Question 1 (20 marks)
This question relates to material covered in the Topics 1 to 3. This question addresses the 5th and 6th subject learning outcomes.
For the following numerical problems, detailed answers must be shown. This involves providing a brief description of the problems, formulae used, progressive and final answers to the questions. For assignments you are expected to show your workings using the appropriate formula.
a. Jayne Saxby is considering buying a new house for $500,000 and needs to borrow money from a bank. Currently, ANZ bank offers a 30-year loan. She can choose to pay weekly at an interest rate of 4.55% pa, or fortnightly at 4.75% pa.
(i) Which payment option should Jayne choose? (3 marks)
(ii) If Jayne wants to pay $1,000 a week, how long will it take her to pay off the loan? (3 marks)
b.Jennifer Jean is 30 years old and has just had a baby son. She and her husband want to open a “Bump” savings account with Westpac for their baby and save up to $200,000 by the time he is 18 years old. Westpac’s savings rate is currently at 2.5% pa. Jennifer and her husband want to pay a monthly fixed payment at the end of each month.
(i) If Jennifer and her husband contribute 30% and 70% respectively to the savings, what is Jennifer’s monthly payment? (4 marks).
(ii) When the son is 18 years old, Jennifer and her husband will withdraw $100,000 to pay for his higher education. The rest of the savings will be kept in the son’s account at a deposit rate of 4% for another 10 years. During this 10 years, the son will be allowed to withdraw $1,000 at the beginning of each month for three years right after he turns 18. The rest of the money will be kept in the bank account until he turns 28 and will be used as a gift for the purchase of his own house. Calculate the value of the gift (7 marks).
(iii) If the son wants to buy a house for $800,000 and uses the gift as a deposit for the house, and the loan term is 30 years with monthly repayments at a nominal rate of 4.5% per annum, what will be his monthly repayment amount? (3 marks).
Question 2 (10 marks)
This question relates to material covered in Topics 4 and 5. This question addresses the 5th and 6th subject learning outcomes.
Kai Sayers is holding an investment portfolio including 10-years bonds, 1000 preference and 1000 ordinary shares. His bonds have a total face value of $5,000 and pay coupons on a semi-annual basis at an annual coupon rate of 8%. The market’s required yield to maturity on a comparable-risk bond is 7%. The preference shares recently paid a dividend of $0.55 and have a market rate of return of 11%. The company issuing ordinary shares just announced a net profit of $120 million over its equity of $400 million, 60% of its earning is retained and the rest is to pay dividend at $1.20 per share. The current dividend growth rate is expected to be maintained in the next three years, but then will change to 6% per year indefinitely. The market’s required rate of return on the ordinary shares is 20%.
(i) Use an Excel spreadsheet to draw a timeline showing the cash flows of the ordinary shares (2 marks)
(ii) Calculate the market value of Kai’s investment portfolio (8 marks).
Question 3 (20 marks) The dividend imputation taxation system
This question relates to material covered in Topic 1 particularly the Australian taxation system and dividend imputation credits. This question addresses the 1st, 2nd, and 3rd subject learning outcomes.
Students are expected to conduct their own research and develop their own opinions about the merits of this topic. There is no single correct answer and students will be marked on the depth of their research, the quality of their arguments (for and against), and their demonstrated understanding of the issues involved in this complex area of financial policy.
Write an essay of between 600 and 1,000 words addressing the following issues:
– Identify the major differences between the classical taxation system and the dividend imputation taxation system.
– Use examples with calculations to demonstrate your understanding of how imputation (or franking) credits work.
– Discuss the impacts of the dividend imputation taxation system on domestic and international investors.
Question 4 (45 marks)
This question relates to material covered in Topics 1-5. This question addresses the 1st, 2nd and 3rd subject learning outcomes.
Westpac Banking Corporation (WBC.AX) and Commonwealth Bank of Australia (CBA.AX) are amongst four big banks in Australia. These two companies are having the highest capitalisation within the Financial Sector.
- Find the monthly holding period returns for the 2017/18 financial year for Westpac (WBC), Commonwealth (CBA), and the market (MKT) as proxied by the All Ordinaries index. The monthly holding period return is the return you would receive if you bought an asset on the first day of the month (opening price) and sold it on the last day of the month (closing price). Using Excel, conduct a line graph with all three monthly returns included. The line graph will allow easy comparison of the performance of WBC, CBA and the MKT over the year with percentage (%) return results plotted on the y (vertical) axis and time (month) on the x (horizontal) axis. (Use ‘Close’ rather than ‘Adjusted Close’ for the selling price.) Note: Opening price MUST equal previous month closing price (10 marks).
- For each of the three investment options calculate the average monthly holding period return (3 marks).
- For each of the three investment options calculate the annual holding period return (4.5 marks).
- For each of the three investment options calculate the standard deviation of the monthly rates of return (6 marks).
- Use the scatter plot Excel graph function to plot your results from (3) and (4) above with risk on the x axis and return on the y axis for each of three investments (3.5 marks).
- If the 10 year government bond rate is 2.78% and the long term return on the market as proxied by the ASX is 5.85%, assuming the beta (β) for WBC is 1.26 and for CBA is 1.23, use the Capital Asset Pricing Model (CAPM) to find the expected returns for WBC and CBA (4 marks).
- Construct and graph the Security Market Line (SML) (use a scatter plot and fit the SML line) showing where WBC, CBA and the MKT should lie (5 marks).
- Based on your findings construct a portfolio made up of 40% WBC and 60% CBA. Calculate the estimated return and β for this portfolio (4 marks).
- Based on your understanding of the CAPM and the SML, which of these asset(s) or portfolio(s) would you invest in and which would you not invest in. Explain your choice (5 marks).