MU - S1 2002 - Introduction to Finance

MU - S1 2002 - Introduction to Finance - EXAM CODES: TITLE...

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Unformatted text preview: EXAM CODES: TITLE OF PAPER: EXAM DURATION: READING TIME: MONASH UNIVERSITY LIBRARY I IIIHHH EH 004093340 I Monash University Semester One 2002 Faculty of Business and Economics AFClltJO, AFC2100 INTRODUCTION TO FINANCE 3 hours 10 minutes THIS PAPER IS FOR STUDENTS STUDYING A T:( tick where applicable) Cl Berwick [J Caulfieid l. m Clayton El Gippsland fl Malaysia El Peninsula El Distance Education D Enhancement Studies B Open Learning D Other (specify) 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 THIRTEEN questions, totalling 100 marks. Begin your answer to each question on a new page in your script book. A formulae sheet is included. CALCULATORS OPEN BOOK SPECIFICALLY PERMITTED ITEMS if yes, items permitted are: Page I of 7 Elton; QUESTION 1 Students must answer ALL parts of this question. (a) Deficit entities can raise debt finance directly by issuing securities or indirectly through financial intermediaries. For each of these two methods, identify the different types of \ securities and debt facilities that are available, in the Australian market, to a large public company. ‘ (b) What are the main activities of a public unit trust? [5+3=8 marks] QUESTION 2 Students must answer any TWO of (a), (b), (c) and (d) and suggest reasons for each trend. Some of the trends that have been observed in the liabilities of the Australian banking sector are: (a) current deposits that do not earn interest have declined; (b) growth in the use of Certificates of Deposit; (0) retail savings deposits have declined; and (d) foreign currency liabilities have grown rapidly. [2+2fl marks] QUESTION 3 Students enrolled in AFC1100 may answer EITHER part (a) 0R part (b) of this question. Students enrolled in AFC2100 must answer part (b) of this question. (3) Identify and explain three (3) characteristics of debt. In the context of a. company, identify and explain the main differences between debt and equity. [6 marks] (b) “Many public unit trusts are unlisted while some are listed. Also, some types of unit trusts are vulnerable to liquidity problems.” (i) What is the significance, for investors, of the difference between listed and unlisted trusts? (ii) Explain why some unit trusts can have liquidity problems. How can such problems be avoided? [3+34 marks] “l Page 2 of 7 QUESTION 4 Students must answer ALL parts of this question. Bill Smiggons purchases a set of football cards for $100 and sells them 4 weeks later for $105. (a) What nominal annual rate of return did Bill receive? (b) What effective annual rate of return did Bill obtain? (c) What annual rate of return did Bill receive expressed as a continuously compounded return? ON 5 [2+2+2=6 marks} QUESTI Students must answer ALL parts of this question. A student is given a choice of three income streams, as follows: (a) $1,500 pa in perpetuity where the first payment will be received in 10 years’ time, OR (b) $6,000 in three years’ time and $6,000 in five years’ time, 0R (0) $8,000 in three months’ time. Which income stream will be chosen assumin a discount rate of 8% a? Show all calculations. g P [2+2+2=6 marks] QUESTION 6 Students enrolled in AFC1100 may answer EITHER part (a) OR part (b) of this question. Students enrolled in AFC2100 must answer part (b) of this question. A homebuyer borrows $250,000 to purchase a unit. Repayments will be paid on a monthly basis over the next 20 years. The current interest rate is nominally 12% pa. (a) If after 5 years the interest rate drops to 11% pa, what will be the monthly repayment for the remainder of the 20 year term? If after 5 years the interest rate drops to 11% pa, and the homebuyer does not decrease the level of repayments, how long will it take to repay the loan? [6 marks] QUESTION 7 Students must answer ALL parts of this question. Distinguish between the following: (a) ordinary shares in a company and. units in a unit trust; 03) primary market and secondary market; (c) fixed charge and a floating charge. [3+3+3=9 marks] Page 3 of 7 QUESTION 8 Students must answer ALL parts of this question. . On 1 July 1999 the market price of a share in Michael Ltd (MCL) was $10.20. On 1 