WACT1001 Workbook (Students) 20 July 20

MACQUARIE UNIVERSITY INTERNATIONAL COLLEGE
DIPLOMA PROGRAM
WACT1001 Finance 1A
Workbook
2019
Table of Contents
Topic 1.1 The Financial System ......................................................................................... 1

In-class Activities............................................................................................................ 1
After-class Exercises ...................................................................................................... 8
Topic 1.2 Time Value of Money A Single Cash Flows .................................................... 11
In-class Activities.......................................................................................................... 11
After-class Exercises .................................................................................................... 20
Topic 2.1 Time Value of Money B Multiple Cash Flows .................................................. 26
Topic 2.2 Time Value of Money C Annuities (Part 1) ...................................................... 38
Topic 3.1 Time Value of Money C Annuities (Part 2) ...................................................... 53
Topic 3.2 Mortgage Loan .................................................................................................. 65
Topic 4.1 Bond Valuation ................................................................................................. 80
Topic 4.2 Share Valuation................................................................................................. 91
Topic 5.1 Capital Budgeting ........................................................................................... 100
In-class Activities........................................................................................................ 100
After-class Exercises .................................................................................................. 109
Topic 5.2 Risk and Return .............................................................................................. 114
Topic 6.1 Raising Capital ................................................................................................ 123
Topic 1.1 The Financial System
In-class Activities
Macquarie University International College *WACT1001 Finance 1A 1

Activity 1.1A Price and value
Consider the property sale and rent history for 39 Post Office St Carlingford.
https://www.domain.com.au/property-profile/39-post-office-street-carlingford-nsw-2118
https://www.realestate.com.au/property/39-post-office-st-carlingford-nsw-2118
The property at Carlingford sold in December 2012 at $755,000 and was then rented out at
$450/wk. The same property sold again in Feb 2014 at $1,220,000. It is now rented out at
$500/wk.
1. How many years will it take to recover the purchase price at the rent in Dec 2012 and
Feb 2014?
2. What was the nominal percentage increase from Dec 2012 to Feb 2014 in the house
price?
2 Macquarie University International College *WACT1001 Finance 1A

3. What was the nominal percentage increase from Dec 2012 to Feb 2014 in the weekly
rent?
Activity 1.1B The Financial System
Study the below diagram which shows the net loans between various sectors of the
economy at March 2020. The direction of the arrows depicts the direction that loans moneys
flowed. E.g. Rest of World lent money to the Government in Australia and is therefore owed
213.5bn.
Source: ABS, March 2020. Amounts outstanding at end of March quarter 2020
https://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/5232.0Main%20Features4Mar%202020?opendocument&tabname=
Summary&prodno=5232.0&issue=Mar%202020&num=&view=Accessed 20th July 2020

1. Who are the biggest savers/lenders in Australia (ignore the net amount contributed
by ‘Rest of World)?
2. Who are the biggest spenders/borrowers?
3. The Financial Corporations have money owed to them and money owed by them.
How might you describe their position based on your Lesson 1 knowledge?
Activity 1.1C Determinants of Interest Rate Levels
Use the figure (the determinants of the equilibrium rate of interest) to complete the following
table.

Curve to be Direction the Changes in the real
Scenarios affected curve to be shift interest rate
(Demand/Supply) to (left/right) (increase/decrease)
A major breakthrough in
technology
An increase in Corporate
taxes
RBA buys government

bond
Increase in wages following

shortage of labour (low
unemployment)
Activity 1.1D Fisher Equation
The current rate for government bonds is 5.5%p.a. If annual inflation is predicted to be 1.5%
p.a., what is the real rate of interest (p.a.) estimated to be
1. Using the simplified Fisher Equation?
2. Using the full version of the Fisher Equation?

