BHMH2113 Financial Management (FM)

2021/22 Semester 1

Online test
Instructions:

§ Start at 7:30pm Nov 2 (Tuesday)

§ Submission Deadline: before 8:45p.m., Nov 2, 2021 (Tuesday)
§ You MUST submit the Take-home test online via the submission link under the individual
lecture group Moodle, NOT in-person, NOT email.
§ Answers must be hand-written “clearly” in “black colour pen” on “A4-size” “single-lined
paper”. In case of not following these rules, deduct each for 3 marks out of 100 marks.
§ You are reminded NOT to use computer to type/print out answers nor to write them up
by pencil, MUST be hand-written by pen and submit in one PDF format file to lecture
Moodle group link. In case of not following these rules, deduct 100 marks.
§ Write your student name and student number on first page, deduct each missing item for
3 marks.
§ For any late submission of assignment, 5 marks will be deducted for =<5 min. late; 10 marks
will be deducted for =<10 min. late; 15 marks will be deducted for =<15 min. late, 40 marks
will be deducted for =<30 min. late, 70 marks will be deducted for =<45 min. late, submission
is not accepted for more than 45 min. late.
§ Show all your FM equations and workings for all questions.
§ All answers should be rounded to two decimal places (i.e. abc.xx, def.yy%), except the
question has other requirement.
§ To answer clearly, answer each question (Q1, Q2, …) on a new/separate page.
§ No marks will be given to students who copy from others’ work. The same rule also applies
to those who let others copy their work. In other words, no marks will be given for similar
output.
§ Declaration: Once you submit your work, that means you declare that the scanned copy is
your work. You do it by your own and have not discussed with others.
§ 50 full marks, 3 pages (include this page).

1
Question 1 (14 marks)
Part 1
You want to retire in the next 20 years. A fund manager suggests you to save annually (end-of-year)
in an investment fund for the next 20 years. The fund manager believes your investment can earn 8%
(APR) during the mentioned whole period and you can get one million dollars after 20 years.

Required:
(a) Draw the necessary timeline(s) of the investment period. (2 marks)

(b) Compute the annual deposit each year (use one FM equation). (8 marks)

Part 2
Show the working steps and find the present value equation at year 0 for the following cash
flows below, given the annual interest rate is r: (4 marks)

Year 0 1 2 t-1
…
Cash C C C C C C C C C C

Question 2 (10 marks)

(a) Determine the future value of a single sum of $1,000 deposit today with an annual interest
rate of 20% compounded monthly for 15 years. (5 marks)

(b) If you require an effective annual interest rate of 12% of an investment and the payment is
paid quarterly, what is the quarterly rate (d.yy%)? (5 marks)

Question 3 (12 marks)

Susan purchased a 7-year, 8% corporate bond with semi-annual coupon payment. The par value of
the bond is $1,000 and the purchase price is $669.

Required:
(a) Write down the equation for bond price calculation. (3 marks)

(b) Use the above equation, input all relevant figures to set the equation including the unknown YTM.
(3 marks)

(c) By trial-and-error method to show only one YTM trial working (1?%) and one calculated bond
price (Hint: YTM may be higher than 15% and less than 17%, final answer in % and 2 decimal
places). Then, what’s the new YTM of the bond if an investor decides to purchase and hold it to
maturity? (6 marks)

2
Question 4 (14 marks)
(a) ABC company will pay dividend $20 per share next year and will increase the dividend by
5% per year thereafter. The required return on this stock is 12%, what is the current share price
by Gordon Growth Model? (10 marks)

(b) A high-tech stock has an odd dividend policy. The stock pays no dividend in every odd year,
and a $5 dividend per share in every even year; that is, the dividend pattern in the following years
is $0, $5, $0, $5, $0, $5,… onwards. If the required rate of return is 10% per year, determine the
stock value today. (4 marks)

- End of Test -