Question 1 (20 marks)

This question relates to material covered in the Topics 1 to 3. This question addresses the 5th and 6th subject learning outcomes.

For the following numerical problems, detailed answers must be shown. This involves providing a brief description of the problems, formulae used, progressive and final answers to the questions. For assignments you are expected to show your workings using the appropriate formula.

(a)   Scotty Thomson expects to receive the following stream of cash flows from an investment over the next 7 years:

 End of year Cash flow (\$) 1 3,000 2 6,500 3 280 4 1,400 5 3,000 6 0 7 10,000

If Scotty’s required rate of return is 6% per annum on this investment, how much should he pay for this investment opportunity? (4 marks)

(b)     Jarrad Waite has purchased a new apartment in North Melbourne for \$1.8 million. He plans to finance the whole amount with a loan from the community bank Kanga Kash. Jarrad has been offered a 30 year term loan with monthly repayments at a nominal rate of 5% per annum.

Given Jarrad is financing the whole purchase amount with debt, what will be his monthly repayment amount? (4 marks)

(c)     Ben Cunnington is planning for his retirement and has \$50,000 to invest as a lump sum into a retirement investment plan. Ben plans to work for another 35 years before retiring at the age of 65 and, as well as the \$50,000 lump sum, he plans to deposit \$1,500 into a capital secured share index fund each month of his remaining working life. He estimates that his retirement account will generate an annual return of 7%. Ben plans to retire at 65 and then draw a pension from his savings for a further twenty five years. During this retirement phase Ben expects to be investing conservatively and estimates a 5% per annum return. At the age of 90, at the completion of the pension, Ben would like to have \$200,000 remaining in the account for contingencies.

(i)     Calculate the Future Value of the monthly saving deposits and the lump sum deposited today based on monthly compounding and a rate of 7% per annum (4 marks).

(ii)     Calculate the annual pension that Ben will receive after retirement, taking into account the requirement to have \$200,000 remaining at the end of the pension period.  Ben plans to receive his first retirement pension payment annually with the first payment occurring one year after he retires (8 marks).

Question 2 (10 marks)

This question relates to material covered in the Topics 1 to 3. This question addresses the 5th and 6th subject learning outcomes.

Following is an example of a cash flow timeline developed using the Table Function within MS Word.  Please use this example as a means to develop a similar timeline in your answer to the following question.

Example only:

Below are the expected cash flows and interest rates for the next nine years.  Cash flows will occur at the end of the nominated years.

 Cash Flows Interest Rates Year 0 Years 1 – 4 4.5% Year 1 +\$ 2,500 Year 2 Year 3 +\$ 2500 Year 4 Year 5 +\$ 2,700 Years 5 – 6 6% Year 6 -\$ 1,500 Year 7 Years 7 – 10 7% Year 8 Year 9 +\$ 7,000 Year 10 +\$ 10,000

(i)     Using the Table function within MS Word, draw a time line showing the above cash flows and interest rates (4 marks).

(ii)    What will be the accumulated value of all these cash flows at each of the following times (6 marks):

Time 0

Time 4

Time 10

Question 4 (50 marks)

This question relates to material covered in Topics 1-5. This question addresses the 1st, 2nd and 3rd subject learning outcomes.

Conduct some research into the 2017/18 financial year performance of the largest players in the Australian grocery market Woolworth’s and Coles by looking at the performance of the publicly listed companies which own these businesses, Woolworths Group Limited (WOW.AX) and Wesfarmers Limited (WES.AX). These two companies, through their Woolworth and Coles supermarket divisions, record approximately 61% of the more than \$100 billion annual sales in the Australian grocery market (Roy Morgan Research Institute, 2018).

(i)    Find the monthly holding period returns for the 2017/18 financial year for Woolworths (WOW), Wesfarmers (WES) and the market (MKT) as proxied by the All Ordinaries index. The monthly holding period return is the return you would receive if you bought an asset on the first day of the month (opening price) and sold it on the last day of the month (closing price). Using Excel provide a line graph with the monthly returns for all three securities. Graph your results on one graph showing monthly returns for  WOW, WES and the MKT over the year with percentage (%) return results plotted on the y (vertical) axis and time (month) on the x(horizontal) axis. (Use ‘Close’ rather than ‘Adjusted Close’ for the selling price.) Note: Opening price MUST equal previous month closing price (12 marks).

(ii)    For each of the three investment options calculate the average monthly holding period return? (3 marks)

(iii)   For each of the three investment options calculate the annual holding period return? (4.5 marks)

(iv)   For each of the three investment options calculate the standard deviation of the monthly rates of return (9 marks).

(v)    Use the scatter plot Excel graph function to plot your results from (iii) and (iv) above with risk on the x axis and return on the y axis for each of the three investments (3.5 marks).

(vi)   If the 10 year government bond rate is 2.00% and the long term return on the market as proxied by the ASX is 5.75%, assuming the beta (β) for WOW is 0.77 and for WES is 0.81, use the Capital Asset Pricing Model (CAPM) to find the expected returns for WOW and WES (4 marks).

(vii)  Construct and graph the Security Market Line (SML) (use a scatter plot and fit the SML line) showing where WOW, WES and the MKT should lie (5 marks).

(viii) Based on your findings construct a portfolio made up of 30% WOW and 70% WES. Calculate the estimated return and β for this portfolio (4 marks).

(ix)   Based on your understanding of the CAPM and the SML, which of these asset(s) or portfolio(s) would you invest in and which would you not invest in. Explain your choice (5 marks).

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