Assignment
Question 1 (show all workings)
This question relates to material covered in the Topics 1 to 3. This question addresses the 5th and 6th subject learning outcomes. A thorough understanding of financial mathematics forms the basis of all learning in this subject.
For the following numerical problems, detailed worked answers must be shown. This involves providing a brief description of the problem, formulae used, progressive and final answers. For assignments you are expected to show your workings using the appropriate formula entered using the MS Word formula function.
(a) You wish to go on an overseas family holiday in 15 months' time which will cost $20,000. If your financial institution is offering you 6% pa (compounded monthly), how much do you need to deposit in your account each month in order to save the required amount before you go on holidays?
(b) You have been offered the opportunity to purchase a mining business investment which is priced at $16,000,000. The investment involves some start-up costs in the first years and some mine re-mediation costs after the project is completed in 10 years. The expected cash flows for the project are below and you have an expected rate of return of 15% pa.
End of year Cash flow ($,000)
1 -2,500
2 0
3 5,000
4 6,800
5 7,000
6 7,000
7 9,500
8 5,500
9 2,000
10 -4,500
(i) Based on your required rate of return would you purchase this investment?
(ii) What would the value of these cash flows be at the end of Year 2?
(c) You have commenced work as a certified Financial Planner. Your supervisor has provided the following financial data for a new client Gaye Livermore. The client turned 45 years old today and plans to retire when she turns 60. The client owns a diversified share portfolio which is valued today at $125,000. It is expected that this portfolio will earn (on average) 6% per annum indefinitely. Gaye also has a superannuation account with a balance of $750,000 to which she currently contributes $1,000 per month. The superannuation account is expected to continue to earn 8% per annum. At her retirement your client plans to consolidate her financial holdings and purchase a monthly annuity as a pension to fund her planned lifestyle. Gaye believes she will need to self-fund her retirement until she reaches the age of 90 at which time she would like to have $100,000 remaining to fund any costs not covered by the age pension. During the pension phase of her retirement Gaye will adopt a conservative investment strategy which will return 3% pa (compounded monthly) on her annuity investment.
(i) What will be the value of Gaye's financial assets when she retires at age 60?
(ii) What will be the monthly pension amount that Gaye will receive on her retirement?
Question 2
This question relates to material covered in Topic 1 particularly the Australian taxation system and interest rates. This question addresses the 1st, 2nd, 3rd and 4th subject learning outcomes.
Students are expected to conduct their own research and develop their own opinions about the merits of this topic. There is no single correct answer and students will be marked on the depth of their research, the quality of their arguments (for and against), and their demonstrated understanding of the issues involved in this complex area of financial policy. Please refer to the instructions regarding referencing and the risks of plagiarism in the assignment submission instructions.
(i) Explain the concept of a ‘Real Rate of Interest'. How does the real rate of interest differ from the notional interest rate charged against (or received) by consumers of financial products? Explain the ‘real rate of interest' principle using the example of a client who has $100,000 of their money invested in an ‘at call' bank account which is currently paying 0.5% per annum.
(ii) In Australia there is an ongoing political argument about the value of ‘negative gearing' in the investment housing market. One argument used to support the removal of negative gearing tax deductions is that the practice leads to ordinary Australian taxpayers subsidising (through tax deductions to property owners) the purchases of numerous properties by wealthy Australians and consequently artificially inflates housing prices. Define ‘negative gearing' in the context of the Australian housing market and provide a general evaluation of whether you believe the practice of allowing negative gearing is a good thing for the Australian economy and society.
Question 3 Risk and Return (show all workings)
This question relates to material covered in Topics 1-5. This question addresses the 1st, 2nd and 3rd subject learning outcomes.
(i) Is ‘risk' a bad thing? Define risk in terms of investment.
(ii) Explain the Australian dividend imputation credit system and how it applies in Australia. Include an analysis of how the receipt of franking credits will result in differing returns for Australian resident and international investors.
Below is the monthly share price data for Australian mining giant BHP for the 2018 calendar year.
Date Open Close Dividends (100% Franked)
Jan 29.57 30.2
Feb 30.2 30.5
Mar 30.5 28.21 0.705852
Apr 28.21 30.95
May 30.95 32.79
Jun 32.79 33.91
Jul 33.91 34.86
Aug 34.86 33.21
Sep 33.21 34.63 0.855978
Oct 34.63 32.21
Nov 32.21 30.69
Dec 30.69 34.23
(iii) Calculate the 2018 monthly returns (in both $ and %) for BHP.
(iv) Calculate the average monthly return (%) for BHP.
(v) Using the data provided calculate the annual holding period return (in both $ and % terms) for an international (non-Australian) shareholder of BHP.
(vi) Calculate the annual holding period return (in both $ and % terms) for an Australian resident shareholder of BHP.
(vii) Using the monthly data (below) for the Australian All Ordinaries share price index (Source: https://au.finance.yahoo.com/quote/^AORD) calculate the monthly returns (%) for the Australian share market (MKT) during 2018.
Date Open Close
Jan 6146.5 6117.3
Feb 6117.3 5868.9
Mar 5868.9 6071.6
Apr 6071.6 6123.5
May 6123.5 6289.7
Jun 6289.7 6366.2
Jul 6366.2 6427.8
Aug 6427.8 6325.5
Sep 6325.5 5913.3
Oct 5913.3 5749.3
Nov 5749.3 5709.4
Dec 5709.4 5783.3
(viii) Calculate the average monthly return (%) for the MKT (ALL ORDS).
