Student Number: (enter on the line below)
Student Name: (enter on the line below)
TRIMESTER 1, 2022
Assessment Weight: 50 total marks
• All questions must be answered by using the answer boxes provided in this paper.
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This assessment consists of six (6) questions and is designed to assess your level of knowledge of the key topics covered in this unit.
Question 1 (11 marks)
Four years ago Jonathan had started his saving for his dream holiday in Hawai by putting a lump sum of $20,000 into an investment portfolio. The portfolio has been paying a rate of returns of 11.5% per year, compounding weekly.
a) Calculate how much money Jonathan has accumulated by his investment portfolio now? (5 marks)
ANSWER a): ** Answer box will enlarge as you type
b) If Jonathan would like to have totally $50,000 for his dream holiday and moves all the saving accumulated from current portfolio to another instrument that pays the interest rate of 15.5% per year, compounding annually. How long will it take for Johnathan to reach his target of $50,000 ? (6 marks)
Question 2 (7 marks)
Linda decided to borrow $350,000 from a bank to buy her dream house. She approached Prosperity Bank and they offered Linda the following mortage package: interest rate of 2.45 % per year, weekly repayment, for 30 years.
a) Calculating the amount of weekly repayment Linda needs to make for the mortgage. (4 marks)
b) Linda is considering two investment offers for saving up money to pay off her mortage in 10 years. Investment A offers the rate of return of 9.95% per year, compounding daily. Investment B offers the rate of return of 10% per year, compounding quarterly. Help Linda choose the better investment by calculating Effective Annual Interest Rate (EAR). (3 marks)
Question 3 (7 marks)
Green Valley Ltd currently has the following capital structure:
Debt: $2,500,000 paying 8.5% coupon bonds outstanding with an annual before-tax yield to maturity of 8% on a new issue. The bonds currently sell for $105 per $100 face value.
Ordinary shares: 80,000 shares outstanding currently selling for $65 per share. The firm just paid a $7.50 dividend per share this year. The share has 3% growth rate in dividends, which it expects to continue indefinitely. The firm's marginal tax rate is 30%.
a) Calculate the current total market value of the firm. (2 marks)
b) Calculate the capital structure and weighted average cost of capital (WACC) for the firm. (5 marks)
Question 4 (7 marks)
ABC Investment Ltd has set up a portfolio that comprises Gold shares and Silver shares.
The following information relates to these shares.
Expected return 17% 12%
Standard Deviation of return 15% 5%
Correlation of coefficient - 0.5
a) Determine the expected return of the portfolio if 65% of Gold shares and 35% of Silver shares are combined to form the portfolio. (1 mark)
b) Determine the risk of the portfolio by calculating portfolio standard deviation given the same portfolio combination. (4 marks)
c) For the past 5 years, the portfolio has the consecutive rate of returns of 12%, 15 %, -14%, 13% and 16%. Calculate the geometric average return of this portfolio for the period. (2 marks)
Question 5 (7 marks)
The following data available for Delicious Catering Ltd.
Account Beginning balance Ending Balance Use/source of cash
Accounts payable 47,800 55,500
Inventory 22,600 29,700
Long term debts 85,500 145,600
Common stock 120,500 100,000
Other information: The company just placed an order for 9,000 pieces of pizza bases at a price of $0.5/unit. The supplier offers the credit terms of 1.5/10, net 40.
a) Calculate the net cash and identify the source of cash or the use of cash for each account by filling into the column next to the ending balance (4 marks)
b) What is the discount being offered by the supplier to Delicious Catering Ltd.? How quickly must the company pay to get the discount? If the company takes the discount, how much should they pay? (3 marks)
Question 6 (11 marks)
The following information is available about Green Valley Ltd’s newly issued securities and investment projects under consideration.
- A corporate bond that has 12% annual coupon rate, yield to maturity of 10.5%. The bonds have a face value of $1,000 and will mature 15 years from now.
- Two alternative investment projects, of which the company only has enough capital to undertake either of them.
Year Project A Project B
Initial Investment $88,500 $98,500
1 $45,000 $51,000
2 $39,000 $48,000
3 $33,000 $43,000
4 $31,000 $42,000
a) Compute the value of Green Valley Ltd’s bond. (5 marks)
b) Advise the company’s management on which project the company should choose, using Profitability Index (PI) investment criterion if the required rate of return is 10%. (6 marks)
END OF FINAL ASSESSMENT
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