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FINANCE
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Question 1
Current dividend pay-out ratio = 60%
Profit after tax (FY2018) of AAR = $500,000
Net profit after tax (FY2019) = 20% higher
Karina Adams owns % of ordinary shares of AAR = 10%
Cost of furniture = $5000
Total bill amount = $35,000
Market rate of interest = 8% p.a.
Amount she consume in June 2020 =?
Now,
 Total dividend paid in FY2018
= Current dividend pay-out ratio * Profit after tax = 60% * 500000 = $300,000
 Income in the form of dividend for Karina Adams on June 2019
= Total dividend paid in FY2018*% of ordinary shares of AAR = 300,000 * 10% = $30,000
 Total expense in FY2019
= Cost of furniture + Total bill amount = 5000 + 35000 = $40,000
It is apparent from the above that her income in FY 2019 is $30,000 and total expenses would
be $40,000 and hence, she would require additional $10,000 so as to meet the expenditure.
Therefore, she needs to take a loan of $10,000.
 Estimated profit after tax FY2019
= 1.2 * 500,000 = $600,000
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It is essential to note that the dividend pay-out would be same and therefore, the estimated
dividend income of Karina Adams FY2020 = (0.1*0.6*600000) = $36,000
 Interest imposed on the loan in FY2019
= (0.8*10000) =$800
 Amount that would be consumed in June 2020
= Estimated dividend income – Loan repayment amount – Interest amount
= 36,000 – 10,000 – 800 = $25,600
Therefore, $25,600 would be consumed by Karina Adams in June 2020.
Question 2
Cost of house = $750,000
% deposit from FC Bank = 20%
Rate of interest = 7.2% (Compounded monthly) = 0.6% p.m.
Time = 10 years or 120 months
Interest rate on loan increased = 9.6%
(a) New monthly repayment when James pays off loan by agreed date
Equal monthly instalment
Loan = (1-20%) * 750,000 = $600,000
EMI= 600000∗0.006∗( 1.006 )120
( 1.006 )120−1 =$ 7,028.51
The relevant amortization table for the first three years is shown bwlow,
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Working:
1) Closing loan balance = Opening loan balance – Principal repayment
2) Principal repayment = EMI – Interest
3) Interest = Opening loan balance * Interest rate per month
Outstanding loan
(at the end of three year)
= $ 462,687.16
Rate of interest(New) = 9.6% p.a.
=0.8% per month
Remaining time =7 years =
7*12 =84 months
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EMI (new)= 462687.16∗0.008∗( 1.008 )84
( 1.008 )84−1 =$ 7585.87
(b) Computation of extra period added to term of loan
P = $ 462,687.16
EMI $7058.21
Interest rate (New) = 9.6% p.a.
=0.8% per month
7058.21= 462687.16∗0.008∗( 1.008 )N
( 1.008 ) N−1
N=94 months
It is essential to note that the three years had passed which means the pending loan amount
would be discharged in 84 months without any further increase in interest rate and thus, the
extra payment needed 10 months (94 months -84 months).
Question 3
(a) Present value of payment
After required return = $300,000 in a year (6th year onwards)
Expected amount received (Inflows)= $120,000 (in year 4) and $220,000 (in year 5)
Required return = 10% p.a.
PV = FV
( 1+ R ) N =120000
1.14 + 220000
1.15 + 300000
0.1∗1.15
PV =$ 2,081,328
(b) Present value of perpetuity that will start paying two years from now
¿ 220000
(0.1)∗(1.1)2 =$ 1,818,182
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It can be seen from the above that 2nd investment will not be selected because present value of
2nd investment is lesser than the present value of 1st investment (Lasher, 2017).
Question 4
(a) Bond price will be the sum of present values of the future cash flows (sale price and
coupon payment).
Bonds would be matured = April 1, 2022
Bond price=
4000∗
(1− 1
1.056 )
0.05 + 100000
1.056
Bond Price=$ 94,924.31
Bonds would be matured = April 1, 2026
Bond price=
4000∗
(1− 1
1.0514 )
0.05 + 100000
1.0514
Bond Price=$ 90,101.36
(b) It can be seen from the above computation that the changes in bond price with long
maturity period is higher than with the bond price with short maturity period. Further, the
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duration of long maturity bond makes bond price more sensitive with respect to the
interest rate as compared with the bonds with shorter maturity periods (Petty et. al.,
2016).
