Trimester 3, 2018 FIN700 Financial Management Assignment

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KOI
Trimester 3, 2018
FIN700 – Financial Management
ASSIGNMENT– GROUP
Due date: Submit to your Tutor by the start of your Tutorial in Week 9, viz.,
when held, from Monday, 14 January to Saturday, 19 January, 2019.
Keep a soft copy in case of misadventure.
Penalties for late lodgment, as per the Subject Outline, will be strictly applied.
This Assignment consists of 4 problems, each involving
calculations, and in some cases recommendations.
You are required to complete this Assignment in Groups of 2 or 3 or 4 people.
**Groups of 1 or more than 4 persons will incur a penalty of 5 marks out of 30%.**
All members of the Group should come from the same Tutorial class. You may
consult and discuss the Assignment topic with others, but you must write up your
answers yourselves. Penalties for copying and plagiarism are severe.
You should follow the following typing conventions:
 Answers to be typed, in the space provided after each question
 If additional pages are required, use the blank pages at the end.
 Times New Roman font (at minimum , 12 pitch), 1.5 line spacing; and
 Left and right margins to be at least 2.5 cm from the edge of the page.
Research, Referencing and Submission
You should quote any references used at the end of each question.
Use Harvard referencing! See http://en.wikipedia.org/wiki/Harvard_referencing
As this is a calculations problem, there is no need to submit via TURNITIN.
Do not submit this page. Submit page 2 onwards, along with KOI Group Assignment Cover Page& Mark’g Rubric.
Marking Guide
The Assignment will be scored out of 70%, with 20 marks also awarded for
quality of Recommendations and 10 for Presentation, in line with the rubric
in the Subject Outline. This mark will be converted to a score out of 30%.
Dr Mervyn Fiedler, Subject Co-ordinator, FIN 700. 6 December, 2018.
T318 - FIN700 – Financial Management – Group Assignment Page 1 of 12

______________________________________________________________________
***NOTE:When submitting Assignment, please submit from this page onwards,
with a KOI Group Assignment cover page in front,
and a FIN700 Marking Rubric at the back.***
Trimester T318
FIN700
GROUP ASSIGNMENT
Students: Please complete the following before submitting for marking.
Group members
Student No. Student Name Percentage Contribution to Assignment Signature
1. ………………………………………………………………………………………………
2. ………………………………………………………………………………………………
3. ………………………………………………………………………………………………
4. ………………………………………………………………………………………………
Tutor:
Please circle one name:
Dr Mervyn Fiedler; Ms Ruhina Karim; Mr Nishith Panthi;
Tutorial Day …………………………………………………and Time ……………………….
This Assignment consists of four questions. All questions must be answered.
Please answer all questions in the spaces provided after each question.
Two extra pages are included at the end of the Assignment. If more pages are
required, please copy (or extend) page 14.
T318 - FIN700 – Financial Management – Group Assignment Page 2 of 12

QUESTION `1. [6 + 6 + 4 = 16 Marks.]
a) This is a two period certainty model problem.
Assume that Dorothy Pix has a sole income from Oz Electronics Ltd in which she
owns 15% of the ordinary share capital. Currently, she has no savings.
In early December, 2018, Oz Electronics Ltd reported net profits after tax of
$600,000 for the last accounting year, 2017-18 (1 October, 2017 to 30
September, 2018), and announced it expects net profits after tax for the current
accounting year, 2018-19, to be 25% higher than last financial year’s figure. The
company has a dividend payout ratio of 60%, which it plans to continue, and will
pay the annual dividend for 2017-18 in late-January, 2019, and the dividend for
2018-19 in late-January, 2020.
In late-January, 2019, Dorothy wishes to spend $84,000, which will include the
cost of a new car. How much can she consume in late-January, 2020 if the
capital market offers an interest rate of 8% per year?
T318 - FIN700 – Financial Management – Group Assignment Page 3 of 12

