- Subject Code :FINA501
- Country :Australia
SECTION 1: SHORT ANSWERS (TOTAL: 40 MARKS)
Instructions:
You must show your working and relevant formula(s) for each answer to obtain full marks. Where applicable, round your final answer to two decimal places unless otherwise stated.
Question 1: Portfolio and Rates of Returns (10 marks)
- You bought a share for $25.80. After 1 year, you sold the share for $27.5. The share paid a $1.40 dividend per share.
- What was your total dollar return? Show all work and formula(s) clearly. Round only the final answer to two decimal places, where applicable. (1 mark)
- What was your total percentage return? Show all work and formula(s) clearly. Round only the final answer to two decimal places, where applicable. (1 mark)
- Suppose the risk-free rate is 2.75%, the expected market return is 13.5%, and Hi-Growth’s share has a beta of 1.35.
- Based on the CAPM, what is the expected return on this share? Show all work and formula(s) clearly. Round only the final answer to two decimal places, where applicable. (2 marks)
- Compare the beta and expected return of this share with the market beta and expected market return. Include relevant figures in your discussion; relate these figures with the concept of risk and expected return. [Note: The discussion must be in your own words. Word limit: 60 words, excluding figures; answers beyond word limit will not be marked.] (1 mark)
- You own a share portfolio invested 10% in shares of A, 30% in shares in B, 35% in shares in C and 25% in shares in D. The betas for these four shares are 0.8, 0.9, 1.2 and 1.4, respectively. What is the portfolio beta? Show all work and formula(s) clearly. Round only the final answer to two decimal places, where applicable. (2 marks)
- You have $100,000 to invest in a portfolio that has two companies’ shares: Share A and Share Z. Share A has a beta of 1.30 and an expected return of 18.60%, while Share Z has a beta of 0.80 and an expected return of 12.60%. You target to have a portfolio beta of 1.10.
- How much (in percentage and dollar amount) will you invest in each share? (2 marks)
- What is the expected rate of return of your portfolio? (1 mark)
Question 2: Stocks and Stocks Valuation (10 marks)
- Neat Nut Inc. does not expect to initiate dividends over the next four years. The company will then pay a dividend of $1.5 per share five years from today and will increase the dividends by 3.5% per year thereafter. The company has an 11% required rate of return.
- What is the company’s stock price in today’s dollars if the desired rate of return is 11%? [Clearly show all formula(s), steps, relevant figures and final answer. Round only the final answer to two decimal places, where applicable.] (3 marks)
- Identify two or more possible reasons that the company does not plan to initiate dividend in the beginning years. Briefly explain. [Note: The discussion must be in your own words. Word limit: 60 words, excluding figures; answers beyond word limit will not be marked.] (1.5 marks)
- Renew & Reuse Ltd has preferred stock with a par value of $50 and an annual $2.25 cumulative dividend. An investor is willing to pay $13 for this preferred stock. What yield or rate of return is this investor seeking for the investment? Show all work and formula(s) clearly. Round only the final answer to two decimal places, where applicable. (1.5 marks)
- The next dividend payment by Antique Preservation Ltd will be $1.25 per share. The dividends are anticipated to maintain a growth rate of 4.5% forever. If the company’s share currently sells for $28.75 per share, what is the required return? Show all work and formula(s) clearly. Round only the final answer to two decimal places, where applicable. (2 marks)
- All Organic Ltd shares currently sell for $26.45 per share. The market requires a return of 11.5% on the firm’s shares. If the company maintains a constant 3.5% growth rate in dividends, what was the most recent dividend per share paid on one share? Show all work and formula(s) clearly. Round only the final answer to two decimal places, where applicable. (2 marks)
Question 3: Bonds and Bond Valuation (10 marks)
- E-Learning Company will issue a zero-coupon bond this coming month. The projected yield for the bond is 5%. The par value of the bond is $1,000. [Show all steps, workings, and formula(s) clearly. Round final answer to two decimal places, where applicable.]
