Principle of Finance ACST603

FINAL EXAM, S2 2019

 Held during Final Exam week:

- Tuesday 12 November at 9:30am
 The final exam is worth 60% of the overall assessment.
 The topics will cover lecture 1 to lecture 12.
 The topics on efficiency ratios such as receivable turnover, payable turnover, inventory
turnover including operating cycle and cash cycle is not examinable. Also, not
examinable is Accounting rate of Return and Profitability Index under Capital
Budgeting/Investment evaluation topic. Further, bootstrapping method of term structure
will not be examinable.

Final Exam structure and what is permitted during the exam:

Part A: 20 MCQ’s. Each worth 3 marks (practical: 16/17 questions; theory: 4/3 questions)
Part B: 3 questions. Each worth 20 marks (consists of subparts mostly quantitative/practical
questions).
Total: 120 marks.
• Test will be for 2 hours plus 10 minutes reading time.
• Need to bring your own student ID card, pen (black blue), pencils and calculator.
Normal or financial calculators are permitted. Programmable calculators where you
can save text or graphics are NOT permitted.
• Formula sheet will be provided (Also see ilearn exam cover sheet and formula sheet).
• Closed book exam (notes are not allowed). Cheat sheet NOT allowed.
• It is possible to achieve a 100% mark.
• Reading period: read and mark relevant parts of questions. Identify related questions
from independent questions.
• Writing period: Read carefully before attempting:
 working steps carry more credits than final answer.
 Demonstrate sufficient understandings.
 Error-carried-forward.

How to best prepare for the test?

Attempt lots of example questions of which there are many on ilearn. For example,
- Lecture examples
- Tutorial examples
- Lecture practice examples
- Sample test paper
- Practice questions under examination conditions!
 Formulas

Simple interest Formula

S= P + I , I= S − P Total Interest Earned 2.1
I = P × r ×T Simple interest earned over term 2.2
S = P × (1 + rT ) Future value in terms of present value 2.3

P S (1 + rT )
= Present value in terms of future value 2.4

=r ( S P ) − 1 T Rate of return per annum 2.5

=r ' ( S P ) − 1 Rate of return over term of contract 2.6

=T ( S P ) − 1 r holding period / term of investment 2.7

= T (1 + rT )
MD Modified duration of bank bill 2.8

fp = Franking Proportion, 1 for fully franked.

t c = Corporate Tax Rate (always 30%).

t p = Personal Tax Rate.

GrossedUpDiv = CashDiv + FrankingCredit

CashDiv
=
1 − t c . fp
FrankingCredit = GrossedUpDiv. t c . fp
CashDiv
= . t . fp
1 − t c . fp c
PersonalTaxOwing = GrossedUpDiv. t p − FrankingCredit

CashDiv CashDiv
= . tp − . t . fp
1 − t c . fp 1 − t c . fp c
CashDiv
= . �t − t c . fp�
1 − t c . fp p

= GrossedUpDiv. �t p − t c . fp�
 Compound interest Formula

S P (1 + i )
=
T
Future value in terms of present value 2.9

I = S − P = P (1 + i ) − 1
T
 
Interest earned over term 2.10

P S (1 + i )
=
T
Present value in terms of future value 2.11

(1 T )
=i ( S P ) − 1 Compound rate of return per annum 2.12
 
=i ' ( S P ) − 1 Compound rate of return over term of contract 2.13

log e ( S P )
T=
log e (1 + i )
holding period / term of investment 2.14

T
MD = Modified Duration of Single Payment due at time
(1 + i )
2.15
T

m
 im 
i =+
1  −1
the effective annual rate as a function of the annual
rate convertible m times per year
2.16
 m 

 1

im =m × (1 + i ) − 1
m the nominal rate convertible m times per year as a
2.17
 
function of the effective annual rate

the annual effective rate i in terms of the

continuously compounded annual interest
=
i er − 1 rate, r.
2.18

the continuously compounded annual

=r log e (1 + i ) interest rate, r.in terms of the annual 2.19
effective rate i
n m
 in   im  the nominal rate convertible n times per
1 +  =1 +  year as a function of the nominal rate 2.20
 n   m convertible m times per year
A = L + OE
V=D+E
T
Duration = ∑W × t
t =1
t
i.e. Duration = 1*W 1 +2*W 2 + 3*W 3 +4*W 4

