THE UNIVERSITY OF THE SOUTH PACIFIC Faculty of Business and Economics School of Accounting & Finance AF208 FINANCIAL MANAGEMENT - «Semester 2, 2009 On-Campus Mode ' Mid — semester Examination 11" September, 2009 Time allowed: 2 hours plus 10 minutes reading Instructions to Candidates: 1 2 3. ‘There are four (4) questions with equal weighting. ALL questions are compulsory. This examination has Total Marks of 80 and a weighting of 25%. ‘There are 3 pages in this question paper inchuding the cover page, but excluding the pages of resent/future valie tables, ‘You can use silent, non — programmable calculators, ‘Write your answers in the answer booklet provided, Begin answering each question on a fresh page.Question 1 20 marks) Cen our goal of maximizing the value of the shares conflict with other goals, such as avoiding unethical or illegal behavior? In particular, do you think subjects like customer and employee safety, the environment, and the general good of society fit in this framework, or are they essentially ignored? Try to think of some specific scenarios to illustrate your answer, Question 2 (20 marks) In January 2009, Mike Goods signed « contract to play forthe Sydney Lions that guaranteed him a minimum of $9 955 000. The gitaraifieed payments were $875 000 in 2009, $650 000 in 2010, $800 000 in 2011, $1 million in 2012, $1 million in 2013, and $300 000 in 2014. In addition, the contract calls for $5 330 000 in deferred money payable at the rate of $240 000 per year from 2014 to 2030 and then $125 000 a year from 2031 to 2040. a, If the relevant rate of interest is 8 percent p.a. and all payments are made on 1 July each year, what would the present value of these guaranteed payments be on 1 January 2009? (15 marks) b. [fhe were to receive an equal salary at the end of each of the 5 years from 2009 to 2014, what would his equivalent annual salary be? (5 marks) Question 3 20 marks) Answer the following. Bach part of this question is independent of the others. 2. Given an interest rate of 10% per year, what is the value at the end of year 5 of # perpetual stream of $120 annual payments starting at the end of year 9? (4 marks) b, What is the future value of an ordinary annuity consisting of 10 annual payments of $100 with an interest rate of 9.569% p.a, compounded monthly? (7 marks) Co©. Your job pays you only once a year, for all the work you did over the previous 12 months Today, December 31, you just received your salary of $50,000 and you plan to spend all of it, However, you want to start saving for retirement beginning next year. You have decided that one year from today you will begin depositing 2 percent of your annual salary in an account that will eam 8 percent per year. Your salary will increase at 4 percent per year ‘throughout your career. How much money will you have on the date of your retirement 40 years from today? (9 marks) Ss Question 4 20 marks) ‘VanuaCorp Ltd has 100,000 shares on issue. VanuaCorp Ltd is expected to pay dividends of $2.30, $3.00 and $4.00 in the next three years — Dy, Dz and Ds, respectively. After three years, the dividend is expected to grow at a constant rate equal to 4 percent per year indefinitely. ‘The current rate on government bonds is 5 percent, whereas the expected retum on the market is 10 percent: VanuaCorp’s beta coefficient is 1.40, a Compute the expected stock price of VanuaCorp Ltd’s common stock today. Assume that the investors” required rate of return is equal to the expected retim of VenuaCorp. (15 marks) b. IEVanuaCorp Ltd has a price ~ eamings ratio of 9, what is its forecasted earning? (5 marks) The Endtg -[+£)-4 FY. yn a+ =PV0 +E" PVA =c sant FVA= fares ah ei PV, = eft 0527") as Lae) at} ee 4y =i] ie a+ wy “Ha +a 2 BR) =) On OF =)(0,- ERY 7; fi Formulae E(®) = K+ B ERa) - Ry vip Sax ry ¥, F +5" 3 F Barn Gy