b) This is an annual equivalent benefits problem.
Fast Track Ltd, which operates a delivery service, requires a new van. It has
received two quotes. Van M will cost $60,000 now, has a three year life and will
cost $6,000 a year to operate. Van N will cost $90,000 now, has a four year life
and will cost $8,000 a year to operate. Sales in the first year under both vans are
expected to be $50,000, and will increase by 10% a year over the following 2
years with Van M and 15% a year over the following 3 years with Van N. The
relevant discount rate is 7% per annum. Ignoring depreciation and taxes,
calculate the AEB for each. Which van should the company purchase and why?
c) This question relates to the valuation of interest-bearing securities.
Because of the drought, Country Bank Ltd has experienced large losses on its
rural loan portfolio and is unable to pay its next three annual interest payments
on its recent issue of unsecured notes. The notes are of $10,000 face value
each, mature in January, 2024 and bear a yearly interest coupon payment of 9%.
The Bank paid the interest due this month (January, 2019), and following a
meeting of creditors, arranged to defer payment of the next three interest
coupons due in January 2020, January, 2021 and January, 2022 respectively.
Under the arrangement with creditors, the bank will pay the remaining interest
coupons (due in January, 2023 and January, 2024) on their due dates, and pay
the three deferred coupons (without interest) along with the normal final interest
payment and face value of the notes on the maturity date. Country Bank Ltd’s
notes are now seen as risky, and require an 18% per annum return.
REQUIRED: Calculate the current value of each unsecured note issued by
Country Bank Ltd.
T318 - FIN700 – Financial Management – Group Assignment Page 4 of 12

QUESTION 2. [(4 + 6) + (2 + 2 + 3 + 3) = 18 Marks]
a) This question relates to the time value of money and deferred annuities.
Lisa Li is 36 years old today and plans to retire on her 60th birthday. With future
inflation, Lisa estimates that she will require around $1,900,000 at age 60 to
ensure that she will have a comfortable life in retirement. She is a single
professional and believes that she can save $4,000 at the end of each month,
starting in one month’s time and finishing on her 60th birthday.
i) If the fund to which she contributes her monthly saving of $4,000 earns
3.9% per annum, compounded monthly (after tax), how much will she
have at age 60? Will she have achieved her targeted sum? What is the
surplus or the shortfall?
Annuity due
FV= C{(1+i)n -1}
i
C= Payment or deposit amount
i= interest rate (as a decimal)
n= number of years
FV= future value
if follow the per month annuity
F.V. 4000{(1+.00325)288-1} = 1902640
0.00325
ii) When she reaches age 60, Lisa plans to travel extensively, and wishes to
draw from her accumulated fund a monthly pension of $12,000, starting
one month after her 60th birthday, and ending on her 65th birthday. She
then wishes to draw a monthly pension starting one month after her 65th
birthday, and ending on her 90th birthday, after which she expects that the
fund will be fully expended.
If, after she reaches age 60, the fund continues to earn the above return
of 3.9% per annum, compounded monthly, calculate the monthly pension
Lisa will be able to draw from the fund, starting one month after her 65th
birthday. Assume that the fund balance reduces to zero as planned after
the last pension payment is drawn on her 90th birthday.
T318 - FIN700 – Financial Management – Group Assignment Page 5 of 12

Monthly
pension of
$12000
Particular Time period
Amount to
be
available
at 60
Years
compounding
Amount to
be
available
at 65
Years
5 1902640 (1.00325)60 2311568.28
12 12000*60 720000 720000
Monthly
pension
Required to
be calculated
25
12 X*300 1182640 1591568.28
Monthly
pension
required to
be withdrawn
3942.133 5305.228
QUESTION 2 continued.
b) This question relates to loan repayments and loan terms.
Samuel and Sandra Sharp wish to borrow $600,000 to buy a home. The loan
from the Highway Bank requires equal monthly repayments over 20 years, and
carries an interest rate of 5.1% per annum, compounded monthly. The first
repayment is due at the end of one month after the loan proceeds are received.
You are required to calculate the following.:
i) The effective annual interest rate on the above loan (show as a
percentage, correct to 3 decimal places).
Effective interest rate formula {1+(i/n)12-1}
{1+(.051/12)12-1} 5.22%
T318 - FIN700 – Financial Management – Group Assignment Page 6 of 12