(ix) Calculate the annual holding period return (in % terms) for the Australian share market (MKT) (as proxied by the All Ords index) during 2018.
(x) Using Excel (XL) prepare a line graph comparing the monthly returns for BHP and the return on the Australian (MKT).
(xi) Calculate the risk for 2018 as measured by standard deviation of both BHP and the MKT.
(xii) According to Yahoo Finance BHP Ltd has a Beta of 1.12. In terms of share investment, define what Beta represents. What does BHP's Beta of 1.12 mean? How risky is it?
(xiii) The average return on the market (MKT) in Australia for the past 10 years has been 9.55% (Source: https://www.asx.com.au). The yield on Australian 10 year treasury bonds is currently 2.29%. Using these as proxies for the Return on Market (MKT) and Risk Free Rate (Rf), combine them with the BHP Beta (above) and calculate the return expected for BHP using the Capital Asset Pricing Model (CAPM).
(xiv) Using the CAPM data from the previous question create an XL scatter plot graph to plot the Security Market Line (SML) using the Risk Free Rate, Return on Market, and BHP as data points.
(xv) Recreate the graph from (xiv) above but this time also include the actual 2018 returns for BHP and the MKT as previously found (using the same beta measures).
(xvi) Based on your CAPM findings construct a portfolio made up of 40% BHP and 60% MKT. Calculate the estimated return and β for this portfolio.
Note: Online submission via Turnitin is required for this assignment. Please see details under Requirements after Marking Rubric.
Rationale
This assessment task will assess the following learning outcome/s:
be able to evaluate and explain the congruence of accounting, finance and treasury functions.
be able to explain and critique the objectives of financial management in contemporary organisations.
be able to critically evaluate mainstream financial theory and concepts.
be able to discuss and evaluate ethical considerations in financial dealings.
be able to demonstrate appropriate communication skills in the context of corporate finance.
be able to demonstrate specific technical competencies and skills in utilising quantitative techniques in financial analysis.
The requirements of this assignment cover up to and including Topic 5 of the Online Learning materials. The assignment is designed to develop your financial analysis and problem solving skills and develop your written communication skills. The questions require you to apply the knowledge and tools covered in the subject topics in order to demonstrate your understanding of the subject content. This assignment has a heavy focus on fundamental financial mathematics which is a critical building block to develop your capacity to understand and resolve complex finance problems.
Marking criteria and standards
Learning outcome
Marking Criteria
High Distinction
Distinction
Credit
Pass
Ability to identify issues in modern finance theory and apply the appropriate finance technique. Understanding of the theoretical issues underpinning financial management. Appropriate and professional referencing of sources. Ability to present your answers neatly, effectively, and appropriately using computers.
Correctly identify underlying financial management issues and all of the potential implications of finance data/results and underlying finance theory. Output and recommendations are well researched, logically argued, and well written in a manner that very effectively conveys the key outcomes and recommendations to the end user. All references and sources acknowledged and professionally presented.
Correctly identify underlying financial management issues and all of the potential implications of finance data/results. A demonstrated and excellent understanding of finance theoretical perspectives. Output and recommendations are well researched and include well written arguments with references and sources acknowledged and output professionally presented
Correctly identify underlying financial management issues and major implications of finance data/results A good understanding of finance theoretical perspectives. Output and recommendations are well written and logically argued with references and sources acknowledged and professionally presented
Identify underlying financial management issue and most implications of the reported finance data/results. A solid understanding of finance theoretical perspectives. Written in clear and concise language with references and sources acknowledged and professionally presented.
Identify underlying financial management issue. Some understanding of theoretical perspectives and capacity to interpret the results of quantitative problem analysis in a manner that adds value to the finance data/results. Academic referencing and formatting at an acceptable standard developed for management
Ability to identify type of finance problem and apply appropriate financial management technique to solving problem. Ability to correctly interpret the results of your analyses and to clearly convey your understanding of the results to the end user
Correctly identify underlying financial management problem and identify and use appropriate finance technique to accurately solve problem. High level ability to interpret the results of quantitative problem analysis in a manner that adds value to the data/results. Use of appropriate formulae with no errors. Excellent standard of formatting enhancing the logical presentation of the data output enhancing comprehension by report end users
Correctly identify underlying financial management problem and identify and use appropriate finance technique to accurately solve problem. Ability to interpret the results of quantitative problem analysis. Use of appropriate formulae with very few errors. High standard of formatting enhancing the logical presentation of the output which aids understanding by report end users
Identify underlying financial management problem and use appropriate finance technique to solve. Capacity to broadly interpret the results of quantitative problem analysis. Use of appropriate formulae with few errors. Consistent formatting that enhances the presentation of the output to improve understanding by report end users
Identify financial management problem and solve using appropriate finance technique. Able to interpret the results of quantitative problem analysis. Largely correct use of appropriate formulae. Largely consistent formatting and presentation of the output to meet professional expectations
Largely identify financial management problem and attempt to solve using appropriate finance techniques. Ability to generally interpret the results of quantitative problem analysis. Mostly correct use of formulae. Acceptable formatting and presentation of the output.
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.