Question 1

a.      Your twin daughters will be starting high school next year and they have indicated they wish to attend university when they finish school in six (6) years time. You have no current savings and anticipate that it will cost approximately $90,000 in total for both children.

Your financial institution has offered you a 6% p.a. (compounded quarterly).

How much to you need to deposit to your bank account each quarter in order to save the total amount required before your children commence university?

b.  Due to the recent decrease in overseas demand for used plastics for recycling, your company has decided to invest into recycling technologies.

The used plastics will be recycled into pellets to sell to Australian producers of plastic packaging products. The initial investment is expected to be $30,000,000 and the term of the project is 5 years. The expected return is from the project 12% p.a. The annual cash flows are outlined below:

 

End of year Cash flow p.a.
Year 1 $6,000,000
Year 2 $8,500,000
Year 3 $9,500,000
Year 4 $12,000,000
Year 5 $15,000,000

 

i.    Based on your required rate of return would you purchase this investment? Present all calculations to support your answer.

 

ii.      Would you change your opinion if from (i) if the expected rate of return rose to 14%? Present all calculations to support your answer.

 

c.  You are a financial planner and have been provided details for a new client; Jayne Mansfield. Jayne is 37 years old today and plans to retire when she is 67.

Jayne has $80,000 in a balanced managed fund. She will not add any further savings to this fund however it will remain in place until retirement. This fund earns 6% p.a. after tax on average. Jayne’s superannuation fund has a balance of $85,000, which she contributes $1,500 per month. The superannuation fund earns 7% p.a.

When Jayne retires, she will add BOTH her super and investment balances together and purchase an annuity, which will provide her with a regular income stream throughout retirement.

Her life expectancy is 85 years old, but she is concerned that if she reaches life expectancy and has spent all of her savings she will have nothing left to fund further lifestyle comforts she may need in her advanced years. To ensure she has some money left over to supplement her aged pension, she would like to have a balance of $200,000 remaining in the fund at age 85.

Jayne’s retirement annuity will earn 7% p.a, which will be compounded monthly.

i.      What will be the value of Jayne’s financial assets when she retires at age 67? Present all calculations to support your answer.

ii.   What will be the monthly pension amount that Jayne will receive in retirement to age 85? Present all calculations to support your answer.

 

Question 2

 

a. Tristar Renewables Ltd (Tristar) is entering into an interstate expansion phase and requires $100 mil to fund this project. Tristar does not have the funding for this investment today, hence a borrowing arrangement will be negotiated. Income from new branches will fund operation and borrowing costs over the 10 year term of the loan.

 

The company is considering the following terms:

  • Global Banking Corp (GBC): quarterly repayments due at the end of each quarter. The interest rate 4.1% p.a. compounding quarterly.
  • International Financing Group (IFG): Annual repayments paid at the end of each year over the 10 year period. The interest rate is 4% p.a. compounding annually.
  • Worldwide Wholesale Banking Services (WWBS): Repayments to be made at the end of each 2 year period, across the 10 year term. The interest rate 4.05 % p.a. compounding annually.

i.    Calculate the payments for each of these options, (show all workings).

ii.    Indicate which one you prefer. You will need to justify your decision.

 

b.  Jamie wants to invest in the following three companies:

 

Company Beta Portfolio Weighting
Company A 0.80 30%
Company B 1.05 40%
Company C 1.30 30%

 

  1. Calculate the beta of his portfolio.
  2. Explain to Jamie the risk of his portfolio compared to the market.
  3. What might this mean in terms of risk and reward trade off?

 

Question 3

Below is the Financial Year 2018 – 2019 monthly share price data for Qantas (https://tinyurl.com/y3xkfsap)

 

Date Open Close
July 18 6.17 6.72
Aug 18 6.72 6.43
Sept 18 6.45 5.9
Oct 18 5.81 5.47
Nov 18 5.44 5.96
Dec 18 6.06 5.79
Jan 19 5.84 5.44
Feb 19 5.44 5.73
Mar 19 5.77 5.66
Apr 19 5.66 5.61
May 19 5.57 5.55
Jun 19 5.47 5.4

 

  1.     Calculate the 2018-2019 monthly holding period returns (in both $ and %) for Qantas (ASX code QAN).
  2.    Calculate the average monthly return (%) for Qantas.
  3.   Calculate the annual holding period return (HPR) for Qantas.
  4.   Using Excel, prepare a line graph of the HPR for Qantas.
  5.    Calculate the risk measured by the standard deviation for Qantas.
  6.   If the standard deviation for the market is 10.67%, how does this compare with Qantas’s standard deviation calculated in (v)? Explain your conclusions.

     

Question 4

 

Calculate the expected returns for Qantas 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 2.75%

–    the average return on the market for the past 10 years has been 9.25%

–    use the Qantas beta of 0.59

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