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FIN510 ?Aspects of Corporate Finance

Semester 2, 2016

Maximum Marks: 92 The assignment may be completed using excel functions

where appropriate. You should make reference to the

formula that is applied to your calculations.

(Please show your calculations clearly)

Instructions:

If you use excel spreadsheets, please copy and paste them into MSWord. Once you have completed the assignment, it needs to be lodged in the

Assessments section of Learnline. Your assessments must be lodged using

MSWord. PDF, Excel or paper copies will not be accepted. Required:

1) Make sure your entire assignment can be readily printed on A-4 paper

in portrait (preferred) or landscape format with appropriate page

breaks. Do not have a portion of a ?wide? worksheet expand beyond 1

page.

2) Make sure your name and student number are on every page of your

submission. Ethics:

This is not a group assignment; it is an individual assessment. Your solutions

will likely be different from other students. If portions of your assignment are

copied or very close to copying, all parties will be penalised for copying.

Copying would be considered plagiarism and CDU has strict policies. It is up to

you to keep your assessment confidential. Q. 1 Max Marks: 13

Consider the following bonds:

Bond Coupon Rate (annual

payments)

0%

3%

6%

9% A

B

C

D Maturity (years)

18

12

18

12 Par Value = $1,000

Required:

(a) What is the percentage change in the price of each bond if its yield

to maturity falls from 8% to 7%?

(Marks : 8) (b) Which of the bonds A-D is most sensitive to 1% drop in interest

rates from 8% to 7% and why? Provide an intuitive explanation in

your own words for your answer.

(Marks: 5) Q. 2 Max Marks: 11

When you purchased your house, you took out a 30-year annual paymentmortgage with an interest rate of 7.5%. The annual payment on the mortgage

is $15,000. You have just made a payment & have now decided to pay the

mortgage off by repaying the outstanding balance.

Required:

(a) What is the amount of the loan taken?

(Marks: 4.75) What is the payoff amount if: (b) You have lived in the house for 10 years?

(Marks: 1) (c) You have lived in the house for 19 years?

(Marks: 0.75) (d) You have lived in the house for 10 years and you decide to pay off

the mortgage immediately before the 10th payment is due?

(Marks: 4.5) Q.3 Max Marks : 24

Using the following data for the 90-day bank accepted bills (BABs) and

All Ordinaries Accumulation Index: 2001

2002

2003

2004 BABs

(% p.a.)

5.9

4.3

4.8

5.6 Returns

(BABs)

-0.2712

0.1163

0.1667 All Ordinaries

Accumulation Index

16,701.8

15,351.3

17,786.7

22,690.1 Returns

(All Ords)

-0.0809

0.1586

0.2757 (a) Calculate the expected returns on BABs and the All Ordinaies

Accumulation Index over the last three years.

(Marks: 5.0) (b) Calculate the standard deviation of returns on BABs and the All

Ordinaies Accumulation Index over the last three years.

(Marks: 5.0) (c) Calculate the covariance of returns between BABs and the All

Ordinaies Accumulation Index in the last three years.

(Marks: 4.0) (d) Calculate the correlation coefficient between BABs and the All

Ordinaies Accumulation Index in the last three years.

(Marks: 4.0) (e) Provide an explanation on the covariance of returns and

correlation coefficient between BABs and the All

Ordinaies Accumulation Index in the last three years.

(Marks: 2.0) (f) Calculate the variance of returns on an equally weighted portfolio

in the BABs and All Ordinaries Accumulation Index.

(Marks: 4.0) Q.4 Max Marks : 22.5

(a) The expected return on the market portfolio equals 10%. The

current risk-free rate is 5%. What is the expected return on a

stock with a beta of 0.5?

(5 marks) (b) A particular stock sells for $50. The stock?s beta is 1.5, the riskfree rate is 6%, and the expected return on the market portfolio is

12%. If you forecast that the stock will be worth $57 next year

(assume no dividends), should you buy the stock or not?

(11 marks) (c) You believe that a particular stock has an expected return of 12%.

The stock?s beta is 0.65, the risk-free rate is 5%, and the expected

market risk premium is 8%. Based on this, is your view that the

stock is overvalued or undervalued?

(6.5 marks) Q. 5 Max Marks: 21.5

Consider the following projects: Year

Project A

Project B

Project C 0

-1,000

-6,000

10,000 1

1,000

1,000

1,000 2 3 4 5 1,000

2,000 4,000

3,000 1,000

4,000 1,000

5,000 (a) Calculate the NPV of all projects assuming that that then the cost

of capital is 8%.

(Marks: 6) (b) Calculate the payback period and the discount payback for each

project.

(Marks: 6) (c) Which of the projects would a firm using the payback method

accept if its policy were to accept all projects with a payback

period of 3 years or less?

(Marks: 2) (d) What is the internal rate of return on Project A, B and C?

(Marks: 6) (e) If you could choose only one of these three projects (they are

mutually exclusive), which one would you choose? Why?

(Marks: 1.5)

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