MAF 101 Deakin University Fundamentals of Finance MAF101 Discussion
Question 1 (This question has four parts (a), (b), (c) and (d))
In March 2021, ASX-listed company Computershare Ltd (CPU) raised $835M through a renounceable rights issue.
(a) Is this an example of a primary or secondary market transaction? Justify your classification.
(b) Was this transaction carried out in the money or capital market? Justify your classification by explaining what distinguishes these two markets.
(c) Was Computershare undertaking direct or indirect financing? Justify your answer.
(d) Explain whether Computershare is a surplus or deficit unit in this instance.
(2 + 2 + 2 + 2 = 8 marks)
Question 2 (This question has three parts (a), (b) and (c))
- Given the below quotes for the Japanese Yen and the Malaysian Ringgit, calculate the MYR/JPY cross rate.
- JJ Fashion Wholesalers Ltd, an Indian clothing manufacturer, has a contract to purchase cotton from an Australian supplier to the value of AUD $700,000. How much will this order cost in Indian rupees (INR) if the bank has quoted JJ Fashion an AUD/INR exchange rate of 54.07 – 54.98?
- Would JJ Fashion Wholesalers Ltd prefer the AUD/INR exchange rate to be higher or lower? Why?
USD/JPY 110.38
USD/MYR 0.43.
(3 + 3 + 2 = 8 marks)
Question 3 (This question has four parts (a), (b), (c) and (d))
The following table shows the possible states of the milk market for the coming year, and the returns Dairy Farmers Ltd and Magic Milkshakes Ltd expect under the different milk price scenarios.
|
Milk Market |
Probability |
Dairy Farmers Ltd Return |
Magic Milkshakes Ltd Return |
|
High Milk Prices |
15% |
15% |
-18% |
|
Average Milk Prices |
55% |
8% |
12% |
|
Low Milk Prices |
30% |
-10% |
20% |
- Calculate the expected return of Dairy Farmers Ltd, Magic Milkshakes Ltd and a portfolio with 60% of funds invested in Dairy Farmers Ltd and 40% invested in Magic Milkshakes Ltd.
(b) Calculate the risk of both the individual company expected returns, and the risk of the portfolio mentioned in (a). The correlation between the returns of the two companies is -0.2.
(c) Interpret your calculations in (a) and (b) regarding the expectations for the portfolio, assuming a normal distribution.
(d) Is the investor better off investing in the portfolio, or should he/she pick just one? Justify your recommendation.
(4 + 7 + 3 + 2 = 16 marks)
Question 4 (This question has four parts (a), (b), (c) and (d))
- You have decided to start saving for an extended overseas trip in five years’ time. If you put $800 per month into a savings account at ANZ earning 2.5% p.a. compounding monthly at the beginning of each month, how much will you have after five years?
- How much interest will you have earned over the period?
- What is the effective annual interest rate you will have earnt on your savings?
- You realise you should check out the interest rates on offer at some other banks to see if you can get a better deal. You are disappointed to discover that they all have the same headline rate of 2.5%. However, the NAB rate is compounding daily, while the CBA rate is compounding semi-annually. Of the three savings accounts on offer, which should you choose and why?
(4 + 2 + 2 + 2 = 10 marks)
Question 5 (This question has two parts (a) and (b))
(a)GrowthSec Ltd has raised $10M in debt funding by issuing 100 5 year bonds with a face value of $100,000 each. The bonds pay semi-annual coupons at 6% p.a. If the yield to maturity is 7% p.a., what will be the price of each bond?
- If after one year the bond is trading at a premium, what must have happened to market interest rates? Why has this impacted the bond price?
(5 + 3 = 8 marks)
Question 6 (This question has three parts (a), (b) and (c))
- Your client, Jane Hislop, has an investment portfolio which is 30% invested in Fund 1 and 70% invested in Fund 2. Calculate the beta of her portfolio if:
- The standard deviation of Fund 1 is 8%, the standard deviation of Fund 2 is 16% and the standard deviation of the market is 10%.
- The correlation between Fund 1 and the market is 0.9 and the correlation between Fund 2 and the market is 0.7.
- Explain to Jane how risky her individual fund investments are, and the risk of her portfolio relative to the market.
- Relative to return of the market, what return can she expect from her individual funds, and from her overall portfolio?
(4 + 3 + 3 = 10 marks)