Activity 1.1E Inflation, interest Rates and purchasing power
Assume that you deposit $1,000 today to a term deposit account that pays 2.5% p.a.
interest. Interest is payable at the end of each year. Assume a hamburger costs $8 today.
a. Calculate how much you expect to have in one year’s time in the term deposit
account:
b. How many hamburgers can you buy today using $1,000?
c. How many hamburgers can you buy using the money you get from your term deposit
account in one year assuming the burger costs you: (Correct your answer to a whole
number. You cannot buy a part of a hamburger.)
Number of hamburgers you can buy

Cases Hamburger Price
(Change in purchasing power)
1 $8.10
2 $8.20
3 $8.40
d. For each case in c), what is the change in purchasing power as a percentage? (Do
not use the rounded answer in part c. We want a precise change in the purchasing
power.) (Correct to the nearest 0.01%)
Cases Hamburger Price Change in purchasing power
1 $8.10
2 $8.20
3 $8.40

e. Use the full version of the fisher equation to confirm the answers in part d) (to find the
real interest rate) (Correct to the nearest 0.01%)
Nominal Inflation (Price change

Cases The real interest rate in %
rate in % in %)
1 2.5%
2 2.5%
3 2.5%

Topic 1.1 The Financial System
After-class Exercises

Exercise 1.1A Nominal rate vs real rate of interest
Suppose you borrow $500 from your friend, agreeing to pay him back the $500 plus 7%
nominal interest in 12 months’ time. Assume inflation over the life of the contract is expected
to be 4.25%.
1. What is the total dollar amount you will have to pay back? (Correct to the nearest
cent) ($535.00)
2. Using the simplified Fisher Equation, what is the real interest rate? (Correct to the
nearest 0.01%) (2.75%)
3. Recalculate (b) using the exact Fisher Equation to calculate the real rate of interest.
(Correct to the nearest 0.01%) (2.64%)

4. If the nominal interest on the loan is fixed, what happens to the real rate of interest in
(c) if the magnitude of the expected annualised price-level change (rate of inflation)
increases by 1 percentage point i.e ∆Pe = 4.25%+ 1%.(Correct to the nearest 0.01%)
(1.66%)
Exercise 1.1B Financial system
What is the difference between direct financing and indirect financing? Identify the main
players using direct financing and indirect financing. Given your reasons why they prefer that
method.

Topic 1.2 Time Value of Money A
Single Cash Flows
In-class Activities

Activity 1.2A FV - Compounding once per period
Sam is a university student. He gets $1,000 from his part-time job and wants to invest the
money. The following term deposit offers are provided by the banks:
Banks Interest Rate (Compound) Years

Bank A 5% p.a. 5
Bank B 15% p.a. 5
Bank C 15% p.a. 15
Bank D 5% p.a. 100
For each bank, calculate, to the nearest cent,

a) The future value of Sam’s money
b) The simple interest earned by Sam
c) The interest on interest earned by Sam
a) The future value of your money

Bank A
Bank B
Bank C
Bank D

b) The simple interest
Bank A
Bank B
Bank C
Bank D
c) The interest on interest

Bank A
Bank B

Bank C
Bank D
Activity 1.2B FV – compounding more frequently than once per year
Sam’s grandmother gets $10,000 from her age pension and wants to deposit the money for
5 years.
• Bank Moneybag is within walking distance, pays 5% p.a. compounded quarterly and
provides free coffee and cake in the morning.
• Bank Loanly in town pays 5% p.a. compounded daily. Getting to Bank Loanly
requires a bus trip but she can ride free as a senior citizen. More important though,
this bank does not serve coffee and cake.
Which bank should Sam’s grandmother choose?
1. Find the future value at the end of 5 years if $10,000 is invested at 5% p.a.
compounding quarterly. (Correct to the nearest cent)
a) The effective compound interest rate per period (i) is:
b) The number of periods (n) is:

c) The future value is
2. Find the future value at the end of 5 years if $10,000 is invested at 5% p.a.
compounding daily. (Correct to the nearest cent)
a) The compound interest rate per period (i) is:
b) The number of period (n) is:
c) The future value is
3. Conclusion

Activity 1.2C Effective Annual Rate (EAR)
1. Use the EAR formula to compare the interest rates of the two banks in Activity 1.2B.
2. Use the EARs to recalculate the future value in Activity 1.2B.

