Question 1

1. Polly is a Year 9 student. She currently has \$3,000 in a savings account that pays 4% annually. She intends to use her current savings plus what she can save over the next 4 years to buy a car. The car will cost \$15,000 in 4 years. How much should she save each year if she intends to purchase the car in 4 years? All relevant cash flows will occur at the end of each year and interests are compounded yearly.
2. Ben took up a loan to purchase a farm machine. The terms of his loan require him to make quarterly payments of \$3,434 over 7 years. The relevant rate of interest is 7.2% per year, compounded quarterly. For the same amount of loan and interest rate, will Ben pay off the loan sooner if he makes quarterly payments of \$3,876 instead? Show all relevant calculations to support your answer.
3. Sharon won a lottery that will make a payment \$80,000 every year, starting today, for the next 10 years. If she invests the payments at a rate of 5.00% per year, what is the present value of the cash flows over the 10 year period? Interests for the 10 equal payments will be compounded at the end of each year.

Question 1

1. Derek will retire in 20 years. Upon retirement, he anticipates a yearly cash flow of \$80,000 will be needed for 25 years to support his lifestyle (yearly cash flows assumed to occur at the end of each year). To date, he has accumulated \$40,000 towards his retirement. How much more will Derek have to invest each year for the next 20 years to have the necessary funds for his retirement? Use a 8% per year discount rate throughout this problem (for discounting or compounding).
2. Josh, a professional tennis player, was offered a contract from a major sponsor recently. existing contract will make a large amount of payment in the first year and smaller amounts thereafter. Taking advice from his agent, Josh decided to ask his team to provide an alternative offer while he also makes his own counter offer based on your advice. Josh needs to finalise his contract today. Assuming an interest rate of 10%, which of the three contracts has the best value?

 YEAR EXISTING CONTRACT TEAM’S OFFER JOSH’S OFFER 1 815000 402500 527500 2 367500 385000 757500 3 274000 385000 365000 4 184725 395000 282500 5 184725 395000 252500

Question 3

1. AVA is a consumer products company growing at a constant rate of 6.5%. The company’s last dividend was \$3.36. Assuming a required rate of return of 12%, calculate the market value of this share.
2. Koala Resort is expected to grow at a constant rate of 8.5%. If the company’s dividend for next year is \$1.6 and its current market price is \$25.25, what is the required rate of return on this share?
3. KCC Limited is issuing 8-year bonds with a coupon rate of 10% with semi-annual coupon payments and face value of \$1,000. If the yield on the bonds of similar risk is 11.28%, calculate the bond price. The company intends to raise \$2.8 million for a capital investment, how many bonds will need to be sold to raise the required capital? (round your answer up to nearest 1,000).

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