Instructions:
• All questions are compulsory in this examination.
• Total 5 questions
• Time allowed: 2 hours
• Write your answers and workings on separate pieces of paper. Please upload to LearnJCU DropBox as a single document.
• Financial calculator/Excel is permitted
1. Michael is 45 and is conscious that he will be retiring in a few years. He has gone to his financial advisor to assist him choose an appropriate investment for his retirement. He is given the following options:
a. An annuity that pays S$150,000 at the end of each of the next 8 years
b. A perpetuity that pays S$150,000 forever with the first payment due 15 years from today
i. What investment should Michael choose if the annual interest rate is 7%? (10 marks)
ii. Does Michael’s decision change if the interest rate decreases to 6%? Explain your reasoning and show your workings. (10 marks)
2. James Cook University decides to issue a bond with a maturity of 5 years and a face value of S$1,000. The coupon for the bond is 8% and interest is paid on a semi-annual basis. What would be the value of the bond if the market interest rate is 9.5%? (20 marks)
3. Punggol Bakery is expected to generate earnings per share (“EPS”) of S$4.80 in the upcoming year. At present, the company has not identified any profitable investment opportunities so it decides to pay out all earnings as dividends. Based on this analysis, Punggol Bakery is currently trading at S$25.55 per share. However, a new Chief Financial Officer is hired and they can source profitable opportunities for the company to pursue. They believe that another bakery can be set-up in Sengkang which will deliver a return of 14.5%. However, in order to fund this Punggol Bakery will have to retain earnings of 40%. By deciding to invest in the new bakery, what effect would this have on Punggol Bakery’s share price? (20 marks)
4. Let’s assume we have a 15 year coupon bond and a 25 year coupon bond. Both have identical coupons at 7.5% per annum paid semi-annually. Currently the market interest rate is 8%. What would be the respective change in each bond price be if interest rates increased to 9%? Please assume that the face value for both bonds is S$100. (20 marks)
5. James Cook University (“JCU”) wishes to set up an endowment to fund research into the financial markets and is approaching wealthy investors for donations. JCU has determined that it needs S$500,000 per year to be able to carry out its research. It has also calculated that the costs of research will increase by 2.5% per annum. The research will commence from the end of Year 3 and if market interest rates are 5% how much does JCU need to raise from investors to set up the endowment? (20 marks)
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