Activity 1.2D PV with compound interest
Sam wants to buy a laptop in one year. Suppose a laptop will cost him $1,500 in one year.
Bank Moneybag offers to pay an interest rate of 4% p.a. compounded quarterly for a 12-
month term deposit. How much should Sam deposit today? (Correct to the nearest cent)
Activity 1.2E To find number of periods
Sam has $1,400 he gets from his part-time job. If he deposits his money with Bank
Moneybag that pays 4% p.a. compounded quarterly. How long in years should he wait to get
the laptop (price: $1,500) he wants. (Correct to 2 decimal places)

Activity 1.2F To find the compound interest rate
Sam does not want to wait longer than a year to buy the laptop at $1,500. He has $1,400
today and wants to do the term-deposit with another bank that offers a higher interest rate.
What is the lowest interest rate p.a. compounded quarterly does Sam need? (Correct to the
nearest 0.01%)
Activity 1.2G Changing interest rate-FV
Sam deposit $1,400 with Bank Loanly today. The bank adjusts its saving account interest
rate every 3 months. The proposed interest rates for the next year are as follows:
Period APR
The first quarter 7% p.a. compounded quarterly
The second quarter 6% p.a. compounded monthly
The third quarter 6.6% p.a. compounded monthly
The fourth quarter 6.5% p.a. compounded weekly
1. Calculate how much would Sam have in the bank account after 6 months? (Correct
to the nearest cent.)

2. After 6 months, Sam can make another deposit into the saving account. He wants to
have $1,500 to buy the laptop in one year. How much should he deposit in 6 months
to get enough money? (Correct to the nearest cent.)

Topic 1.2 Time Value of Money A
Single Cash Flows

Exercise 1.2A Simple interest versus compound interest
Suppose you deposit $10,000 in an account that pays 14.4% interest, compounded annually
for exactly 5 years. At the end of 5 years indicate the following components of the account
balance:
i. Principal
ii. Simple Interest
iii. Interest on interest
Exercise 1.2B To find the future value
Twenty five years ago, Mrs Z invested $10,000 in an account paying an annual rate of 5.4%
p.a. compounded monthly. What is the value of the investment today? (Correct to the
nearest cent.)

Exercise 1.2C To find the present value
John Smith has asked you for a loan and has promised to pay back $8,500 at the end of four
years. If you normally invest to earn 5% p.a. compounding monthly, how much will you be
willing to lend to John Smith? (Correct to the nearest cent.)
Exercise 1.2D To compare the APRs
Kerry wants to deposit her savings into a bank account. The interest rates offered by the
local banks are as follows:
Banks Interest rates

Bank A 5% p.a. compounded half-yearly
Bank B 4.9% p.a. compounded quarterly
Bank C 4.8% p.a. compounded monthly
Which bank should she choose? Show all your workings. (Bank A)

Exercise 1.2E To find the number of periods
You invest in a mutual fund today that pays 9% p.a. compounding monthly. How long in
years will it take to double your money? (Round your answer to 2 decimal places.)
Exercise 1.2F To find the compound interest rate
1. Your tuition for the coming year is due today. You borrow $8,000 from your uncle and
agree to repay him an amount of $9,250 in three years. Calculate the nominal
interest rate p.a. compounding monthly. (Round your answer to 0.01%).

Exercise 1.2G Changing interest rates
1. Danny deposits $3,000 in to his bank account in Bank A today. Bank A pays interest
at 4.2% p.a. compounded quarterly. He transfers all his money to Bank B after 3
months for a higher interest rate of 4.8% p.a. compounded monthly. How much is in
his account 2 years after the transfer? (Correct to the nearest cent.)
2. Suppose you need to repay $1,500 in 18 months. Calculate the amount that you
have borrowed today if the interest rate is 10% p.a. (compounding quarterly) for the
first 6 months and 7% p.a. (compounding semi-annually) thereafter.