Question 5
(a) Time line showing expected dividends of Altron
Dt=D0× ( 1+g ) t
The timeline to summarise the above is indicated as follows.
(b) Value of Altron’s share
This can be determined through dividend (computed above) and dividend growth model
given by Gordon.
P0= D0× ( 1+ g )
( RE−g ) = D1
( RE−g )
Dividend growth rate = 5%
Time period = 7 years
Terminal dividends value (After 7 year) ¿ ( 1.77
0.13−0.05 )=$ 22.125
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Present value of shares will be computed by using the dividends and the terminal dividend
value at 13% discount rate.
The price of Altron’s shar
¿ ( 1.62
1.13 )+ ( 1.46
1.132 )+
( 1.31
1.133 )+ ( 1.39
1.134 )+ ( 1.47
1.135 )+ ( 1.58
1.136 )+ ( 1.69
1.137 )+
( 22.125
1.137 )
The price of Altron’s share = $ 16.02
Question 6
Annual equivalent cost (AEC)
Annual equivalent cost (AEC) for first quote
Asset price = $100,000
Annual maintenance cost = $ 3,000
Time period = 3 years
Discount rate = 9% p.a.
AEC=100,000∗
( 0.09
1−1.09−3 ) +3000=$ 42,505.48
Annual equivalent cost (AEC) for second quote
AEC= NPV
Annuity Factor
Cash flow for
year 0
Cash flow for
year1
Cash flow for
year 2
Cash flow for
year 3
Cash flow for
year 4
-$90,000 -$8000 -$9000 $10,000 -$10,000
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NPV =−90,000+ (−8000
1.09 )+ (−9000
1.092 )+
(−10000
1.093 )+ (−10000
1.094 )
NPV =−$ 119.720.7
AEC= 119720.7∗0.09
1−1.09−4
AEC=$ 36,954.03
It can be seen from the above that the 2nd quote comes out to be lesser than the 1st quote
and hence, the preferable quote would be the second one.
Question 7
a) Money spent (extensive feasibility study) = $25,000 which would be sunk cost and hence
not considered in analysis of the project (Brealey, Myers and Allen, 2014).
The incremental cash flows for the project over useful life of four years is estimated below.
Working
 Depreciation ( Annually )=500000
4 =$ 125,000
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 Assuming the derived capital gains will be taxed @30%.
 Salvage value will be taxed @30% considering that the book value has reduced to zero.
 Opportunity cost would be loss of rent considering that the project is not adopted. This
means the company derives the amount in the form of lease rents.
 Amount for termination of the lease rents = 1.1 * 30000 = $33,000 and this amount would
not be taxed and will be considered separately.
(a) Payback period
Recovered amount (first three years) = $438,000
Required amount that needs to be recovered (in fourth year) = 568000 – 438000 = $130,000
Required time so as to recover the remaining amount (fourth year) ¿ ( 130,000
198500 ) =0.65
Hence, the payback period = 3 years + 0.65 years = 3.65 years
(b) Net present value
Cost of capital = 12%
NPV=−C0+∑
t=1
T Ct
( 1+ r )t
NPV = {−568000 } + {( 149500
1.12 ) + ( 139000
1.122 )+ ( 149500
1.123 ) +( 198500
1.124 )}
NPV =−$ 91,146.4
(c) Present value of index
Present value of index= NPV
Original outlay =−$ 91146.4
$ 568000 =−0.16
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(d) It is apparent from the above that the NPV comes out to be negative which implies that
company must not undertake this project. Negative NPV refers that project will not
generate any profit to the company (Damodaran, 2015).
References
Brealey, R.A., Myers, S.C. and Allen, F. (2014) Principles of corporate finance. 2nd ed. New
York: McGraw-Hill Inc, pp. 123
Damodaran, A. (2015) Applied corporate finance: A user’s manual. 3rd ed. New York:
Wiley, John & Sons, pp.178
Lasher, W. R., (2017) Practical Financial Management. 5th ed. London: South- Western
College Publisher, pp. 151
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M., and Nguyen, H. (2016)
Financial Management, Principles and Applications. 6th ed. NSW: Pearson Education, French
Forest Australia, pp. 165
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