ii) The amount of the monthly repayment (consisting of interest and principal
repayment components) if the same amount is to be repaid every month
over the 20-year period of the loan.
SR.NO. Opening
Balance (in $) EMI (in $)
Principal
amount (in
$)
Interest
(in $)
Closing
Balance(in $)
1 600000.000 3992.946 1442.946 2550.000 598557.054
2 598557.054 3992.946 1449.079 2543.867 597107.975
3 597107.975 3992.946 1455.237 2537.709 595652.738
4 595652.738 3992.946 1461.422 2531.524 594191.317
5 594191.317 3992.946 1467.633 2525.313 592723.684
6 592723.684 3992.946 1473.870 2519.076 591249.813
7 591249.813 3992.946 1480.134 2512.812 589769.679
8 589769.679 3992.946 1486.425 2506.521 588283.254
9 588283.254 3992.946 1492.742 2500.204 586790.512
10 586790.512 3992.946 1499.086 2493.860 585291.426
11 585291.426 3992.946 1505.457 2487.489 583785.968
12 583785.968 3992.946 1511.856 2481.090 582274.113
13 582274.113 3992.946 1518.281 2474.665 580755.832
14 580755.832 3992.946 1524.734 2468.212 579231.098
15 579231.098 3992.946 1531.214 2461.732 577699.884
16 577699.884 3992.946 1537.721 2455.225 576162.162
17 576162.162 3992.946 1544.257 2448.689 574617.906
18 574617.906 3992.946 1550.820 2442.126 573067.086
19 573067.086 3992.946 1557.411 2435.535 571509.675
20 571509.675 3992.946 1564.030 2428.916 569945.645
21 569945.645 3992.946 1570.677 2422.269 568374.968
22 568374.968 3992.946 1577.352 2415.594 566797.616
23 566797.616 3992.946 1584.056 2408.890 565213.559
24 565213.559 3992.946 1590.788 2402.158 563622.771
25 563622.771 3992.946 1597.549 2395.397 562025.222
26 562025.222 3992.946 1604.339 2388.607 560420.883
27 560420.883 3992.946 1611.157 2381.789 558809.726
28 558809.726 3992.946 1618.005 2374.941 557191.721
29 557191.721 3992.946 1624.881 2368.065 555566.840
30 555566.840 3992.946 1631.787 2361.159 553935.053
31 553935.053 3992.946 1638.722 2354.224 552296.331
32 552296.331 3992.946 1645.687 2347.259 550650.644
33 550650.644 3992.946 1652.681 2340.265 548997.964
34 548997.964 3992.946 1659.705 2333.241 547338.259
35 547338.259 3992.946 1666.758 2326.188 545671.501
T318 - FIN700 – Financial Management – Group Assignment Page 7 of 12

36 545671.501 3992.946 1673.842 2319.104 543997.658
37 543997.658 3992.946 1680.956 2311.990 542316.703
38 542316.703 3992.946 1688.100 2304.846 540628.603
39 540628.603 3992.946 1695.274 2297.672 538933.328
40 538933.328 3992.946 1702.479 2290.467 537230.849
41 537230.849 3992.946 1709.715 2283.231 535521.134
42 535521.134 3992.946 1716.981 2275.965 533804.153
43 533804.153 3992.946 1724.278 2268.668 532079.874
44 532079.874 3992.946 1731.607 2261.339 530348.268
45 530348.268 3992.946 1738.966 2253.980 528609.302
46 528609.302 3992.946 1746.356 2246.590 526862.945
47 526862.945 3992.946 1753.778 2239.168 525109.167
48 525109.167 3992.946 1761.232 2231.714 523347.935
49 523347.935 3992.946 1768.717 2224.229 521579.218
50 521579.218 3992.946 1776.234 2216.712 519802.983
51 519802.983 3992.946 1783.783 2209.163 518019.200
52 518019.200 3992.946 1791.364 2201.582 516227.836
53 516227.836 3992.946 1798.978 2193.968 514428.858
54 514428.858 3992.946 1806.623 2186.323 512622.235
55 512622.235 3992.946 1814.302 2178.644 510807.933
56 510807.933 3992.946 1822.012 2170.934 508985.921
57 508985.921 3992.946 1829.756 2163.190 507156.165
58 507156.165 3992.946 1837.532 2155.414 505318.633
59 505318.633 3992.946 1845.342 2147.604 503473.291
60 503473.291 3992.946 1853.185 2139.761 501620.106
61 501620.106 3992.946 1861.061 2131.885 499759.046
62 499759.046 3992.946 1868.970 2123.976 497890.076
63 497890.076 3992.946 1876.913 2116.033 496013.162
64 496013.162 3992.946 1884.890 2108.056 494128.272
65 494128.272 3992.946 1892.901 2100.045 492235.372
66 492235.372 3992.946 1900.946 2092.000 490334.426
67 490334.426 3992.946 1909.025 2083.921 488425.401
68 488425.401 3992.946 1917.138 2075.808 486508.263
69 486508.263 3992.946 1925.286 2067.660 484582.977
70 484582.977 3992.946 1933.468 2059.478 482649.509
71 482649.509 3992.946 1941.686 2051.260 480707.823
72 480707.823 3992.946 1949.938 2043.008 478757.886
73 478757.886 3992.946 1958.225 2034.721 476799.661
74 476799.661 3992.946 1966.547 2026.399 474833.113
75 474833.113 3992.946 1974.905 2018.041 472858.208
76 472858.208 3992.946 1983.299 2009.647 470874.909
77 470874.909 3992.946 1991.728 2001.218 468883.182
78 468883.182 3992.946 2000.192 1992.754 466882.989
T318 - FIN700 – Financial Management – Group Assignment Page 8 of 12