Exercise 1.2H Challenge Questions
1. George needs a loan today to buy a second-hand car. Bank X charges an interest
rate of 5.2% p.a. compounded weekly and George needs to repay a single amount of
$10,000 to Bank X in 3 years. Bank Y charges an interest rate of 5.4% p.a.
compounded quarterly. If George borrows the same amount from Bank Y, how much
should he repay in 3 years? (Correct to the nearest cent.)
2. You have been offered with two investment opportunities, A and B. Both investments
will provide you with the same accumulated value in 3 years’ time. For option 1, you
need to investment $50,000, today and earn an interest rate 6.5% per annum
compounded monthly. How much should you invest in Option B today, if the interest
rate you can earn is 5% per annum compounded semi-annually? (Correct to the
nearest cent.)

Topic 2.1 Time Value of Money B
Multiple Cash Flows
In-class Activities

Activity 2.1A Future value (MCF)
Paul deposits $1,500 today and $500 at each year end for 2 years. If he earns interest at
10% p.a. effective, how much will he have after 3 years (Correct to the nearest cent)?
1. Draw the time line.
2. Calculate the future value of Paul’s deposits.
Activity 2.1B Present Value
Suppose that you made a gift to your university, pledging $1,000 per year for 4 years and
$3,000 for the fifth year, for a total of $7,000. After making the first three payments, you
decide to pay off the final two payments of your pledge because your financial situation has
improved. How much should your pay to the university if the interest rate is 6% p.a.
compounded monthly (Correct to the nearest cent.)?

2. Calculate how much you should pay.
Activity 2.1C To compare cash flows
Project A and B generates the following cash flows. Assume all cash flows earn an interest rate of
j4=10% Which project is more valuable?
Project A $8,000 $9,000

Years 0 j4 = 10% 1 2 3
Project B $10,000 $7,000 $2,000

j4 = 10%
Years 0 1 2 3 4 5 6 7
1. Compare the two projects calculating the present value of all cash flows.

2. Compare the two projects calculating the future value of all projects.
Activity 2.1D Equations of value
Vincent makes the following deposits into his bank account: $1,500 in one year and $2,500
in 3 years. He also makes the following withdraws: $1,000 in 2 years and $2,000 in 4 years.
How much is left in his bank account after 5 years if the interest rate is 4% p.a. compounded
quarterly? (Correct to the nearest cent.)
Required
1. Draw the timeline for this question.

2. Write down an equation of value using the end of year 5 as the focal date. Let the
balance in year 5 be 𝑋𝑋.
3. Write another equation of value using the beginning of year 1 as the focal date Let
the balance in year 5 be 𝑋𝑋.
4. Solve the equation to find 𝑋𝑋.

Activity 2.1E Equations of value
Required
1. Draw the time line for the hidden question.
2. Write down the focal date of your choice and the equation of value on that focal date.
3. Solve the equation
Activity 2.1F Changing interest rate
Ross makes the following two deposits into his bank account: $1,500 in 6 months and
$2,400 in 12 months. The bank pays interest at 5% p.a. compounded half-yearly for the first
24 months and 4.5% p.a. compounded quarterly thereafter. How much is in Ross’s bank
after 3 years? (Correct to the nearest cent.)

Required
1. Draw the time line:
2. Write an equation of value and calculate the value at the end of three years:

Topic 2.1 Time Value of Money B
Multiple Cash Flows

Exercise 2.1A FV/PV of multiple cash flow
1. Arian borrowed a certain amount from his friend and promised to repay him, starting
in 1 year from today, the amounts of $1225, $1350, $1500, $1600, and $1600 in 1 to
5 years respectively. If the friend normally discounts investments at 8 per cent p.a.
compounding monthly, how much did Arian borrow?
2. You would like to buy your mother a surprise gift for her birthday in 4 weeks. To get
enough money, you make the following deposits: $100 today, $150 in a week, $200
at the end of each week for week 2 and week 3. How much will you have in 4 weeks
if the interest is 8% p.a. compounded weekly (Correct your answer to the nearest
cent)?

