Question 1

Jeremy Kohn is planning to invest in a  10-year bond that pays a  12 percent coupon. The current market rate for similar bonds is 9 percent. Assume semi-annual coupon payments.

What is the maximum price that should be paid for this bond?

Show your workings and round to the nearest dollar.

Question 2

Harvey’s Toymakers is introducing a new line of digital toys, which it expects to grow their earnings at a much faster rate than normal over the next three years. After paying a dividend of $2.00 last year, it does not expect to pay a dividend for the next three years. After that Harvey’s plans to pay a dividend of $4.00 in year 4 and then increase the dividend at a rate of 10 percent in years 5 and 6. What is the present value of the dividends to be paid out over the next six years if the required rate of rate of return is 15 percent?

Show your workings and round your final answer to two decimal places.

Question 3

Your brother (tech-head) insists that depreciation is a source of cash. He cites the fact that depreciation is an ‘add back’ item on the reconciliation of profit to cash flow from operations. Set him straight. Be gentle.

Question 4

Sunshine Ltd. is a privately owned business in Brisbane that operates 100 fruit juice bars in Queensland. It achieved strong results last year, with record total sales of AUD 200 million. Its cost of goods sold (COGS) then was 70% and its owners have indicated that going forward, it will be able to maintain this level of COGS for any new shop that it plans to open.

The strong results were down in large part to the company’s aggressive marketing efforts. This marketing compaign cost the company a total of AUD 200,000 per year, which is shared equally among all of its juice bars. Currently, with the summer coming soon, Sunshine Ltd. is considering opening a new juice bar on UQ Refectory to cater specifically to UQ students and staff. This investment will cost a total of AUD 1.5 million to establish. Sunshine has estimated that it will be able to achieve the same sales revenue for the new bar and operate this bar for 5 years. Sunshine Ltd. is subject to a 30% corporate tax rate. Sunshine Ltd. has asked you, a finance expert, to analyse this potential project.

a)   Estimate the after-tax cash flows for the first 5 years of operations for this new juirce bar project.

b)   If the discount rate is 8.0%, what is the NPV of this project? Should Sunshine accept this project?

Show your workings and round your final answers to nearest dollars.

Question 5

Lorraine Jackson won a lottery. She will have a choice of receiving $25,000 at the end of each year for the next 30 years, or a lump sum today. If she can earn a return of 10 per cent on any investment she makes, what is the minimum amount she should be willing to accept today as a lump-sum payment?

Show your workings and round your final answer to nearest hundred dollars

Question 6

Aquaman Stock has exhibited a standard deviation in share returns of 0.7, whereas Green Lantern Stock has exhibited a standard deviation of 0.8. The correlation coefficient between the share returns is 0.1. What is the standard deviation of a portfolio composed of 70 per cent Aquaman and 30 per cent Green Lantern?

Show your working and round your final answer to four decimal places.

Question 9

Under CAPM assumption, security with only diversifiable risk has an expected return that exceeds the risk-free interest rate. Is this statement true or false? Explain.

You will not be rewarded by only answering “True” or “False” without the correct explanation.

Question 10

The last four years of returns for a stock are as follows:

Year 1 2 3 4