- What is the amount of coupon payment? Briefly comment on your answer. (0.5 mark)
- What is the price of the bond using a semi-annual convention if the maturity is 30 years? (1.5 marks)
- New Creation Company is about to issue a bond with semi-annual coupon payments, a coupon rate of 6.5%, and par value of $1,000. The yield-to-maturity for this bond is 7%. What is the price of the bond if the bond matures in 25 years? [Show all steps, workings, and formula(s) clearly. Round final answer to two decimal places, where applicable.] (2 marks)
- An investment banking firm for New Era Corporation has forecasted the prices for the company’s new issue of bonds under several different economic conditions as displayed in the following table. What is the expected (average) selling price of the bond? [Show all steps, workings, and formula(s) clearly. Round final answer to two decimal places, where applicable.] (1.5 marks)
| Recession | Steady | Boom | |
|---|---|---|---|
| Probability | .55 | .35 | .10 |
| Bond price | $950 | $1,000 | $1,175 |
- All Tracks Investments Ltd is buying a 90-day bank bill today. The bill matures in 90 days’ time. The bill has a face value of $100,000 and the current market yield on this bill is 2.55% pa. What is the price that the company will have to pay to buy the bill today? [Show all steps, workings, and formula(s) clearly. Round final answer to two decimal places, where applicable.] (2 marks)
- Consider a thirty-year, 7.5% coupon, semi-annual bond. A broker quotes a price of $1050. What is the bond’s rate of return? [Show all steps, workings, and formula(s) clearly. Round final answer to two decimal places, where applicable.] (2.5 marks)
Question 4: Time Value of Money (10 marks)
- As part of your investment plan, you have set the goal of buying a $1,000,000 property in 10 years.
- You assume that the bank will require you to deposit 20% of the house price and approve your mortgage loan of 80% of the house price. What is the amount of deposit you must have in 10 years? (0.5 mark)
- If you currently have no saving allocated for this financial goal of saving for the deposit of the house, how much do you have to save monthly into your bank account that pays 3.75% annual interest rate, compounded monthly? [Clearly show all formula(s), steps, relevant figures and final answer. Round only the final answer to two decimal places, where applicable.] (1.5 marks)
- Suppose you currently have a saving of $100,000 in the bank earning an annual interest rate of 3.75%, compounding monthly. In addition to this saving, you plan to save more periodically by depositing cash into your bank account that also earns 3.75% annual interest rate, compounded monthly. How much do you need to contribute monthly to attain your saving goal (the amount of house deposit)? [[Clearly show all formula(s), steps, relevant figures and final answer. Round the answer to two decimal places, where applicable.] (1.5 marks)
- Compare your answers in parts (ii) and (iii). Which monthly contribution is lower? Clearly explain why. Use relevant figures to illustrate your point. (1.5 marks)
- Prepare an amortisation schedule for a four-year loan $8,500. The interest rate is 9.5% per year with monthly compounding and the loan calls for equal monthly payments.
- Calculate the monthly loan repayment. [Clearly show all formula(s), steps, relevant figures and final answer. Round only the final answer to two decimal places, where applicable.] (1 mark)
- Fill in all relevant values under each column in the table below. Show the formula(s) used to calculate each column. (2 marks)
| Time(month) | Periodic (Annuity) Loan Payment ($) | Interest Expense($) | Principal Repayment ($) | Outstanding Loan Balance ($) |
|---|---|---|---|---|
| 0 | ||||
| 1 | ||||
| 2 | ||||
| 3 | ||||
| 4 |
Display formulas here:
Interest expense:
Principal repayment:
Outstanding loan balance:
State the interest amounts paid in the first and final periods. Which of these two periods has a lower interest amount? Clearly explain why this is the case. Use relevant figures for illustration. Also comment on the outstanding loan balance at the end of final period. (2 marks)
Section 2 (THEORY/DISCUSSION) (TOTAL 10 MARKS)
Question 1: Dividends and stock investments (5 marks)
In this course, you have learned that not all public companies would pay dividends. Clearly answer the following questions.
- Some companies choose to pay dividends. Clearly list and explain one or more reasons for paying dividends. [Word limit: 50 words. Answers beyond the word limit will not be marked. Answers must be written in your own words.] (1 mark)
- Certain companies choose not to pay dividends. Clearly list and explain two or more reasons for not paying dividends. [Word limit: 50 words. Answers beyond the word limit will not be marked. Answers must be written in your own words.] (2 marks)
- Explain why some investors would prefer dividend-paying stocks and why some investors would invest in non-dividend paying stocks. [Word limit: 50 words. Answers beyond the word limit will not be marked. Answers must be written in your own words.] (2 marks)
Question 2: Portfolio risk and diversification (5 marks)
In this course you have learned about systematic risks, unsystematic risks, beta, standard deviation and the measuring investment risks including that of a well-diversified portfolio.
- State and explain in your own words the two major types of risks related to diversification. Explain why and how one of these risks can be diversified away. (2.5 marks)
- Clearly explain how risks of a well-diversified portfolio is measured. Further elaborate why this measurement is appropriate. You may use an example to clearly illustrate your points. (2.5 marks)