3. Find the total value on 1 July 2012 of payments of $1080 on 1 July 2004 and $660 on
1 July 2017 if the rate of interest is 5.5% p.a. compounding semi-annually. (Correct to
the nearest cent.)
Exercise 2.1B To compare cash flows
Project A generates the following cash flows: $3,000 at the end of year 1, $5,000 at the end
of year 2 and $8,000 at the end of year 4. Project B generates $ 7,000 at the end of year 3
and $10,000 at the end of year 5. Which project is more valuable if the interest rate is 7%
p.a. compounding half-yearly? Show your working to support your answer. (Correct to the
nearest cent.)

Exercise 2.1C Equations of value
1. Jack is 15 years’ old and his younger brother, Jill, is 13 years’ old. Their parents plan
to make the following deposits into a bank account. $9,000 in one year and $8,000 in
two years. The bank pays interest at 6% p.a. compounded monthly. Jack and Jill can
withdraw the same amount at the age of 18. How much can each child withdraw?
(Correct to the nearest cent.)
2. Mathew has $10,000 in his bank account today. He plans to withdraw $5,000 in 2
years and $3000 in 4 years. How much is left in the bank account in 6 years if the
interest rate is 5% p.a. compounding semi-annually? (Correct to the nearest cent.)

Exercise 2.1D Changing interest rates
1. Ivy deposits $1,500 to Bank A in 6 months who pays interest at 5% p.a. compounded
quarterly. Three months later, Ivy transfers the balance to Bank B who pays an
interest of 6% p.a. compounded quarterly. She makes another deposit of $2,400 to
Bank B three month after the transfer. Calculate the balance in Bank B 9 months
after the transfer. (Correct to the nearest cent.)
2. Jennifer makes the following deposits into her bank account: $5,000 in 3 months,
$7,000 in 7 months and $8,000 in 10 months. What is the balance of her bank
account in 1 year if the interest rate is 3.6% p.a. compounding monthly for the first
half year and 4.8 % p.a. compounding monthly thereafter? (Correct to the nearest
cent.)

Topic 2.2 Time Value of Money C
Annuities (Part 1)
In-class Activities

1. Draw the timeline.
2. Write an equation of value on 1 July 2028 and solve the equation.
Activity 2.2C Present Value of An Annuity (PVA)
An investment opportunity requires an annual payment of $750 for 12 years, starting a year
from today. If your required rate of return is 8% p.a. effective, what is the value of the
investment today?
Required
1． Draw the time line.

2． Write an equation of value and solve the answer.
Activity 2.2D Focal date of the PVA formula
Parents deposit a sum of money on the day their child is born. The bank pays interest at
4.5% p.a. effective. The sum, plus the interest, is sufficient for the child to make yearly
withdraws of $3,500 each year from the child’s 20th birthday to the child’s 25th birthday
inclusive. Calculate the sum of money deposited (Correct to the nearest cent.).
Required
1. Draw the timeline:
2. Write an equation of value and solve the answer.

Activity 2.2E Relationship between FVA and PVA
Olivia borrows money from a bank at 8% p.a. compounded half-yearly. She has the following
repayment options:
Option A: She makes 6 half-yearly repayments of $3,000 starting in 6 months’ time.
Option B: She makes a single repayment of $X at the end of year 2.
The two options are equivalent. Find $X (to the nearest cent).
Required
2. Use the FVA formula to solve the question.
3. Use the PVA formula to solve the question.

4. Use a combination of the FVA and the PVA formulas to solve the question.
Activity 2.2F Find the size and the number of payments
Noah borrows $4,000 from a bank at 6% p.a. compounded monthly. He makes monthly
repayments starting in one month.
Required
1. Calculate the monthly repayment if he wants to repay the loan in one year.

