Question 1. (This question has three sub-questions: (a), (b) and (c))
a) Sam simply received a authorities lottery. His prize could be taken both within the type of a 20-year bizarre annuity or as a lump sum that’s paid instantly. What idea might Sam apply to help him in selecting between the bizarre annuity or the quick lump sum? Clarify how this Assessment will Help Sam in making a greater determination
b) “If a financial savings account has an APR (annual proportion price) of 10%, then its EAR (efficient annual price) have to be greater than 10%.” Is that this assertion appropriate or incorrect? Clarify your reply.
c) (c) Sam is planning to save lots of up for a visit to Italy in 5 years. He estimates that he’ll want $20,000 for this journey. At the moment, Sam has $5,000 in a financial savings account paying three.6% yearly. He plans to make use of his present financial savings plus what he can save over the following 5 years to finance this journey. How a lot cash ought to Sam save at the start of every yr over the following 5 years to finance this journey?
Question 2. (This question has two sub-questions: (a) and (b))
(a) Your monetary supervisor is asking you to guage the extent of market effectivity for the Australian market. After performing some analyses within the Australian market, you consider you can make abnormally worthwhile trades by observing that the CEO of a sure firm all the time wears her crimson go well with on days when the corporate is about to launch constructive details about itself. Describe which type or types of market effectivity is/are constant together with your perception.
(b) The desk under supplies the details about two bonds:
Bond Par worth Time period to maturity Coupon price
A $1000 three years 10% every year, paid semi-annually
B $1000 15 years 10% every year, paid semi-annually
(i) Suppose the market rate of interest is 6% every year for each bonds, with out performing any calculations, focus on whether or not these two bonds ought to promote at an identical costs or if one needs to be value greater than the opposite.
(ii) Will your reply in Half (i) be completely different if the market rate of interest is 10% every year for each bonds? Clarify.
(iii) Suppose the market rate of interest is eight% every year for each bonds, what costs do you acquire for every of those two bonds?
Question three. (This question has three sub-questions: (a), (b) and (c))
(a) Sam is evaluating two shares, Share A and Share B. He finds that the usual deviation of returns for each Share A and Share B is strictly the identical. He then makes the next two statements:
(i) “Will probably be detached for me to buy Share A or Share B, because the anticipated returns for each shares ought to all the time be the identical.” Do you agree or disagree with this assertion?
Clarify.
(ii) “If there’s one other share that has greater anticipated return than that of Share A and Share B, then its customary deviation of returns should even be greater than that of Share A and Share B as properly.” Do you agree or disagree with this assertion? Clarify. (b) Classify every of the next occasions as a supply of systematic danger or unsystematic danger. Use one to 2 sentences to briefly justify your classification for every of the occasions.
(i) In March 2015, Former NAB banker Lukas Kamay was convicted of insider buying and selling and was sentenced to seven years and three months in jail.
(ii) Apple’ share value sunk by greater than 5% on the information of the demise of Steve Jobs.
(iii) The current COVID-19 lockdowns in Sydney and Melbourne are inflicting safety costs across the Australia to fall precipitously.
(c) Based mostly in your current analysis, there are six pharmaceutical corporations engaged on a brand new COVID19 vaccine for the Delta-variant. As an investor, you will have the choice of investing in one in every of them versus all six of them:
(i) Is your systematic danger prone to be very completely different? Why?
(ii) For those who resolve to put money into all six pharmaceutical corporations and type an funding portfolio accordingly, would you take into account such funding portfolio is well-diversified?
Clarify.
Question four. (This question has two sub-questions: (a) and (b)) (a) The online money flows for 2 initiatives, A and B, are as follows:
Internet Money Flows
Yr Venture A Venture B
zero -$60,000 -$35,000
1 $45,000 $32,000
2 -$15,000 $17,000
three $60,000 -$5,000
(i) Are you able to make capital budgeting selections for the above initiatives primarily based on the IRR
(inside price of return) technique? Clarify. (ii) Given a reduction price of 10% p.a., calculate the NPV of the above initiatives.
(iii) Assuming you will have $60,000 to speculate, which one must be chosen? Clarify.
(iv) Will your reply in Half (iii) be completely different you probably have $100,000 to speculate and these two initiatives should not mutually unique? Clarify.
