MU - S1 2004 - Introduction to Finance

MU - S1 2004 - Introduction to Finance - ‘1 MONASH...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 4
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 6
Background image of page 7
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ‘1 MONASH UNIVERSITY L BRA Hill “Mill I ll!“ 004094779 Office Use On] Monash University Semester One Examinations 2004 Faculty of Business and Economics EXAM CODES: AFC1100 TITLE OF PAPER: INTRODUCTION TO FINANCE EXAM DURATION: 3 hours READING TIME: 10 minutes ' THIS PAPER IS FOR STUDENTS STUDYING A T:( tick where applicable) Cl Berwick ClaytOn D Malaysia El Distance Education [:1 Open Learning CI Caulfield CI Gippsland El Penin5ula E] 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. 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. Accordingly, calculators with a full alphabetic keyboard are prohibited. Candidates should READ ALL INSTRUCTIONS CAREFULLY and attempt ALL questions in your script books. There are TWELVE questions, totalling 100 marks. Begin your answer to each question on a new page in your script book. A formulae sheet is included. CALCULATORS El YES El N0 OPEN BOOK El YES El N0 SPECIFICALLY PERMITTED ITEMS El YES M NO if yes, items permitted are: Page 1 of 7 RY I QUESTION 1 Identify two regulatory bodies that have important responsibilities in relation to the Australian financial system. Compare and contrast the responsibilities of these two bodies. [6 marks] QUESTION 2 What are the main features of a Treasury note? How does a Treasury note differ from a Treasury bond? [4 marksl QUESTION 3 Alison has been offered three different income streams, from which she must select only one. A discount rate of 9% per annum may be used for all cash flows. Stream 1: Three payments of $5,000 every 2 years, the first payment of which is made 2 years from today. Stream 2: A single payment of $12,000 received in 6 months. Stream 3: $2,500 at the end of each year for 6 years. Which income stream represents the best value for Alison? Show all calculations. _ [6 marks] QUESTION 4 John Howard purchased a second hand car for $5,900 and sold it 30 days later for $6,000. (a) What annual nominal rate of return did John achieve? (b) What was the effective annual rate of return achieved? (c) What was the continuously compounded annual rate of return? [2+2+2=6marks] Page 2 of7 QUESTION 5 On 1St April 2004 Walter Ivers obtained a bank loan for the amount of $240,000 for a period of 15 years. ' (a) (b) (C) If the borrowing rate is initially set at 10% per annum and repayments are made at the end of the month, what monthly payment will repay the loan in full in the prescribed period? If after 5 years the borrowing rate increases to 12% per annum, what monthly payment will be required if the loan is repaid in full in the prescribed period? What proportion of the monthly payment does the interest component represent during the first month after the interest rate has increased to 12% (ie. for month 61)? {3 + 5 +4 = 12 marks] QUESTION 6 (a) (1)) Identify two types of investing institutions that operate in the Australian market. In what ways are the activities of investing institutions similar to the activities of financial intermediaries? What are the essential differences between investing institutions and financial intermediaries? Outline the basic business of merchant banks. How does “investment banking” differ from “merchant banking”? - [6 + 4 = 10 marks] QUESTION 7 (a) (b) (C) What are the main similarities between a debenture and a mortgage? How do they differ? Three years ago, XYZ Ltd issued 8-year debentures with a coupon rate of 10.5% per annum. Each debenture has a face value of $1000. Coupons are paid every 6 months and a coupon is just about to be paid. The current market yield for the debentures is 7% per annum. (i) What is the maximum price you would be prepared to pay for one debenture today? (ii) Assuming that interest rates remain unchanged, what will happen to the price of these debentures once the coming coupon payment has been made? Is the value of the debentures today greater or less than the issue price? Explain your answer. . [4 + 6 + 5 = 15 marks] Page 3 of 7 QUESTION 8 MGX Ltd is a listed company. On 5 May 2004 it announced a 1-for-3 renounceable rights issue at a subscription price of $12.40 per share. The company also announced that funds raised by the issue would be used to establish production facilities for its new anti-obesity drug which recently passed its final clinical trials. The share price rose by 2% after those announcements on 5 May. The ex-rights date is 25 May 2004. The closing price of MGX shares on 24 May was $14 per share. (a) What is a renounceable rights issue? (b) What is the most likely explanation for the 2% share price rise on 5 May after the company’s announcement? - (c) What do you expect the price of the shares to be on 25 May? Show all calculations. (d) What is the value of a right? Show all calculations. (6) Explain why the share price change from 24 May to 25 May does not reflect any change in shareholders’ wealth. [2+2+3+2+4=13 marks] QUESTION 9 Dividend imputation means that shareholders ina company are taxed as if the company was a large partnership. Discuss. [6 marks] QUESTION 10 You are an analyst for an Australian unit trust. The trust has investments in about 100 companies listed on the ASX. The trust’s portfolio manager is considering investing in listed shares in foreign companies. She asks you to provide advice on this idea. What are the advantages and disadvantages of adding foreign investments to the existing portfolio? [6 marks] QUESTION 11 The currency of the nation of Homeland is called the ‘home’ (symbol HLD). As in Australia, foreign currency is generally quoted in Homeland as a rate per unit of home currency (that is, per HLDl). The currency of Foreignland is called the ‘foreign’ (symbol FLN). You have asked the Western Homeland bank for a quote on the 3-month forward rate for ‘foreigns’ and have received the following reply: Spot rates: 3.5220 and 3.5290 3 months’ forward margin: +167l+187 If you agree now to sell FLN 8,750,000 in 3 months’ time, how much ‘home’ currency will you receive? [6 marks] Page 4 Of 7 QUESTION 12 “Hedgers and speculators should always use exchange-traded derivatives rather than over the counter derivatives.” (3) Define the meaning of the terms ‘hedger’ and ‘speculator’. (b) What are the advantages of using exchange-traded derivatives rather than over the counter derivatives? Are there any disadvantages? ' [4 + 6 = 10 marks] Page 5 of 7 FORMULA LIST " f. 1+—-—1 [365] S=PO+D" S P: (1+i)“ i=[(1+rl)(1+r2)...(1+rn)]E —_1 Jicl- l+p . 1T] i=G+JJ —1 In S = Pt:jn I' i=eJ—1 rt=PthPl-l Pt-l —C—‘+ C22+...+ C“ —C0= 1+r (1+r) (1+r)n Page 6 of 7 n : 10g[R/(R — Pi)] log(1+i) P _NPCR+S KR N+1 D 1 PO: 0( +9 I—g . . t ' .. Imputation Cred1t= 1 °t x Franked D1v1dend "' c P=g1— 1. + F_ 1 (1+1)‘1 (1+1)" 1+rtcms] 1 + rcom fl fcomfttsrms. : Scum/terms[ Page 7 of7 ...
View Full Document

This note was uploaded on 08/25/2008 for the course AFF 3111 taught by Professor Smith during the Three '08 term at Monash.

Page1 / 7

MU - S1 2004 - Introduction to Finance - ‘1 MONASH...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online