79 466882.989 3992.946 2008.693 1984.253 464874.296
80 464874.296 3992.946 2017.230 1975.716 462857.066
81 462857.066 3992.946 2025.803 1967.143 460831.262
82 460831.262 3992.946 2034.413 1958.533 458796.849
83 458796.849 3992.946 2043.059 1949.887 456753.790
84 456753.790 3992.946 2051.742 1941.204 454702.047
85 454702.047 3992.946 2060.462 1932.484 452641.585
86 452641.585 3992.946 2069.219 1923.727 450572.366
87 450572.366 3992.946 2078.013 1914.933 448494.352
88 448494.352 3992.946 2086.845 1906.101 446407.507
89 446407.507 3992.946 2095.714 1897.232 444311.793
90 444311.793 3992.946 2104.621 1888.325 442207.172
91 442207.172 3992.946 2113.566 1879.380 440093.607
92 440093.607 3992.946 2122.548 1870.398 437971.059
93 437971.059 3992.946 2131.569 1861.377 435839.490
94 435839.490 3992.946 2140.628 1852.318 433698.861
95 433698.861 3992.946 2149.726 1843.220 431549.136
96 431549.136 3992.946 2158.862 1834.084 429390.273
97 429390.273 3992.946 2168.037 1824.909 427222.236
98 427222.236 3992.946 2177.251 1815.695 425044.985
99 425044.985 3992.946 2186.505 1806.441 422858.480
100 422858.480 3992.946 2195.797 1797.149 420662.682
101 420662.682 3992.946 2205.130 1787.816 418457.553
102 418457.553 3992.946 2214.501 1778.445 416243.051
103 416243.051 3992.946 2223.913 1769.033 414019.138
104 414019.138 3992.946 2233.365 1759.581 411785.774
105 411785.774 3992.946 2242.856 1750.090 409542.917
106 409542.917 3992.946 2252.389 1740.557 407290.529
107 407290.529 3992.946 2261.961 1730.985 405028.567
108 405028.567 3992.946 2271.575 1721.371 402756.993
109 402756.993 3992.946 2281.229 1711.717 400475.764
110 400475.764 3992.946 2290.924 1702.022 398184.840
111 398184.840 3992.946 2300.660 1692.286 395884.179
112 395884.179 3992.946 2310.438 1682.508 393573.741
113 393573.741 3992.946 2320.258 1672.688 391253.484
114 391253.484 3992.946 2330.119 1662.827 388923.365
115 388923.365 3992.946 2340.022 1652.924 386583.343
116 386583.343 3992.946 2349.967 1642.979 384233.376
117 384233.376 3992.946 2359.954 1632.992 381873.422
118 381873.422 3992.946 2369.984 1622.962 379503.438
119 379503.438 3992.946 2380.056 1612.890 377123.382
120 377123.382 3992.946 2390.172 1602.774 374733.210
121 374733.210 3992.946 2400.330 1592.616 372332.880
T318 - FIN700 – Financial Management – Group Assignment Page 9 of 12

