BX2014 Online Mid-term Test 2021
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BX2014 Online Mid-term Test
Written Examination
20 May 2021
Question 1 (Time Value of Money)
Over the past several years, Mr Lee has been able to save regularly. As a result, today he has $14,188 savings. He wants to establish her retirement fund in 5 years and feels he will need $50,000 to do so.
a. If he can earn 12% p.a. on his money, how much will his $14,188 savings be worth in
5 years? Will Mr Lee have $50,000 he needs? If not, how much more money will he need?
(8 marks)
b. Given your answer to (a), how much will Mr Lee have to save each year over the next
5 years to accumulate the additional money, assuming he can earn interest rate at 12% p.a.?
(7 marks)
c. If Mr Lee can afford to save only $2,000 a year, given your answer to (b), will he have $50,000 he needs to establish his retirement fund in 5 years? What expected return Mr Lee should seek to grow his savings of $14,188 to $50,000 in 5 years? If he invests in an investment with 12% return per annum, how long should Mr Lee plan ahead for his savings to achieve his retirement fund?
(5 marks)
d. As a portfolio manager, what possible advice you could suggest Mr Lee to consider to achieve his goal in terms of the time value of money factors/considerations.
(5 marks) (Total: 25 marks)
Question 2 (Stock & Bond Valuation)
Auschamp Ltd. has an outstanding issue of bond with a par value of $1,000, paying 8 percent coupon rate semi-annually. And, the company just paid a dividend of $2.70 per share. The dividends are expected to grow at 5.0 percent for next 2 years. i.e. year 1 and 2, and after year 2, dividends are estimated to grow at 4 percent thereafter indefinitely. Based on market information, government bond’s yield for 10-year maturity is 5 percent, market expected return
is 15 percent, and beta of Auschamp’s stock is 1.5. Assume no market friction and taxes. Required:
(a) The bond of Auschamp Ltd. was issued 25 years ago and has 5 years to maturity. What is the value of the bond assuming 10 percent rate of current interest rate?
(5 marks)
(b) Calculate the Auschamp’s bond price one year later from today (t=1). What are the factors affecting bond’s yield?
(5 marks)
(c) If interest rate is expected to increase, what characteristics and types of the bonds and stocks would have a better performance?
(5 marks)
(d) Assume that the forecasted dividends and the required rate ofreturn are the same one year from now, as those forecasted today. What is the expected intrinsic value ofthe stock one year from now (t=1), just after the dividend has been paid in year one?
(5 marks)
(e) As an investor, you would like to include Auschamp’s securities into your portfolio. However, based on your risk tolerance, you prefer a balance portfolio consisting both Auschamp’s bond and stock. You have a 3 years financial plan to grow your current investment amount by compounding it at targeted 13 percent per annum. Assume the yield curve is flat and the risk perceived by investors on Auschamp’s stock is unchanged. Show your working how you could achieve your goal.
(5 marks)
2022-08-02