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Task
Important note: For numerical problems, please include detailed worked solutions. This include the formula you are using, the substitution and the final answer. Intermediate answers should be at least 6 decimal place and final answer to 2 decimal places.
Question 1
(a). Frank is planning to retire in 15 years and buy a house in the Moreton Bay Region in Queensland. The house he is currently looking at is priced one million and is expected to grow in value each year at a 6% rate. Assuming that Frank can earn 8% annually on his investments, how much must he invest at the end of each of the next 15 years to be able to buy his dream home when he retires?
(b). ‘The chairman of BTL Limited is emphasising the need to create and maximise wealth for the shareholders, while the chairman of the ATL Limited believes that maximising profit of the company should be the priority’. Which company do you think adopts the correct strategy? Make a critical evaluation.
(c). Forward Tech Ltd estimates their required rate of return on average to be 15%. Last year’s dividend was $3 and the current share price of the company is $95. Find the estimated growth rate of dividend for the company.
(d). Word Travel has issued six-year bonds that pay $30 coupon twice each year. The face value of these bonds is $1,000 and they offer a yield-to-maturity of 7%. How much does are the bonds worth?
Question 2
Good Bank pays 8% interest, compounded annually, on term deposit. Value Bank pays 7% interest, compounded quarterly.
a. Based on effective annual interest rates, in which bank would you prefer to deposit your money? Explain your answer with supporting calculations.
b. Could your choice be influenced by the fact that you might want to withdraw your funds during the year as opposed to the end of the year? (Assume that funds must be left on deposit during an entire compounding period for the interest to be earned).
Question 3
Write a short essay of 400-500 words for each of the following parts. For each part, illustrate with appropriate example/s. Example/s can also be historical ones.
(a). Would agency cost or problem interfere with maximising shareholder wealth, hence less profit in the long run?
(b). Would an investment be worth more if it were an ordinary annuity or an annuity due? Explain and illustrate with an appropriate example.
Question 4
Currently, the risk-free rate equals 5% and the return on the market portfolio is 11%. The following information is provided by an investment analyst:
Share Beta Average return per year
A 1.33 12%
B 0.70 10%
C 1.50 14%
D 0.66 9%
(a). Indicate whether each share is overpriced, underpriced or correctly priced using an appropriate pricing method.
(b) Show and explain how a smart investor could construct a portfolio of shares comprising of C and D that would outperform share A.
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