(b) Sky Tech is an organization that producing photo voltaic panels. The corporate is analysing the opportunity of introducing a brand new product, named ‘Photo voltaic-2022’, to the market. The ‘Photo voltaic-2022’ will undertake a brand new expertise of utilizing silicon photo voltaic modules. This new expertise might largely enhance the ability conversion effectivity. The venture is estimated to be of 5 years period. The corporate’s tax price is 35%. The next is the extra details about the venture:
(i) To supply this new product, Sky Tech must introduce a brand new manufacturing line. This manufacturing line requires an preliminary funding of $7,500,000 in mounted asset which is absolutely depreciated over the five-year lifetime of the venture.
(ii) The anticipated annual gross sales variety of ‘Photo voltaic-2022’ is 20,000 models; the worth is $680 per unit. Variable prices of manufacturing quantity to $330 per unit.
(iii) The introduction of the ‘Photo voltaic-2022’ may even lower the corporate’s gross sales of normal photo voltaic panels by 12,500 models per yr; the common photo voltaic panel has a unit value of $350 and unit variable price of $160.
(iv) Up to now, Sky Tech had already spent $1,000,000 in analysis and growth on the brand new silicon photo voltaic modules expertise.
Assess and justify whether or not or not every of the gadgets ((i) – (iv) above) needs to be thought of within the estimation of the incremental annual money circulate from operations for the ‘Photo voltaic-2022’ venture.
Calculate the after-tax incremental annual money circulate from operations.
Question 5. (This question has two sub-questions: (a) and (b))
(a) You might be introduced with the next details about Tesla Company:
• The corporate has 10 million bizarre shares excellent, priced at $45 and with a beta of 1.35. The market danger premium is 9.5% p.a. and Treasury payments are yielding 2% p.a.
• There are 1.2 million choice shares excellent with a par worth of $100 and 7.2% dividend. The market value of the choice shares is $60.
• The corporate has 120,000 of semiannual coupon bonds excellent with $1,000 par worth. The bonds are promoting at 120% of par. The yield to maturity is 7.5% p.a. and the company tax price is 35%.
What’s the Tesla’s after-tax WACC?
(b) You’re the supervisor of a financially distressed firm with $three.1 million in debt excellent that can mature in three months. Your organization presently has $three million invested in risk-free Australian Authorities Treasury payments that can pay $three.1 million in three months.
Assume that you’re supplied with a possibility that entails promoting the $three million risk-free Treasury payments now and investing the proceed in a high-risk venture, with a 30% chance of $6 million repay in three months, and a 70% chance of $1 million repay in three months. For those who have been working the corporate within the shareholders’ greatest pursuits, will you push for the
acceptance of this high-risk venture? Clarify your reasoning.
Formulae
1. FV = PV(1 + ??)
2. FV = PV(1 + ??/??) ×
three. PV =
( )
four. Efficient Annual Price = 1 + – 1
( )
5. FV of an bizarre annuity = ???? ×
( )
6. FV of an annuity due = ???? × × (1 + ??)
7. PV of an bizarre annuity = × 1 –
( )
eight. PV of an annuity due = × 1 – × (1 + ??)
( )
9. PV of a perpetuity =
10. PV of a rising perpetuity =
11. CF of an bizarre annuity =
( )
12. Single interval realized return on a dividend paying inventory =
13. Anticipated return of n observations = E(RAsset) =E(R) = (R1 + R2 + R3 + … + Rn)/n
14. ???????????????? (?? – ??(??)) )
15. ???????????????? ??????????????????(??) = ?? = ????????????????(??)
16. Capital Asset Pricing Mannequin: ??(?? ) = ?? + ?? ??(?? ) – ??
17. Portfolio anticipated return: ?? ?? = ?? ??(??
) + ?? ??(?? ) + … + ?? ??(?? )
18. Portfolio beta: ?? = ?? ?? + ?? ?? + … + ??
19. Fixed dividend progress mannequin: P = ??
20. Annual coupon bond value = 1 – +
( ) (
)
/
21. Semi – annual coupon bond value = 1 –
/ (
+
/ ) (
/ )
22. NPV = ??????
23. Payback interval=Years to get well price + Remaining price to get well
Money circulate in the course of the yr
24. Price of fairness primarily based on rising dividend: ??
= D1 + ??
25. Price of fairness (CAPM): ?? = ?? + ?? ??(??
) – ??
26. WACC with out choice shares: ???????? =
?? (1 – ?? ) + ??
27. WACC with choice shares:
?? + ??
???????? = ?? (1 – ?? ) +
28. Required return on levered fairness: ?? = ?? + (?? – ?? )