2. If he repays $400 at the end of each month. How many full payments of $400 should
he make?
3. Calculate the final smaller repayment of $X made one month after the final $400
repayment. (Round to the nearest cent.)

Activity 2.2G Equivalent interest rates
Find the annual rate of interest compounded monthly which is equivalent to the following
interest rates (Correct to the nearest 0.01%).
1. 12% p.a. compounded quarterly
2. 7% p.a. compounded daily

3. 8% p.a. effective
Activity 2.2H General annuities
Linda has $5,000 in her bank account today earning interest at 4% p.a. compounded
quarterly. She wants to use the money plus what she can save over the next year to buy a
second-hand car. She can make equal month-end deposits of $X starting in one month.
Calculate $X if she wants to buy a car for $8,500 in one year (Correct to the nearest cent).
Required

2. Convert the interest rate.
3. List and solve the equation of value.

Annuities (Part 1)

Exercise 2.2A Future value/present value of an annuity (FVA & PVA)
1. Henry makes a deposit into his bank account today. The money is sufficient for
month-end withdrawals of $500 for the next 7 years. If Henry earns interest at 4.2%
p.a. compounded monthly. How much does he deposit today? (Correct to the nearest
cent.)
2. Kent makes yearly deposits of $5,000 into his bank account at the end of each year.
The bank pays interest at 4% p.a. effective. How much is in the bank account in 10
years? (Correct to the nearest cent.)

Exercise 2.2B Find the size and number of cash flows
1. Nancy borrows $9,800 from her parents today and promises to make quarterly
repayments starting immediately. Her parents charge interest at 5.4% p.a.
compounded quarterly. If Nancy wants to repay the loan with 8 payments, how much
is the quarterly repayment? (Correct to the nearest cent.)
2. Yolanda borrows $ 50,000 from the bank and promises to make quarterly
repayments of $ 5,000 starting in 1 year. The bank charges interest at 6% p.a.
compounding quarterly. How many full repayments of $5,000 does Yolanda need to
make?

Exercise 2.2C Equivalent Interest Rates
Find the nominal annual rate of interest convertible quarterly which is equivalent to the
following interest rates. (Correct to 0.01%)
1. 8.75% p.a. compounded half-yearly
2. 7.5% p.a. compounded daily
3. 7% p.a. effective

Exercise 2.2D General Annuities
1. Laura makes an annual deposit of $ 3,000 at the end of each year for the next 15
years. The bank pays interest at 6% p.a. compounded monthly. Calculate the
balance of Laura’s bank account in 15 years. (Correct to the nearest cent.)
2. Ming needs $40,000 to buy a car in 4 years. He plans to make monthly deposits at
the beginning of each month for 4 years. The bank pays interest at 6% p.a. effective.
How much is the monthly deposit? (Correct to the nearest cent.)

Annuities (Part 2)
In-class Activities

Activity 3.1A Future value of annuities due
You deposit $400 into your bank account at the beginning of each month for 2 years starting
today. The bank pays interest at 3.6% p.a. compounded monthly. Calculate the following:
a) How much do you have immediately after the 24th deposit (Correct to the nearest
cent.)?
b) How much do you have after 2 years (Correct to the nearest cent.)?

Activity 3.1B Present value of annuities due
You plan to withdraw $400 monthly for 24 times from your bank account. You earn interest
at 3.6% p.a. compounded monthly. Calculate the following:
a) How much money do you need today if you start to withdraw in one month? (Correct
to the nearest cent.)
b) How much money do you need today if you start to withdraw today? (Correct to the
nearest cent.)

Activity 3.1C Annuities-changing interest rates
Gordon deposits $X today in his bank account. The money is sufficient for him to make 5
yearly withdrawals of $600 starting from the end of year 3. Calculate $X if the interest rate is
4% p.a. effective from today to the end of year 4 and 5% p.a. effective thereafter. (Correct to
the nearest cent.)
Required
2. Write the equation of value and solve it.
Activity 3.1D Mixed TVM questions
Harry makes half yearly deposits of $2,000 in to a savings account starting in 6 months. He
also makes yearly withdrawals of $3,000 from the same bank account at the end of each
year. The bank pays interest at 6% p.a. compounding half yearly. How much is left in the
savings account at the end of 5 years? (Correct to the nearest cent.)

