 2010, inclusive.

(b) On your table, show the daily percentage change in the daily closing price for the company's shares and the daily percentage change in the All Ordinaries Index in this time period. Show the percentage changes to two decimal places.

(c) Compare the performance of BHP Billiton shares to market performance from May 3, 2010, to May 21, 2010. Did BHP Billiton make any major announcements during this time period and did these announcements affect the company's share price?

(d) Explain what is meant by an efficient share market.

(e) The Australian share market is considered by some analysts to be semi-strong efficient. Explain the meaning of this term.

Question 8

Consider an investment project where the net cash flows in years 1-5 respectively are as follows : $10,000, $20,000, $10,000, $40,000, $30,000. You are given that the initial investment is $20,000. Assume a discount rate of 10% per annum.

(a) Calculate the payback period.

(b) Calculate the discounted payback period.

(c) Calculate the net present value (NPV). Should the investment project be accepted or rejected? Why?

(d) Calculate the profitability index (PI). Should the investment project be accepted or rejected? Why?

(e) Calculate the internal rate of return (IRR). Should the investment project be accepted or rejected? Why?

Question 9

Consider two mutually exclusive investment projects, project A and project B. You are given project A has an expected life of 3 years and project B has an expected life of 9 years. Project A has expected future net cash flows in each of years 1-3 of $12,600. Project B has expected future net cash flows in each of years 1-9 of $6,700. The initial investment required for each project is $20,000. Assume a required rate of return of 15% per annum for each project.

(a) Calculate the payback period for project A and for project B.

(b) Calculate the net present value (NPV) for project A and for project B.

 (c) Calculate the internal rate of return (IRR) for project A and for project B.

 (d) Is project A an acceptable investment project? Is project B an acceptable investment project? Explain your answers.

Question 10

(a) What is the annual headline rate of inflation in Australia to the end of the March, 2010, quarter? If a 12 month fixed term deposit currently earns 6% per annum interest, what is the real rate of return?

(b) The Henry Tax Review was released by the Australian Commonwealth Government on May 2, 2010. What is the current company tax rate in Australia and how will the Government change this rate in response to the Henry Tax Review?

(c) Did the Board of the Reserve Bank of Australia increase the cash rate on May 4, 2010? If it did, what was the increase? State the official cash rate announced on May 4, 2010, and gives a reason why the cash rate was increased or left unchanged.