122 372332.880 3992.946 2410.531 1582.415 369922.349
123 369922.349 3992.946 2420.776 1572.170 367501.573
124 367501.573 3992.946 2431.064 1561.882 365070.509
125 365070.509 3992.946 2441.396 1551.550 362629.113
126 362629.113 3992.946 2451.772 1541.174 360177.340
127 360177.340 3992.946 2462.192 1530.754 357715.148
128 357715.148 3992.946 2472.657 1520.289 355242.491
129 355242.491 3992.946 2483.165 1509.781 352759.326
130 352759.326 3992.946 2493.719 1499.227 350265.607
131 350265.607 3992.946 2504.317 1488.629 347761.290
132 347761.290 3992.946 2514.961 1477.985 345246.329
133 345246.329 3992.946 2525.649 1467.297 342720.680
134 342720.680 3992.946 2536.383 1456.563 340184.297
135 340184.297 3992.946 2547.163 1445.783 337637.134
136 337637.134 3992.946 2557.988 1434.958 335079.146
137 335079.146 3992.946 2568.860 1424.086 332510.287
138 332510.287 3992.946 2579.777 1413.169 329930.509
139 329930.509 3992.946 2590.741 1402.205 327339.768
140 327339.768 3992.946 2601.752 1391.194 324738.016
141 324738.016 3992.946 2612.809 1380.137 322125.207
142 322125.207 3992.946 2623.914 1369.032 319501.293
143 319501.293 3992.946 2635.066 1357.880 316866.227
144 316866.227 3992.946 2646.265 1346.681 314219.963
145 314219.963 3992.946 2657.511 1335.435 311562.452
146 311562.452 3992.946 2668.806 1324.140 308893.646
147 308893.646 3992.946 2680.148 1312.798 306213.498
148 306213.498 3992.946 2691.539 1301.407 303521.959
149 303521.959 3992.946 2702.978 1289.968 300818.982
150 300818.982 3992.946 2714.465 1278.481 298104.516
151 298104.516 3992.946 2726.002 1266.944 295378.515
152 295378.515 3992.946 2737.587 1255.359 292640.927
153 292640.927 3992.946 2749.222 1243.724 289891.705
154 289891.705 3992.946 2760.906 1232.040 287130.799
155 287130.799 3992.946 2772.640 1220.306 284358.159
156 284358.159 3992.946 2784.424 1208.522 281573.735
157 281573.735 3992.946 2796.258 1196.688 278777.477
158 278777.477 3992.946 2808.142 1184.804 275969.336
159 275969.336 3992.946 2820.076 1172.870 273149.259
160 273149.259 3992.946 2832.062 1160.884 270317.198
161 270317.198 3992.946 2844.098 1148.848 267473.100
162 267473.100 3992.946 2856.185 1136.761 264616.914
163 264616.914 3992.946 2868.324 1124.622 261748.590
164 261748.590 3992.946 2880.514 1112.432 258868.076
T318 - FIN700 – Financial Management – Group Assignment Page 10 of 12

