Financial Analysis and Investment Decisions

Solution 1
a)
Net profit of Fisher Ltd for year 2017-18 = $800,000
Dividend payout ratio = 70%
Growth rate of earnings = 20%
Share of Bradley Lane = 12%
Interest rate p.a. = 10%
Estimated profit of Fisher Ltd for year 2018-19 = 800000 x (1 + 20%)
= $960,000
Dividend to be received in late September 2018 = 800000 x 12% x 70%
= $67,200
Dividend to be received in September 2019 = 960000 x 12% x 70%
= $80,640
Amount to be received in late September 2019 from Dividend = $80,640
Amount required in late September 2019 = $95,000
Remaining amount required = $14,360
Amount which can be consumed in late September 2018 by Bradley Lane
= 67200 - (14360/ (1+ 10%))
= $54,145
b)
Discount rate p.a. = 6%
Cost of Van A = $70,000
Useful life = 3 years
Operating cost p.a. = $7,000
Yea Costs PVF PV

r
0 $ 70,000 1.0000 $ 70,000
1 $ 7,000 0.9434 $ 6,604
2 $ 7,000 0.8900 $ 6,230
3 $ 7,000 0.8396 $ 5,877
$ 88,711
PV of costs = $88,711
PV factor for 3 years at 6% = $2.67
AEC = $33,187.69
Cost of Van B = $90,000
Useful life = 4 years
Operating cost p.a. = $9,000
Year Costs PVF PV
0 $ 90,000 1.0000 $ 90,000
1 $ 9,000 0.9434 $ 8,491
2 $ 9,000 0.8900 $ 8,010
3 $ 9,000 0.8396 $ 7,557
4 $ 9,000 0.7921 $ 7,129
$ 121,186
PV of costs = $121,186
PV factor for 4 years at 6% = $3.47
AEC = $34,973.23
AEC for Van A is less than AEC of Van B. Therefore, Van A should be selected.
c)
Coupon rate p.a. = 13%
Required rate of return p.a. = 19%
Face value = $1,000
Interest amount per annum = 1000 x 13%
= $130
Particulars Year
No.
Amount to
be paid
PVF @
19% PV @ 19%

Interest due on Sep-21 paid in Sep-21 3 $ 130 0.5934 $ 77
Interest due on Sep-22 paid in Sep-22 4 $ 130 0.4987 $ 65
Interest due on Sep-23 paid in Sep-23 5 $ 130 0.4190 $ 54
Interest due on Sep-19 paid in Sep-23 5 $ 130 0.4190 $ 54
Interest due on Sep-20 paid in Sep-23 5 $ 130 0.4190 $ 54
Repayment of Notes 5 $ 1,000 0.4190 $ 419
$ 724
Current value of each Farmers Bank unsecured note = $724
Solution 2
a)
i)
Age today = 42 years
Retirement age = 63 years
Period of investment = 21 years
Period of investment (in months) = 21 x 12 months
= 252 months
Rate of interest p.a. compounding monthly= 4.80%
Monthly interest rate = 4.80% / 12
= 0.40%
Contribution each month = $3,700
Targeted sum = $1,600,000
Fund value at retirement = (3700 / 0.40%) ((1 + 0.40%)^(252) - 1)
= $1,604,515.59
= $1,604,516
She will have $1,604,516 at the age of 63 and she will achieve the targeted sum.
Surplus amount = 1604516 - 1600000
= $4,516

ii)
Age today = 63 years
Pension required till = 87 years
Period of pension = 24 years
Period of pension = 24 x 12 months
= 288 months
Rate of interest p.a. compounding monthly= 4.80%
Monthly interest rate = 4.80% / 12
= 0.40%
Suppose the monthly pension amount be P.
(P / 0.40%)(1 - (1 + 0.40%)^(-288)) = $1,604,515.59
P (170.8172) = $1,604,515.59
P = 1604515.59 / 170.8172
P = $9,393
Monthly pension Joan will receive is $9,393.
b)
i)
Rate of interest p.a. compounding monthly= 4.50%
Monthly interest rate = 4.50% / 12
= 0.375%
Effective annual interest rate = (1 + 0.375%)^12 - 1
= 4.594%