Question 1
(a) You wish to go on an overseas family holiday in 15 months’ time which will cost $20,000. If your financial institution is offering you 6% pa (compounded monthly), how much do you need to deposit in your account each month in order to save the required amount before you go on holidays?
(b) You have been offered the opportunity to purchase a mining business investment which is priced at $16,000,000. The investment involves some start-up costs in the first years and some mine re-mediation costs after the project is completed in 10 years. The expected cash flows for the project are below and you have an expected rate of return of 15% pa.
| End of year | Cash flow ($,000) |
| 1 | -2,500 |
| 2 | 0 |
| 3 | 5,000 |
| 4 | 6,800 |
| 5 | 7,000 |
| 6 | 7,000 |
| 7 | 9,500 |
| 8 | 5,500 |
| 9 | 2,000 |
| 10 | -4,500 |
- Based on your required rate of return would you purchase this investment?
- What would the value of these cash flows be at the end of Year 2?
(c) You have commenced work as a certified Financial Planner. Your supervisor has provided the following financial data for a new client Gaye Livermore. The client turned 45 years old today and plans to retire when she turns 60. The client owns a diversified share portfolio which is valued today at $125,000. It is expected that this portfolio will earn (on average) 6% per annum indefinitely. Gaye also has a superannuation account with a balance of $750,000 to which she currently contributes $1,000 per month. The superannuation account is expected to continue to earn 8% per annum. At her retirement your client plans to consolidate her financial holdings and purchase a monthly annuity as a pension to fund her planned lifestyle. Gaye believes she will need to self-fund her retirement until she reaches the age of 90 at which time she would like to have $100,000 remaining to fund any costs not covered by the age pension. During the pension phase of her retirement Gaye will adopt a conservative investment strategy which will return 3% pa (compounded monthly) on her annuity investment.
- What will be the value of Gaye’s financial assets when she retires at age 60?
- What will be the monthly pension amount that Gaye will receive on her retirement?
Question 2
Below is the monthly share price data for Australian mining giant BHP for the 2018 calendar year (source: https:// au.finance.yahoo.com/quote/BHP.AX).
| Date | Open | Close | Dividends (100% Franked) |
| Jan | 29.57 | 30.2 | |
| Feb | 30.2 | 30.5 | |
| Mar | 30.5 | 28.21 | 0.705852 |
| Apr | 28.21 | 30.95 | |
| May | 30.95 | 32.79 | |
| Jun | 32.79 | 33.91 | |
| Jul | 33.91 | 34.86 | |
| Aug | 34.86 | 33.21 | |
| Sep | 33.21 | 34.63 | 0.855978 |
| Oct | 34.63 | 32.21 | |
| Nov | 32.21 | 30.69 | |
| Dec | 30.69 | 34.23 |
i. Calculate the 2018 monthly returns (in both $ and %) for BHP.
ii. Calculate the average monthly return (%) for BHP.
iii. Using the data provided calculate the annual holding period return (in both $ and % terms) for an international (non-Australian) shareholder of BHP.
iv. Calculate the annual holding period return (in both $ and % terms) for an Australian resident shareholder of BHP.
v. Using the monthly data (below) for the Australian All Ordinaries share price index (Source: https://au.finance.yahoo.com/ quote/^AORD) calculate the monthly returns (%) for the Australian share market (MKT) during 2018.
| Date | Open | Close |
| Jan | 6146.5 | 6117.3 |
| Feb | 6117.3 | 5868.9 |
| Mar | 5868.9 | 6071.6 |
| Apr | 6071.6 | 6123.5 |
| May | 6123.5 | 6289.7 |
| Jun | 6289.7 | 6366.2 |
| Jul | 6366.2 | 6427.8 |
| Aug | 6427.8 | 6325.5 |
| Sep | 6325.5 | 5913.3 |
| Oct | 5913.3 | 5749.3 |
| Nov | 5749.3 | 5709.4 |
| Dec | 5709.4 | 5783.3 |
vi. Calculate the average monthly return (%) for the MKT (ALL ORDS).
vii. Calculate the annual holding period return (in % terms) for the Australian share market (MKT) (as proxied by the All Ords index) during 2018.
viii. Using Excel (XL) prepare a line graph comparing the monthly returns for BHP and the return on the Australian (MKT).
ix. Calculate the risk for 2018 as measured by standard deviation of both BHP and the MKT.
x. According to Yahoo Finance BHP Ltd has a Beta of 1.12. In terms of share investment, define what Beta represents. What does BHP’s Beta of 1.12 mean? How risky is it?
xi. The average return on the market (MKT) in Australia for the past 10 years has been 9.55% (Source: https://www.asx.com.au). The yield on Australian 10 year treasury bonds is currently 2.29%. Using these as proxies for the Return on Market (MKT) and Risk Free Rate (Rf), combine them with the BHP Beta (above) and calculate the return expected for BHP using the Capital Asset Pricing Model (CAPM).
xii. Using the CAPM data from the previous question create an XL scatter plot graph to plot the Security Market Line (SML) using the Risk Free Rate, Return on Market, and BHP as data points.
xiii. Recreate the graph from above but this time also include the actual 2018 returns for BHP and the MKT as previously found (using the same beta measures).
xiv. Based on your CAPM findings construct a portfolio made up of 40% BHP and 60% MKT. Calculate the estimated return and β for this portfolio.
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