MU - S2 2002 - Introduction to Finance

MU - S2 2002 - Introduction to Finance - inf: MONASH...

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Unformatted text preview: inf: MONASH UNIVERSITY LIBRARY I“ i I! ll ll Hill H / "'“-- 350.1}: Her-.1 IUNS\ : SECTION 00409695 "2’ Monash University Semester Two Examinations 2002 Faculty of Business and Economics EXAM CODES: AFC1100, AFCZ] 00 TITLE OF PAPER: INTRODUCTION TO FINANCE EXAM DURATION: 180 minutes READING TIME: 10 minutes THIS PAPER IS FOR STUDENTS STUDYING A T:( tick where applicable) El Berwick Clayton El Malaysia [:1 Distance Education El Open Learning El Caulfield U Gippsland D Peninsula U Enhancement Studies El Other (specify) 1. Candidates are reminded that they should have no books, notes, paper, calculators, pencil cases or other material in their possession unless their use has been Specifically permitted by the following instructions. Materials on or under your desk or chair or on your person are deemed to be in your possession. EXAM DURATION: 180 minutes writing time Reading time 10 minutes The use of electronic calculators is permitted provided that they are silent, battery-operated and do not have a memory that can retain text or formulae previously keyed in. Candidates should READ ALL INSTRUCTIONS CAREFULLY and attempt ALL questions in your script books. There are ELEVEN questions, totalling 100 marks. Begin your answer to each question on a new page in your script book. A formulae sheet is included. CALCULATORS YES OPEN BOOK U YES SPECIFICALLY PERMITTED ITEMS El YES if yes, items permitted are: Candidates must complete this section if required to answer in this paper STUDENT ID DESK NUMBER SURNAME ......................................................................... "SIGNATURE ............................................ .. OTHER NAMES (in full) ................................................................................................................................ .. g/r/ygz QUESTION 1 From a financial perspective, what are the main legal rights of a shareholder in a . public company? How do these rights differ from those of a holder of marketable debt securities issued by the same company? ' - [6 marks] QUESTION 2 ‘ ‘ Students must answer ALL parts of this question. (a) What are the main financial activities of a life insurance company? (b) In terms of their assets and sources of funds, what are the main differences between banks and finance companies? [3 + 3 = 6 marks] QUESTION 3 Students must answer only one part of this question. Students enrolled in AFC 1100 may answer EITHER part (a) 0R part (b). Students enrolled in AFC 2100 MUST answer part (b). (a) What are the main regulatory responsibilities of the Reserve Bank of Australia? The Australian Prudential Regulation Authority regulates many types of financial institutions. Identify two such institutional types and outline the main objective of prudential regulation. (1)) To survive, private financial institutions must provide services that are valuable to customers. Explain how financial intermediaries provide maturity transformation. Why is this function important? [6 marks] QUESTION 4 Students must answer ALL parts of this question. (a) What is the future value (FV) after 3 years of an investment of $100 that earns interest at 15% pa payable monthly assuming that the interest is reinvested as it is received? (b) An analyst determines that the appropriate discount rate for an investment is 10% pa in the first three years and 12% pa thereafter. The investment returns $200,000 in two years’ time and $200,000 in four years’ time. What is the present value (PV) of these cash flows? . (c) An investment has an initial value of $400 and rises in value to $500 in one year and drops in value to $480 after the following year. What annual continuously compounding rate of return was earned from the investment in each of these years? Page 2 of 8 f/W For part (c) of this question, what average annual continuously compounding rate of return was earned from the investment? For part (c) of this question, what average annual compounding rate of return was earned from the investment? What is the future value (in ten years’ time) of an ordinary annuity of $1,000 pa assuming a discount rate of 12% pa? For part (t) of this question, what is the real future value (in ten years’ time) of this annuity if an annual inflation rate of 3% pa is assumed? If $200,000 is borrowed to purchase a house at 9% pa interest payable monthly and repayments of $2,000 per month, how long will it take to repay the loan? [l+2+1+1+1+2+1+3=12 marks] QUESTION 5 Students must answer only one part of this question. Students enrolled in AFC 1100 may answer EITHER part (3) OR part (b). Students enrolled in AFC 2100 MUST answer part (b). ‘ (a) An investor invests $40,000 for 5 years at 10% pa nominal interest payable quarterly. if he must pay 25% tax on interest, as it is received, what is the value of his investment after 5 years? An investor invests $40,000 for 5 years at 10% pa nominal interest payable quarterly. If he must pay 25% tax on interest payments when they are received, what is the real value of his investment after 5 years assuming an inflation rate of 2% pa? {6 marks} QUESTION 6 The corporate form of business has many advantages over sole traderships and partnerships, and a stock exchange listing substantially reinforces these benefits. Discuss. [8 marks] Page 3 of 8 8W QUESTION 7 Students must answer only one part of this question. . Studlents enrolled in AFCIIOO may answer EITHER part (a) 0R part (b). Students enrolled in AFCZIOO MUST answer part (b). . r — (a) ABC Ltd recently gained shareholder approval for a 1 for 4 rights issue that is _. now about to take effect, as today is the last day of the cum rights trading period. You are an existing shareholder in ABC Ltd and intend to take up your right to subscribe for the new shares at the issue price of $15.60 per share. Today, your existing investment in ABC Ltd amounts to 1000 shares worth a total of$18,000. (i) How many rights will you own on the ex—rights day, and what is the change in