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P MACQUARIE

University

This question paper must be returned.


SEAT NUMBER:

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STUDENT NUMBER:

FORMAL EXAMINATION PERIOD: SESSION 1, JUNE 2017

Unit Code: ACST101

Unit Name: Finance 1A


Duration of Exam 2 hours (plus 10 minutes reading time)
(including reading time if applicable):

Total No. of Questions: 10 multiple choice and 5 short answer questions


Total No. of Pages
(including this cover sheet):
9

GENERAL INSTRUCTIONS TO STUDENTS:


• Students are required to follow directions given by the Final Examination Supervisor and must refrain from communicating in any way with another student once they have entered
the final examination venue.
• Students may not write or mark the exam materials in any way during reading time.
• Students may only access authorised materials during this examination. A list of authorised material is available on this cover sheet.
• All watches must be removed and placed at the top of the exam desk and must remain there for the duration of the exam. All alarms, notifications and alerts must be switched off.
• Students are not permitted to leave the exam room during the first hour (excluding reading time) and during the last 15 minutes of the examination.
• If it is alleged you have breached these rules at any time during the examination, the matter may be reported to a University Discipline Committee for determination.

EXAMINATION INSTRUCTIONS:
1. All questions must be answered.
2. There are a total of 70 marks available:
Part A (20 marks): Ten multiple choice questions (2 marks each). Answers to these questions must be
recorded on a red-coloured Multiple Choice Answer Sheet which will be read by optical scanner. Use 2B
lead pencils. Please enter your student number and name on this sheet.
Part B (50 marks): 5 short answer questions. Marks for each question, or part of a question, are given in
parentheses. Write your answers in the spaces provided. Show all workings.

3. Illegible handwriting risks loss of marks.

AIDS AND MATERIALS PERMITTED/NOT PERMITTED:


Dictionaries: No dictionaries permitted
Calculators: A non-programmable calculator (no text retrieval capacity) is permitted. Financial calculators
may be used.
Other: Closed book with specified material permitted: One A4 reference sheet of material printed
(handwritten and/or typed) on both sides is permitted. To be collected with exam paper.

Part A Part B TOTAL


Problem Multiple 1 2 3 4 5 TOTAL A+B
Choice
Value 20 10 10 10 10 10 50 70

Mark
Part A: Multiple Choice Questions (20 marks: 2 marks each)
Write answers on the Red Multiple Choice Answer Sheet

1. You want to establish a trust fund, today, which will make payments to your family
of $10,000 each year, forever, starting in exactly one year from today. If you can
earn 6.5% p.a. effective, the amount that you need to invest in the trust fund to
produce the desired cash flow is closest to:
A. $144,456
B. $165,000
C. $71,888
D. $153,846

2. If nominal interest rates in some countries are negative while expected inflation is
positive, this means:
A. The real rate must be greater than expected inflation.
B. The real interest rate must be negative but not as negative as the nominal rate.
C. The real interest rate must be more negative than the nominal rate.
D. The real interest rate must be positive.

3. Which of the following are aspects of independent projects?


A. Their cash flows are related.
B. Their cash flows are unrelated.
C. Selecting one would automatically eliminate accepting the other.
D. Selecting one is dependent on accepting the other also.

4. Which of the following statements about the Australian Prudential Regulation


Authority is NOT correct?
A. It enforces the Corporations Law to promote fairness in markets.
B. It oversees banks and building societies.
C. It oversees Authorised Deposit-taking Institutions.
D. It concerns itself with the financial stability of the financial system.

5. If you were to compare the returns of an individual share to a market index, (like
the ASX 200), you would expect that:
A. The returns of the individual share will show more variability than those of the
market index.
B. The returns of the individual share will show less variability than those of the
market index.
C. The returns of the individual share will show the same level of variability than
those of the market index, if they have the same beta.
D. The returns of the individual share would have some variability but the index
would have zero.

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6. A bond sells at a discount to the par value when the market yield for the bond is:
A. equal to the bond's coupon rate.
B. less than par.
C. less than the bond's coupon rate.
D. greater than the bond's coupon rate.

7. ABC Ltd just issued a 10 year 7% coupon bond. The face value of the bond is
$1,000 and the bond makes semi-annual coupon payments. If the yield to maturity
on the bond is 10%, the bond’s price is closest to:
A. $813.07
B. $815.66
C. $1,000.00
D. $820.90

8. A 7% coupon bond sells at a yield to maturity of 6.5 percent p.a. The bond pays
semi-annual coupons. The effective annual yield (EAY) is closest to:
A. 7.000%
B. 7.123%
C. 6.606%
D. 6.500%

9. Turtle Products Ltd is expected to grow at a constant rate of 8 percent per annum.
If the company’s next dividend is $5.50 and its current price is $55.00, the required
annual rate of return on this share is closest to:
A. 10.0%
B. 16.5%
C. 18.0%
D. 8.0%

10. How much should be deposited into a fund on 1 January 2016 if 9 annual
withdrawals of $10,000 are to be made from the fund? The first withdrawal is on 1
January 2017. Interest is at 5% p.a. effective (EAR).
A. $110,265.64
B. $94,500.00
C. $75,656.32
D. $71,078.22

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PART B SHORT ANSWER QUESTIONS (50 marks)
(Write your answers in the space provided. Show all workings.)