165 258868.076 3992.946 2892.757 1100.189 255975.319
166 255975.319 3992.946 2905.051 1087.895 253070.268
167 253070.268 3992.946 2917.397 1075.549 250152.871
168 250152.871 3992.946 2929.796 1063.150 247223.075
169 247223.075 3992.946 2942.248 1050.698 244280.827
170 244280.827 3992.946 2954.752 1038.194 241326.074
171 241326.074 3992.946 2967.310 1025.636 238358.764
172 238358.764 3992.946 2979.921 1013.025 235378.843
173 235378.843 3992.946 2992.586 1000.360 232386.257
174 232386.257 3992.946 3005.304 987.642 229380.952
175 229380.952 3992.946 3018.077 974.869 226362.875
176 226362.875 3992.946 3030.904 962.042 223331.972
177 223331.972 3992.946 3043.785 949.161 220288.187
178 220288.187 3992.946 3056.721 936.225 217231.465
179 217231.465 3992.946 3069.712 923.234 214161.753
180 214161.753 3992.946 3082.759 910.187 211078.995
181 211078.995 3992.946 3095.860 897.086 207983.134
182 207983.134 3992.946 3109.018 883.928 204874.117
183 204874.117 3992.946 3122.231 870.715 201751.886
184 201751.886 3992.946 3135.500 857.446 198616.385
185 198616.385 3992.946 3148.826 844.120 195467.559
186 195467.559 3992.946 3162.209 830.737 192305.350
187 192305.350 3992.946 3175.648 817.298 189129.702
188 189129.702 3992.946 3189.145 803.801 185940.557
189 185940.557 3992.946 3202.699 790.247 182737.858
190 182737.858 3992.946 3216.310 776.636 179521.548
191 179521.548 3992.946 3229.979 762.967 176291.569
192 176291.569 3992.946 3243.707 749.239 173047.862
193 173047.862 3992.946 3257.493 735.453 169790.369
194 169790.369 3992.946 3271.337 721.609 166519.032
195 166519.032 3992.946 3285.240 707.706 163233.792
196 163233.792 3992.946 3299.202 693.744 159934.590
197 159934.590 3992.946 3313.224 679.722 156621.366
198 156621.366 3992.946 3327.305 665.641 153294.061
199 153294.061 3992.946 3341.446 651.500 149952.614
200 149952.614 3992.946 3355.647 637.299 146596.967
201 146596.967 3992.946 3369.909 623.037 143227.058
202 143227.058 3992.946 3384.231 608.715 139842.827
203 139842.827 3992.946 3398.614 594.332 136444.213
204 136444.213 3992.946 3413.058 579.888 133031.155
205 133031.155 3992.946 3427.564 565.382 129603.591
206 129603.591 3992.946 3442.131 550.815 126161.461
207 126161.461 3992.946 3456.760 536.186 122704.701
T318 - FIN700 – Financial Management – Group Assignment Page 11 of 12

208 122704.701 3992.946 3471.451 521.495 119233.250
209 119233.250 3992.946 3486.205 506.741 115747.045
210 115747.045 3992.946 3501.021 491.925 112246.024
211 112246.024 3992.946 3515.900 477.046 108730.124
212 108730.124 3992.946 3530.843 462.103 105199.281
213 105199.281 3992.946 3545.849 447.097 101653.432
214 101653.432 3992.946 3560.919 432.027 98092.513
215 98092.513 3992.946 3576.053 416.893 94516.460
216 94516.460 3992.946 3591.251 401.695 90925.209
217 90925.209 3992.946 3606.514 386.432 87318.695
218 87318.695 3992.946 3621.842 371.104 83696.853
219 83696.853 3992.946 3637.234 355.712 80059.619
220 80059.619 3992.946 3652.693 340.253 76406.926
221 76406.926 3992.946 3668.217 324.729 72738.710
222 72738.710 3992.946 3683.806 309.140 69054.903
223 69054.903 3992.946 3699.463 293.483 65355.441
224 65355.441 3992.946 3715.185 277.761 61640.255
225 61640.255 3992.946 3730.975 261.971 57909.281
226 57909.281 3992.946 3746.832 246.114 54162.449
227 54162.449 3992.946 3762.756 230.190 50399.693
228 50399.693 3992.946 3778.747 214.199 46620.946
229 46620.946 3992.946 3794.807 198.139 42826.139
230 42826.139 3992.946 3810.935 182.011 39015.204
231 39015.204 3992.946 3827.131 165.815 35188.073
232 35188.073 3992.946 3843.397 149.549 31344.676
233 31344.676 3992.946 3859.731 133.215 27484.945
234 27484.945 3992.946 3876.135 116.811 23608.810
235 23608.810 3992.946 3892.609 100.337 19716.201
236 19716.201 3992.946 3909.152 83.794 15807.049
237 15807.049 3992.946 3925.766 67.180 11881.283
238 11881.283 3992.946 3942.451 50.495 7938.833
239 7938.833 3992.946 3959.206 33.740 3979.627
240 3979.627 3992.946 3979.627 16.913 0.000
QUESTION 2 continued.
iii) The amount of $K, if - instead of the above – the Highway Bank agrees
that Samuel and Sandra will repay the loan by paying the bank $3,200
per month for the first 12 months, then $3,600 a month for the next 12
months, and after that $K per month for the balance of the 20-year term.
SR.NO.
Opening
Balance (in
$)
EMI (in
$)
Principal
amount (in $)
Interest
(in $)
Closing
Balance(in $)
1 600000.000 3200.000 650.000 2550.000 599350.000
2 599350.000 3200.000 652.763 2547.238 598697.238
T318 - FIN700 – Financial Management – Group Assignment Page 12 of 12