∆P  ∆( y ) 
Modified Duration = =− D ×  
P  1+ y 

 (1 + y ) 
Duration of Perpetuity:  
 y 
rtotal = rcapital + rincome
p1 − p0 + c1
rtotal =
p0
Ct
PV(single cash flow) = V0 =
(1 + r)t
C1 1
PV(annuity) = V0 = �1 − �
r (1 + r)T
1
1−
(1+r)T−1
PV(annuity due)= V0 = C1 �1 + � ��
𝑟𝑟

C1
PV(perpetuity with growth) = V0 =
r−g
Present value of growth opportunities:
( EPS1 )
P0 − PVGO =
r
 ( PVGO )  ( EPS1 )
r 1 − =
 P0  P0

Forward rate:

(1 + r0−T )T =
(1 + r0−t )t (1 + rt −T )

𝐶𝐶1 𝐶𝐶2
𝑁𝑁𝑁𝑁𝑁𝑁 = 𝐶𝐶0 + 1
+ +⋯
(1 + 𝑟𝑟) (1 + 𝑟𝑟)2
𝐶𝐶1 𝐶𝐶2
0 = 𝐶𝐶0 + 1
+ +⋯
(1 + 𝑟𝑟𝑰𝑰𝑰𝑰𝑰𝑰 ) (1 + 𝑟𝑟𝑰𝑰𝑰𝑰𝑰𝑰 )2
Ft
Pricebill = V0 = t
�1 + rsimple × �
365
12
reff,annual = �1 + reff,monthly � −1
rAPR,comp monthly
reff,monthly =
12
Pricebond = PV(annuity of coupons) + PV(principal)
C1 1 FaceT
= �1 − � +
reff (1 + reff )T (1 + reff )T
Total earnings NI
EPS = =
number of shares nshares
Dividend per share
PayoutRatio =
Earnings per share
share price Pshare
PE ratio = =
EPS EPS
market capitalisation of equity E
= =
total earnings NI
D E
WACCbefore−tax = rd . + re .
V V
D E
WACCafter−tax = rd . (1 − t c ). + re .
V V
Population mean and variance under different states Sample mean and variance using historical data over
of the world with different probabilities ‘p’ ‘n’ periods
n
∑ni=1(ri ) r1 + r2 + ⋯ + rn
r̅ = �(𝑝𝑝𝑖𝑖 ri ) = 𝑝𝑝1 r1 + p2 r2 + ⋯ + pn rn r̅ 0−n = =
n n
n
i=1 ∑ i=1 [(ri − r̅ )2 ]
n var(r) = σ2 =
n−1
var(r) = σ = �[𝑝𝑝𝑖𝑖 (ri − r̅)2 ]
2

i=1
∑ni=1[(ri − r̅ )2 ]
n
sd(r) = σ = �var(r) = �
sd(r) = σ = �var(r) = ��[𝑝𝑝𝑖𝑖 (ri − r̅)2 ] n−1
i=1
∑ni=1��r1,i − r̅1 ��r2,i − r̅ 2 ��
cov(r1 , r2 ) = σ1,2 =
n n−1
cov(r1 , r2 ) = σ1,2 = ��𝑝𝑝𝑖𝑖 �r1,i − r̅1 ��r2,i − r̅ 2 ��
i=1

cov(r1 , r2 ) σ1,2
correl(r1 , r2 ) = ρ1,2 = =
sd(r1 ). sd(r2 ) σ1 . σ2

σ2p = w12 . σ12 + w22 . σ22 + 2. w1 . w2 . σ1,2

σ1,2 = ρ1,2 . σ1 . σ2

ri = rf + βi (rM − rf )
rP = w1 r1 + w2 r2 + ⋯ + wn rn
βP = w1 β1 + w2 β2 + ⋯ + wn βn
σi,M cov(ri , rm )
βi = =
σM 2 var(rm )
σi sd(ri )
βi = ρi,M . = correl(ri , rm ).
σM sd(rm )