a) 4 marks
Ted Ltd is entitled to receive a cash inflow of $80,000 in 2 years’ time and a further cash inflow of $14,000 in 5 years’ time (in year 5). If the interest rate is 8.5% per annum, how much is this stream of cash inflows worth:
i. today (2 marks)
ii. in 5 years’ time (2 marks)
b) 4 marks
On your 18th birthday your uncle states that he will give you $1,000 each year for 5 years commencing on your 21st birthday. What is the value to you at the time of your 18th birthday of this promised cash flow if the rate of interest is 10%?
c) 6 marks
What is the present value of a perpetual cash inflow of $1,000 received at the end of each year, the first inflow occurring 2 years from now, if the interest rate is 5% per annum? (3 marks) If the above cash inflows can be produced by investing $10,000 in a business this year (year 0) and $6,000 next year (year 1), what is the present value of the investment? (3 marks)
d) 6 marks
Your friend is celebrating her 35th birthday today and wants to start saving for her anticipated retirement at age 65. She wants to be able to withdraw $10,000 from her savings account on each birthday for 10 years following her retirement; the first withdrawal will be on her 66th birthday. Your friend intends to invest her money in the local savings bank, which offers 7% per annum. She wants to make equal, annual payments on each birthday in a new savings account she will establish for her retirement fund.
If she starting these deposits on her 36th birthday and continues to make deposits until she is 65 (the last deposit will be on her 65th birthday), what amount must she deposit annually to be able to make the desired withdrawals on retirement?
Question 2: Interest Rates
a) 5 marks
Ted Bank charges 7% per annum compounded daily (365 days in a year), on its personal loans. Pine Bank charges 7.1% per annum compounded semi-annually. As a potential borrower, which do you prefer?
b) 9 marks
You are considering the purchase of a new home for $700,000. You have a deposit of $100,000. The bank will lend you money at 7% per annum compounded monthly over a period of up to 20 years. If you borrow the required funds over 20 years, what are the monthly repayments? (3 marks) After 2 years, how much do you still owe the bank? (3 marks) What is the interest component of the 25th repayment? (3 marks)
c) 6 marks
Mickey is planning to save $50,000 per quarter for 10 years. Savings will earn interest at an (nominal) interest rate of 12% per annum. Calculate the present value for this annuity if interest is compounded semi-annually.
Question 3: Bonds and Stock Valuation
a) 3 marks
Ted Ltd shares currently sell for $3 per share. The last dividend was $0.2 per share. The dividend is expected to grow at 5%.
i. What is the required return on Ted Ltd? (2 marks)
ii. The dividend yield? (1 mark)
b) 4 marks
Ted Ltd is contemplating selling some 10 year bonds to raise funds for a planned expansion. Ted currently has an issue outstanding with an $8 annual coupon, paid semi-annually. These bonds currently sell for $93.49, a discount relative to their $100 face value, and they have 10 years remaining to maturity. What coupon rate must the new issue have if it is to sell at par when it is issued?