Finance Assessment -

Question 1: Chapter 2: SQ2-12

Go to Yahoo! Finance and enter the symbol for BHP Billiton (BHP.AX) in the 'Quote lookup' box on the left-hand side of the web page. What price did the share last trade at? What is the last trade time? (Note: this will be East Coast time in the United States; i.e. the time according to Wall Street) What is the day's price range for the share? What is the closing change in the price of the share, both in dollar and percentage terms? What is the share's 52-week price range? Now check out some of the links on the left-hand side of the web page. What kind of information listed there do you find interesting?

Question 2: Chapter 5: SP 5-33

(Spreadsheet problem) In 20 years, you should like to have $250 000 to buy a holiday house. If you have only $30 000, at what rate must it be compounded annually for it to grow to $250 000 in 20 years? Use an Excel spreadsheet to calculate your answer.

Question 3: Chapter 6: SP 6-23

(Future value of an annuity and annuity payments) You are planning for retirement in 10 years and currently you have $150 000 in a savings account and $250 000 in shares. In addition, you plan to deposit $8000 per year into your savings account at the end of each of the next five years, and then $10 000 per year at the end of each year for the final five years until you retire. (ignore tax)

a) Assuming your savings account returns 8% interest compounded annually, and your investment in shares will return 12% compounded annually, how much will you have at the end of 10 years?

b) If you expect to live for 20 years after you retire, and at retirement you deposit all of your savings in a bank account paying 11% interest annually, how much can you withdraw each year after you retire (making 20 equal withdraws beginning one year after you retire)so that you end up with a zero balance at death?

Question 4: Chapter 8: SP8-3

(Calculating the standard deviation for a portfolio of two risky investments) Mary Guilott recently graduated from university and is evaluating an investment in two companies' shares. She has collected the following information about the shares of firm A and firm B:

a) If Mary invests half her money in each of the two shares, what is the expected rate of return and standard deviation in portfolio return?

b) Answer part a), where correlation between the two investments is equal to zero

c) Answer part a), where correlation between the two investments is equal to +1

d) Answer part a), where correlation between the two investments is equal to -1

e) Using your responses to parts a)-d), describe the relationship between correlation and the risk and the return of the portfolio.

Question 5: Chapter 9: SP 9-13

(Bond valuation) A 14-year, $1000 face-value Fingen bond has an annual coupon rate of 9%. The market price of the bond is $1100 and the market's required yield to maturity on a comparable -risk bond is 10%.

a) Calculate the bond's yield to maturity.

b) Determine the value of the bond to you, given your required rate of return.

c) Should you purchase the bond?

Question 6: Chapter 10: SP 10-19

(Preference share valuation) Kendra Corporation's preference shares are trading for $25 in the market and pay a $4.50 annual dividend. Assume the market's required return is 14%.

a) What is the share's value to you, the investor?

b) Should you purchase the shares?

Question 7: Chapter 10: SP 10-7

(Ordinary share valuation) Wayne Ltd's outstanding ordinary shares are currently selling in the market for $33. Dividends of $2.30 per share were paid last year, return on equity is 20% and its retention rate is 25%.

a) What is the value of the shares to you, given a 15% required of return?

b) Should you purchase these shares?

Question 8: Chapter 14: SP14-26

(Weighted average cost of capital) As a member of the Finance Department of Ranch Manufacturing, your boss has asked you to compute the appropriate discount rate to use when evaluating the purchase of new packaging equipment for the plant, under the assumption that the firm's present capital structure reflects the appropriate mix of capital sources for the firm, you have determined the market value of the firm's capital structure as follows:

To finance the purchase, Ranch Manufacturing will sell 10-year bonds paying interest at a rate of 7% per year (with semi-annual payments) at the market price of $1050. Preference shares paying a $2.00 dividend can be sold for $25. Ordinary shares for Ranch Manufacturing are currently selling for $55 each and the firm paid a $3 dividend last year. Dividends are expected to continue growing at rate of 5%per year into the indefinite future. If the firm's tax rate is 30%, what discount rate should you use to evaluate the equipment purchase?

References

TITMAN, S., MARTIN, T., KEOWN, A. J. & MARTIN, J. D. 2016. Financial management: Principles and Applications, Melbourne, Pearson Australia.