Question 1 (10 Marks)


Where appropriate, give your answer correct to the nearest cent.
Jack borrows $550,000 on a 30-year home loan to purchase an apartment. The bank
charges an interest rate of 6% p.a. compounded monthly and Jack agrees to make
monthly repayments at the end of each month.

a) Show a formula calculation (and workings) to confirm the monthly repayment is


approximately $3,297.53. (3 marks)

b) Complete the loan amortisation schedule for the last month (i.e. 360th month) of
the loan. (Assume that the interest rate remains the same). (3 marks)

Month Loan Balance (beginning of Interest Repayment Loan Balance


month)________________ (end of month)
360
Workings:

c) Calculate the total amount of interest paid over the thirty years. (4 marks)

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Question 2 (10 Marks)
A business is considering a proposal to install a new device in their small factory. The
device costs $23,000 and will save the business $400 per month in expenses. Assume
that the device will last for 8 years, that the savings remain constant and are at the
end of each month. The first saving commences in one month from now. The effective
annual interest rate is 12.6825%, and the effective monthly interest rate is 1%.
a) Calculate the Net Present Value (NPV) of the proposal. (4 marks)

b) Calculate the payback period for the device (in years to two decimal places).
(3 marks)

c) Describe how you would reach a decision about whether to make this purchase,
using the:

i. Payback period method (1 mark)

ii. Net Present Value method (1 mark)

d) In this example, describe whether the project internal rate of return is likely to be
greater or less than 12.6825% p.a.(effective) and explain why. (1 mark)

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Question 3 (10 Marks)
a) Bandwidth Ltd has just paid a dividend of $3.00 per share on its ordinary shares.
The dividend is expected to grow at 10%p.a. for the next two years (year 1 and 2)
after which it is expected to grow at 3% p.a. indefinitely. The required return is 14%
per annum. Calculate the value of a share in Bandwidth Ltd (to the nearest cent).
(3 marks)

b) Suppose that an investor buys shares in Global Ltd on 11th May 2017 at a price of
$32.00. The company pays no dividends. Assume that the forecasted possible
stock prices are given as follows:
$28.00 with probability one-third
$36.00 with probability one-third
$44.00 with probability one-third
i. Calculate the investor’s expected return. (Answer as a % correct to two decimal
places) (3 marks)

ii. Calculate the standard deviation of the stock’s return. (Answer as a % correct
to two decimal places). (3 marks)

c) Describe how the discount rate used for pricing assets (like bonds and shares) is
determined. (1 mark)

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Question 4 (10 Marks)
Last year Kogan.com Ltd (KGN), an Australian online electronics retailer, issued 28.4
million shares in its Initial Public Offering (IPO). The offer price was $1.80 per share.
The underwriters charged an underwriting fee of 4% of the offer price. Legal costs,
and costs of producing the prospectus were $940,000. On the first day of trade,
Kogan.com shares closed at a price of $1.50 per share.

Where appropriate, give your answer correct to the nearest dollar.


a) Calculate the proceeds to Kogan.com after deducting just the underwriting fee.
(2 marks)

b) Calculate the total issuance cost of the IPO. (2 marks)

c) A recent study shows that Australian IPOs from 2009 to 2015 were on average
under-priced by 8.3%.

i. Describe what is meant by IPO under-pricing. (2 marks)

ii. Describe two factors that might explain IPO under-pricing. (3 marks)

1.

2.

iii. Comment on the extent of any under-pricing in the Kogan.com IPO.


(1 mark)

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Question 5 (10 Marks)
a) Residential mortgage loans with low-start rates which reset to higher rates after an
initial ‘honeymoon’ period, are said to have contributed to the Global Financial
Crisis (GFC).
Describe how low-start loans, specifically, contributed to the GFC. (5 marks)

b) Jack and Jill each take out separate 30-year home loans of $500,000 at 6% p.a.
compounding monthly. Assuming the interest rate is unchanged, Jack pays
$2,997.75 each month as a repayment over 30 years.
Jill chooses to pay interest-only for the first 5 years, being $2,500 per month. After
that she must repay the loan in equal month-end payments over the remaining 25
years. Jill says that her loan is cheaper than Jack’s and that interest-only loans end
up costing borrowers less. Assuming interest rates don’t change, demonstrate that
Jill is NOT correct. Explain with your workings of total loan costs for Jack’s loan
and Jill’s loan. (5 marks)

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