July 2000 MCL’s price was $11.00 and on 1 July 2001 MCL’s price was $9.60. During this two-year period, MCL paid dividends of 20 cents per share in 1999, 25 cents per share in 2000 and 15 cents per I share in 2001. In each year, the ex-dividend date was 1 July. You wish to calculate the rate of return on MCL shares over the period 1 July 1999 to 1 July 2001. (a) Calculate log price relatives for the years ended 1 July 2000 and 1 July 2001. Show all calculations. (b) What average annual rate of return (continuously compounded) has the investor earned during the two—year period ended 1 July 2001? Show all calculations. (0) Without doing any calculations, how would you go about determining MCL’S rate of return during the two-year period ended 1 July 2001, if MCL’s dividend in 2001 was announced on 1 May but the ex—dividend date was on l-June rather than 1 July? Explain. [4+2+3=9 marks] QUESTION 9 Students must answer only one part of this question. Students enrolled in AFC1100 may answer EITHER part (a) OR part (1')). Students enrolled in AFC2100 MUST answer part (b). (a) (i) Compare and contrast a bill of exchange with a promissory note. (ii) Discuss why most issuers of promissory notes tend to be large companies. [8+4=12 marks] (b) (1) Compare and contrast a debenture with a convertible note. (ii) Explain in detail why the interest rate on a convertible note is usually lower than that on a debenture issued by the same company with the same term to maturity. [9+3=12 marks] Page 4 of 7 QUESTION 10 Students must answer only one part of this question. Students enrolled in AFC1100 may answer EITHER part (a) 0R part (b). Students enrolled in AFC2100 MUST answer part (b). (a) You are the shareholder relations manager for Goblin Ltd, which is a listed company. The company has made a 1-for-3 renounceable rights issue at a subscription (“issue”) price of $5.20 per share. The err—rights date is 7 December 2001. The price of Goblin shares at the close of trade on 6 December 2001 was $6.20 per share. When the stockrnarket opened for trading on 7 December the price of Goblin shares immediately fell to $6.00 per share. A Goblin shareholder contacts you to complain that the rights issue has cost her 20 cents per share — equivalent to a loss of about 3.2% (because $0.20 I $6.20 z 0.032). Explain to the shareholder why this is incorrect. What return has she really made? Show your calculations. [8 marks] ABC Ltd issued debentures worth $50 million at the issue date. Today, they have a remaining term to maturity of 5 years 3 months. A coupon payment was paid 3 months ago. Under the trust deed, the coupon rate is 9 per cent per annum. Coupons are paid half yearly. The current market yield for this debenture is 8% per annum. What is the price of the debenture today? Show all calculations. [8 marks] QUESTION 11 ALL students must answer ALL parts of this question. Explain the effect of each of the following factors on the premium of a put option: (a) an increase in the term to maturity (b) a decrease in the volatility of the underlying security (c) a decrease in interest rates [2+2+3=7 marks] QUESTION 12 What is the difference between initial margins and daily margining (marking-to—market)? Explain the role played by the clearing-house in margin requirements. [9 marks] QUESTION 13 “Rodgers and speculators should always use exchange—traded derivatives rather than over-the- counter derivatives. There are many advantages. An obvious advantage is using a standardised financial derivative instrument contract on exchange-traded markets” Critically evaluate this statement. [10 marks] W Page 5 of 7 FORMULA LIST 1+ —— ' [365 S=P(l+i)n S P: (1+i)n 1 i=[(1+r1)(1+r2)...(1+rn)]3 —1 _l+q* 1-- 1+}; . m i=[l+i] —i m C“ ———+ +...+ -C =0 1+r (la-r)2 (1+r)n 0 Formula list continues over the page Page 6 of 7 n _ log[R/(R —- PD] _ log(1+ i) P _ NPCR+S x“ N+1 Ran—S _Do(1+g) r-g Po t0 1—tc Imputation Credit = x Franked Dividend Page '7 of '7 ...
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This note was uploaded on 08/25/2008 for the course AFF 3111 taught by Professor Smith during the Three '08 term at Monash.

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MU - S1 2002 - Introduction to Finance - EXAM CODES: TITLE...

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