Question 1
a). *Your grandfather put some money in an account for you on the day you were born. You are now 18 years old and are allowed to withdraw the money for the first time. The account currently has $3996 in it and pays a 5% interest rate.
- How much money would be in the account if you left the money there until your 25th birthday?
- What if you left the money until your 65th birthday?
- How much money did your grandfather originally put in the account?
(1 X 3 = 3 Marks)
Question 2
Consider the following alternatives:
- $100 received in one year;
- $200 received in five years;
- $300 received in 10 years.
- Rank the alternatives from most valuable to least valuable if the interest rate is 10% per year.
- What is your ranking if the interest rate is only 5% per year?
- What is your ranking if the interest rate is 20% per year?
(1 X 3 = 3 Marks)
Question 3
Suppose Sonic Health Care and Healthscope have the expected returns and volatilities shown below, with a correlation of 22%. In addition, Sonic Health Care and Health scope have beta’s of 1.2 & .5 respectively.
E[R] (%) | SD[R] (%) | |
Sonic Health Care | 7 | 16 |
Healthscope | 10 | 20 |
For a portfolio that is equally invested in Sonic Health Care and Healthscope shares, calculate:
- the expected return;
- the volatility (standard deviation)
- Calculate the expected return and portfolio beta if you increase your investment in Sonic Health Care from 50 to 60% and reduced your investment in Healthscope from 50 to 40%.
(1 X 3 = 3 Marks)
Question 4
Fed Ltd is choosing between two projects, but can only take one (mutually exclusive). The cash flows ($ million) for the projects are given in the following table:
Projects | 0 | 1 | 2 | 3 | 4 |
A | -$ 50 | 25 | 20 | 20 | 15 |
B | -$ 100 | 20 | 40 | 50 | 60 |
- What are the IRRs of the two projects?
- If your discount rate is 5%, what are the NPVs of the two projects?
- Why do IRR and NPV rank the two projects differently?
- Calculate the pay-back period for each project. Which one would be deemed acceptable if Fed management decided and acceptable period would be under 3 years? Are there any limitations to this method of project evaluation?
(2 +2+ 1 + 1 = 6 Marks)
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