worth of your existing (i.e. ignoring the rights) investment? [Show all calculations]. (ii) Explain why the value of your existing investment is giving the appearance of having been adversely affected by the rights issue. (iii) Explain, with the aid of calculations, why you are no worse off as a result of the rights issue. [4 + 2 + 5 = 11 marks] (b) ABC Ltd is a large company listed on the Australian Stock Exchange. As ABC Ltd’s chief financial adviser, you are currently helping the company reach a decision as to the best means of raising new equity capital (i.e. rights issue versus placement) ready for a substantial investment project in the near future. ABC Ltd has not raised any equity capital via either a rights issue or a placement for over a year, and now wants to raise as much as 15% of its existing equity capital. ABC Ltd does not have any time or cost restrictions in relation to raising the additional funds. You also know that ABC Ltd has very good general shareholder relations and that the Company wants to keep them that way. Advise ABC Ltd as to whether to raise the new equity capital via a rights issue or a placement. It should be clear from your advice that you know the precise differences between rights issues and placements, and that you have a detailed knowledge of their respective advantages and disadvantages. [11 marks] QUESTION 8 l. The share price of XYZ Ltd was $20.40, $22.00, and $19.20 on 1 July in each of the a years 2000, 2001, and 2002, respectively. Each of these three dates corresponded to an ex-dividend day, and XYZ Ltd’s dividend per share was 40 cents on 1 July 2000, 50 cents on 1 July 2001, and 30 cents on 1 July 2002. Page 4 of 8 WW You owned 1000 shares before 1 July 2000, and were a member of XYZ Ltd’s dividend reinvestment plan (DRIP) at this time and throughout the investment period 1 July 2000 to 1 July 2002. Under the terms of XYZ Ltd’s DRIP, your annual pro rata dividend entitlements were converted in to new shares at the respective err-dividend prices. For example, you were issued with 20 new shares (rounded to the nearest whole share) on 1 July 2000, as a result of which your total investment in XYZ Ltd was valued at $20,808 on this first ex-dividend date and the start of the investment period. There were no capitalisation changes (i.e. rights issues, bonus issues, etc) during the investment period. (i) How many shares did you own on 1 July 2002? [Show all calculations, rounding all new shares to the nearest whole share]. (ii) Compute the average annual continuously compounded return from your investment over the two-year period 1 July 2000 to 1 July 2002. [Show all calculations] Would you prefer to use a price index or an accumulation index to properly measure your investment’s relative performance? Why? [3+3+2=8marks] QUESTION 9 Students must answer ALL parts of this question. (i) Despite having some common features, there are fundamental differences between an investment in company-issued debt securities and a holding of ordinary shares. Compare and contrast these two types of corporate investment using TWO of the following pointers: I return on investment I length of investment I investment risk. There are many interrelated factors that a company needs to consider before deciding on which debt security to issue. Compare and contrast two specific company-issued debt securities using TWO of the following pointers: I issue costs and interest I security and credit rating - term to maturity [6 6 12 kl + = mar S WW QUESTION 10 Students must answer only one part of this question. . Students enrolled in AFC} 100 may answer EITHER part (a) 0R part (b). Students enrolled in AFC2100 MUST answer part (b). (a) What features of bills of exchange would an experienced debt investor be well , _‘ informed about? Your answer should only discuss those characteristics that are most relevant to (potential) purchasers/discounters of bills of exchange. (b) Bills of exchange and debentures are priced using techniques that reflect their very different terms to maturity. Compare and contrast the methods used to value these two company issued debt securities. Your answer should explain the rationale behind the techniques used. [9 marks] QUESTION 11 Students must answer ALL parts of this question. (i) Provide a precise but non-specific definition of financial derivatives. (ii) Compare and contrast the two general risk-related uses for financial derivatives. (iii) Distinguish between the following three examples of financial derivatives: I Futures contract I Forward contract ' Option contract. It should be especially clear from your answer that you have an appreciation of the different risk exposures underlying the above contracts. [2 +6+ 8 = 16 marks] FORMULA LIST W 1+—1 365 s=Pa+nn S p: (1+i)n l i=fi1+le+Q).n(L+%H;—J _1+q_ f— 1+p - m i=[1+i] -l m EJ-+ C22+...+ C“ —C0=O 1+r (1+fl (1+r)n Formula list continues over the page Page 7 of 8 _ log[R/(R — Pi)] _ log(l + i) . . t . . Imputatlon Cred1t= 1 “t x Franked Dmdend ‘ _ c Page 8 of 8 NV Monash Univers N Semester Two Eiraminations 2002 Faculty of Business and Economics EXAM CODES: AFCIIOO, AFC2100 TITLE OF PAPER: INTRODUCTION TO FINANCE Question 9, Page 5 of the exam paper should be ignored and replaced by the following Question 9. QUESTION 9 Students must answer ALL parts of this question. Despite having some common features, there are fundamental differences between an investment in company-issued debt securities and a holding of ordinary shares. Compare and contrast these two types of corporate investment using EACH of the following pointers: I return on investment - length of investment I investment risk. There are many interrelated factors that a company needs to consider before deciding on which debt security to issue. Compare and contrast two specific company-issued debt securities using only THREE of the following pointers: I issue costs interest rate security credit rating term to maturity. [6 + 6 =12 marks] ...
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MU - S2 2002 - Introduction to Finance - inf: MONASH...

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