# Finance-AW-Q214

## Finance-AW-Q214 Online Services

Question 1

Recently, you just learned that your rich but eccentric Aunt Rosy left you \$1 million in a trust fund. Unfortunately, the fund doesn’t pay out until 10 years later. Apparently, you would wish to have some of the cash today. So you go to one of your local financial institution to see if you can get any money today given your promised future cash inflow.

Your financial institution read over the related papers, and says they won’t give you \$1 million because they have to wait ten years to be repaid. How much would the financial institution be willing to give you now in exchange for the promised cash inflow of \$1 million in the future given the different interest rate applied on this amount?

Required

a. What is the value of the cash flow today if the interest rate is 8% annual compounding?
b. What is the value of the cash flow today is the interest rate is 8% semi-annual compounding?
c. What is the value of the cash flow today is the interest rate is 8% quarterly compounding?
d. What is the value of the cash flow today is the interest rate is 8% monthly compounding?
e. What is the value of the cash flow today is the interest rate is 8% continuous compounding?
f. What is your cost of waiting given the difference of compounding frequency from part a to part e?
g. What kind of conclusion you can draw by observing the compounding frequency and the cost of waiting?

Question 2

In 1880, the Victorian and Queensland governments offered reward for helping to capture the notorious outlaw Ned Kelly. However, the descendants of the two trackers say that they never received the \$50 they were each promised. In 1993, a senior politician stated that, if this were true, the government would be happy to pay the \$100. 120 years later, in 2000, the Aborigines claim \$42 million for each tracker.

Required

a. Please use finance principle explaining why the senior politician was wrong about the \$100.
b. Is the \$42 million claim for each tracker reasonable or not? Please explain.
c. How much was each entitled to? (Please present numerical solutions)

Question 3

You just inherited \$500,000 from your rich Aunt, and wondering how you can make more money with these money. So, you shop around the banks and coming up with the following three rates quoted from three banks

Bank A : 3.4%, compounded daily
Bank B : 3.6%, compounded monthly
Bank C : 3.6%, compounded annually

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## Related Services

Required

a. Which of these three is the best if you are thinking of opening a savings account? (Please present detailed numerical demonstration)
b. Which of these three is the best if they represent loan rates?

Question 4

You and your partner are considering to buy a house. The Dragon Bank would like to lend you \$500,000, to be repaid over a period of 30 years by monthly instalments. The nominal interest rate currently is 5% per annum. The first payment is due at the end of the first month.

Required

a. What is the monthly repayment if the same amount is to be repaid for the period of the loan given the current interest rate?
b. You forecast your annual income, and make a deal with the bank, which you will repay \$2,000 per month for the first 12 months, \$3,000 per month for the 12 months after that, then \$X per month thereafter. The 30 years term of the loan stays, how much is the \$X?
c. Alternatively, you decide to repay \$5,000 per month from the time the money is borrowed until is repaid. How long would it take to repay your loan? What is the amount of your final repayment?

Question 5

As one of the leading investment banks in the world, Goldman Sachs is evaluating its firm value by using the information followed. For the first five years, it is assumed that Goldman Sachs will maintain its existing payout ratio of 13.18% and the current return on equity is 11.15%, the current earnings per share is \$16.87. The cost of equity is 9%. Beyond year 5, it is assumed that competitive pressures and the world economy will bring the return on equity down to 9%, with a growth rate of 4% yields a stable period payout ratio of 55.56%, with the cost of equity in stable growth of 8%.

Required

a. What is the valuation of Goldman Sachs based on the information above?
b. Goldman Sachs was trading at \$187.74 at the time of this analysis in September 2015, what kind of conclusion you can draw from your analysis and the price observed from the market? What investment strategy you can apply?
c. What does the difference between our assumptions about growth and the market’s implied growth rate tell us? (Hint: the implied growth rate can be achieved by estimate the growth rate that will yield the market price. You don’t really need to compute the implied growth rate)

Question 6

You go to The Australian Financial Review on the morning of 26 August 2015, and see the following bond quote, answer the following questions. (Hint: the maturity of this bond left is 2 years)

Issuer
Name ASX Code Coupon Rating
Moody’s Maturity Face Value High Low Last Yield
Heritage Bank HBSHB 7.25%
Quarterly A3 June 2017 100.00 106.40 105.50 106.40 4.3

Required

b. What is the yield to maturity for Heritage Bank Corporate bond based on the last market price?
c. What is the coupon yield of this bond over the next year?
d. If your required rate of return for a bond of this similar risk-class is 5.2%, what value do you place on this Heritage bond? Are you interested in buying this bond?
e. If you purchased this bond for \$106.40 yesterday and the market rate for this bond increased to 5% today, do you have gain or loss? How much is the gain or loss?

Question 7

You just won a radio contest and find out your prize is four tickets to The 10 Sopranos Concert at Astor Theatre in Perth on 25th of September 2015 (Face value of the ticket is \$69 each). Since you are not a fan of The 10 Sopranos, you have no intention to go to the concert. Yet, you find another option: two tickets to your favourite band of Celtic Woman’s The 10th Anniversary World Tour at Perth Arena in September (Face value of the ticket is \$93 each). You did some research, and noticing that on eBay, tickets to The 10 Sopranos are being bought and sold for \$55 apiece; tickets to your favourite Celtic Woman are being out and sold at \$100 each.

Required

a. What is the market value of each option?
b. Is there any profits you can make to execute any possible transactions by comparing these two options?
c. How are you going to evaluate your options?
d. By looking at this real example, how can you link the value principles to the decision faced by the firm?

Question 8

a. “It is well telling companies to maximize net present value, but net present value is an abstract notion. What I tell my managers is that profits are what matters and it’s profits that we are going to maximize.”
b. “It is no good telling me to maximize my share price. I can take a short-run view and maximize today’s price. What I would prefer is to keep it on a gently rising trend.”

Question 9

In the article of “The SEC v. Goldman Sachs_ Reputation Trust and Fiduciary Duties”, Solomon, Morison, and Wilhelm Jr. (2012) describe the controversial involvement of Goldman Sachs in a mortgage-backed securities deal in 2006. When this involvement was revealed, the capital market reacted negatively: Goldman Sachs’ share price closed down more than 13% on the day, and the market value fell overnight about \$10 billion. This was far more than any fine that might have been imposed. Please explain. (Hint: please don’t answer this question from a law perspective, but from a finance perspective) The published article is attached in the Assessment Section for your reference.

Product Code-Finance-AW-Q214