Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: daixieit 

Final Examination

FOUNDATIONS OF FINANCE

Question 1 (6 marks)

Answer BOTH parts of this question:

a) You have just purchased a newly issued 90-day bank-accepted bill with a face value of $100,000.  Given you paid exactly $99,000 for the bill, what was your annual nominal required rate of return on debt? (3 marks)

b) An oil drilling company’s resources are being depleted and known reserves are becoming more scarce.  As a result, the company’s earnings and dividends are declining at a rate of 8% each year.  If the company just paid a dividend of $5 per share and the required rate of return on equity is 15% per annum, what is the theoretical price for one share in the company? (3 marks)

Question 2 (9 marks)

After speaking with your friend Tom, who has considerable finance expertise, you have decided that you want to restructure your share portfolio.  At present, you hold a portfolio worth $40,000 that consists only of ABC shares.  The expected return and standard deviation of these shares are 7% p.a. and 23% p.a. respectively.  Tom has suggested that you should sell your ABC shares, invest some fraction of these funds in BCD shares and the rest in CDE shares.  He claims that a portfolio can be constructed that has the same expected return as your investment in ABC, but with significantly less risk.  The expected return and standard deviation of BCD shares are 8% p.a. and 18%p.a. respectively.  The expected return and standard deviation of CDE shares are 4% p.a. and 3 %p.a. respectively.  Given this information and the fact that the correlation of returns on BCD and CDE shares is 0.55, answer the following questions:

a) What weights would you need to hold of BCD shares and CDE shares in order to obtain an expected return equal to that on your portfolio of ABC shares?    (3 marks)

b) What is the standard deviation of a portfolio comprising BCD and CDE shares in the weights calculated in a). (3 marks)

c) Calculate the minimum variance portfolio weights for a portfolio comprising stocks BCD and CDE. (3 marks)

Question 3 (8 marks)

You work as an investment advisor for a manufacturing firm.  Your boss has just provided you with details of an investment opportunity available to the company, and has asked to you evaluate it.  Details of the investment’s cash flows are tabulated below:

In addition to cash flow information, you have also been provided with the details below.

· The investment opportunity available to the firm is in a different industry to the firm’s normal operations;  

· The industry in which the investment opportunity is available is considered 40% less risky than the firm’s industry;

· The firm’s beta is 1;

· The risk-free rate is 5% p.a; and,

· The expected return on the market is 10% p.a.

Given this information, should your firm undertake the investment?  What is your reasoning behind making your recommendation?

Question 4 (9 marks)

Question

Answer ALL parts of this question:

a) You observe that the ASX 200 Index is at a level of 2,900 and that the SPI futures contract expiring exactly 3 months from today is at a level of 2,915.  Given that the riskless rate of interest is 6.5% p.a., what is the implied dividend yield on the ASX 200 stock portfolio if no costless arbitrage opportunities exist in the marketplace? (3 marks)

b) Calculate the theoretical price of a wheat futures contract with 6 months to expiry given the spot price of wheat is 600 cents per bushel and the risk free rate and cost of carry are 6% p.a. and 4% p.a. respectively.  (3 marks)

c) What are the key differences between forward contracts and futures contracts? (3 marks)

Question 5 (12 marks)

Answer ALL parts of this question:

a) What are the differences between an American call option and a European put option?  (3 marks)

b) Suppose that European call and put options on Coca-Cola Amatil with exercise prices of $10.00 and six months to maturity are selling for $1.25 and $0.75 respectively, that the Coca Cola Amatil stock price is $10 and the riskless rate of interest is 8% p.a.  Does the put-call parity hold in this instance?  Indicate what strategy you would implement in taking advantage of any arbitrage opportunity and the profit you would earn from your strategy (Note: You are NOT required to provide a table outlining the initial and terminal values of your strategy)  (5 marks)

c) It is February 23 and you own one contract (over 100 shares) of May-$2.25 Qantas call options.  The current Qantas share price is $2.55 and the options are selling for $0.35.  You have now decided to cash out of the position.  How much is your total payoff if you exercise the option?  How much will you receive in total if you sell to close? (4 marks)

Question 6 (16 marks)

Question

Your firm makes a sale to a Japanese customer.  The sale price is 100 million Yen payable on 28 February next year.  The forward rate for the end of February is 100 (i.e. 1 Australian Dollar is worth 100 Japanese Yen).  Given this information, answer BOTH the following questions:

a) How can the firm lock in the Australian $1 million sale price? (8 marks)

b) How can the firm take advantage of any decreases in the exchange rate and also ensure that it receives at least Australian $1 million? (8 marks)

Your answer to both questions should indicate the position you would take as well as illustrate what will happen if, in February, the Japanese Yen / Australian Dollar exchange rate turns out to be 150 or 50.