Question 1:

This question relates to topics 1 and 3 and LO6.

a. You plan to take a trip around the world in five (5) years and predict you will need \$50,000 for all anticipated costs.  You do not have any current savings but your bank has offered you 3% p.a. compounded monthly on future savings. Assuming you have five (5) full years to reach your goal, calculate the payments you will have to make each month to save the target amount of \$50,000.

b. Charge Car P/L is considering a project to launch charging stations for electric cars around Australia.  The initial investment is expected to be \$100,000,000 and the term of the project is 6 years.  The required rate of return from the project is 14% p.a.  The annual cash flows are outlined in the following table:

 End of year Cash flow p.a. (\$m) Year 1 20 Year 2 22 Year 3 25 Year 4 30 Year 5 34 Year 6 37
1. Based on Charge Car’s required rate of return would you recommend proceeding with this investment?  Present all calculations to support your answer.
2. Would you change your opinion if Charge Car’s required rate of return increased to 16% pa?   Present all calculations to support your answer.

c. Bobby Brown has just turned 48 years of age and has come to you seeking retirement advice.  During your discussion the following information was communicated:

• Bobby wants to retire on his 65th birthday;
• he currently has \$198,000 in his superannuation fund;
• he contributes \$800 per fortnight into his super account; and
• the investment returns are 8% p.a.

In addition to the super fund, Bobby has also invested \$100,000 today (his 48th birthday).  The investment is in a direct share portfolio which produces average returns of 6% p.a. after tax.  The investment returns are paid every 6 months.

When Bobby retires at the age of 65, he will use his super and non-super investments to purchase an ordinary annuity which will provide him with a regular monthly income stream until he reaches life expectancy at 83 years of age.   The rate of return for the annuity will be 4% p.a.

Bobby is concerned that he may live beyond life expectancy and wishes to ensure he has a residual value of \$150,000 remaining in his annuity when he turns 83.  He will use the money to supplement the aged pension.

1. What will be the value of Bobby’s financial assets when he retires at age 65?   Present all calculations to support your answer.
2. What will be the annual pension amount that Bobby will receive until age 83?  Returns are compounded annually at year end. Present all calculations to support your answer.

Question 2

This question relates to Topic 1 and LOs 2, 3 and 5.

Tony is applying for a new home loan.  He wishes to borrow \$250,000 and make his repayments monthly. The interest rate the bank has quoted him is 4% per annum and the inflation rate is 3% pa.

1. Is this the real rate of interest or the nominal rate of interest?
2. Explain the difference between the real rate of interest and the nominal rate of interest.
3. Calculate the real rate of interest and the nominal rate of interest for Tony.
4. Is it possible for the real rate of interest to equal the nominal rate of interest? Explain.

Question 3

The question relates to topics 1 – 5 and LOs 5 and 6.

GenTech Ltd needs to save \$50 million to expand its production lines in six years’ time. There are three investment options to consider:

• ABC bank: monthly payments due at the end of each month.  The interest rate is 3.5% p.a. compounding monthly.
• XYZ bank: annual payments due at the end of each year.  The interest rate is 3.55% p.a.
• CDC bank: payments to be made at the end of year 2, 4 and 6.  The interest rate is 3.56% p.a.
1.   Calculate the payments for each of these options, (show all workings).
2.  Indicate which one you prefer.  You will need to justify your decision

Question 4

This question relates to Topic 4 and LO’s 2, 3, 4 and 6.

Below is the FY 2019 monthly share price data for Speedybuy Pty Ltd (Speedy).

 Date Open Close July 2018 9.42 14.18 August 2018 14.26 18.13 September 2018 18.11 17.95 October 2018 17.99 12.49 November 2018 12.91 14.42 December 2018 14.85 12.40 January 2019 12.40 15.91 February 2019 16.11 18.44 March 2019 18.50 20.95 April 2019 21.21 25.59 May 2019 25.90 24.15 June 2019 23.68 25.07

1.     Calculate the 2018-2019 monthly holding period returns (HPR), using the opening and closing prices, (in both \$ and %) for Speedy.
2.     Calculate the average monthly return (%) for Speedy.
3.      Calculate the annual holding period return (HPR) for Speedy.
4.     Using Excel, prepare a line graph of the monthly HPR’s for Speedy.
5.     Calculate the risk measured by the standard deviation for Speedy.
6.      If the standard deviation for the market is 10.5%, how does this compare with Speedy’s standard deviation calculated in (e)?  Explain your conclusions.

Question 5

This question relates to Topic 4 and LO’s 1, 2, 3, 5, 6

1. In terms of share investment define what beta (β) represents.
2. According to au.finance.yahoo.com, APT has a beta of 1.88.  What does this mean?
3. In terms of riskiness how would you compare APT’s beta to the market?
4. Calculate the expected returns for APT using the Capital Asset Pricing Model (CAPM) and the following yields.
• The risk free rate (Rf) as measured by the yield on Australian 10 year treasury bonds is 1.5% p.a.
• The average return on the market for the past 10 years has been 10.5% p.a.
• Use the APT beta (β) of 1.88.
1. Using the CAPM data from (d), create an Excel scatter plot graph to plot the Security Market Line (SML)using the Rf, return on the market and APT.
2. Based on your CAPM findings, construct a portfolio made up of 40% market and 60% APT. Calculate the estimated return and beta for this portfolio.

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