Required
Activity 3.1E Zero growth perpetuity
You want to set up a scholarship by investing money into an account earning interest at 4%
p.a. compounding quarterly. The scholarship will pay $5,000 annually forever starting in 3
years. How much do you need to invest today? (Correct to the nearest cent.)
Required

Activity 3.1F Growing perpetuity
You want to set up a scholarship by investing money into an account earning interest at 6%
p.a. effective. The scholarship will make annual payments with the first payment of $5,000 in
3 years. The payments will grow at 2% each year forever according to the expected inflation.
How much do you need to invest today? (Correct to the nearest cent.)


Annuities (Part 2)

Exercise 3.1A Annuities due
1. Nancy borrows $9,800 from her parents today and promises to make quarterly
repayments starting immediately. Her parents charge interest at 5.4% p.a.
compounded quarterly. If Nancy wants to repay the loan with 8 payments, how much
is the quarterly repayment? (Correct to the nearest cent.)
2. Vincent wants to buy a yacht which costs him $60,000. If he starts to make yearly
deposits of $10,000 today. Will he have enough money in 5 years if the interest rate
is 6.5% p.a. compounding quarterly? Show your working to support your answer.

Exercise 3.1B Annuities – changing interest rates
1. Michelle borrows a 3-year bank loan and repays $1,000 at the end of each month.
The banks charges interest at 6% p.a. compounding monthly for the first year and
6.6% p.a. compounding monthly thereafter. How much does Michelle borrow?
2. Yolanda wants to make a deposit today that would be sufficient for her to make 10
annual withdrawals of $6,000 starting in one year. The bank pays interest at 4% p.a.
effective for the first 4 years and then 5% p.a. compounding quarterly. How much
does Yolanda need to deposit today? (Correct to the nearest cent.)

Exercise 3.1C Annuities – Equations of value
Jacky makes month-end deposits of X into his bank account for 2 years. The bank pays
interest at 4.8% p.a. compounding monthly. Jacky stops making deposits after 2 years and
starts to withdraw $500 at the end of each month. If the money in the bank account is
sufficient for him to withdraw 12 times, calculate the minimum X. (Correct to the nearest
cent.)
Exercise 3.1D Perpetuities
1. Using 7% p.a. compounding quarterly interest, calculate the present value of a

perpetuity of $400 per quarter if
a. the first payment is in 3 months. Correct your answer to the nearest cent.
b. the first payment is now. Correct your answer to the nearest cent.

c. the first payment is in 2 years
2. A growing perpetuity has the first payment of $400 to be made in 3 years. The
monthly payments will then grow at 0.1% per month forever. Find the present value
of the perpetuity today if the interest rate is 5% p.a. effective.

Topic 3.2 Mortgage Loan
In-class Activities

Activity 3.2A Loan repayment Schedules
Eddy borrows $30,000 from the bank. The loan is to be repaid by 5 equal year-end
repayments starting in one year. Interest is 6% p.a. effective.
Required
1. Calculate the size of the annual repayment. (Correct to the nearest cent.)
2. Create a loan repayment schedule for Eddy’s loan. (Correct to the nearest cent.)
Opening balance Ending balance of

Time Interest paid Principal paid
of the loan the loan
3. Show all workings for the following values in Year 1 (Correct to the nearest cent.)
Year 1 Workings
Interest paid
Principal paid
Ending balance of the

loan

Activity 3.2B Calculate loan outstanding balance (retrospective method)
Required
1. Find the loan outstanding balance at the end of year 3 using the retrospective
method. You may use you answers in Activity 3.2A. (Correct to the nearest cent.)
2. Check your answer using the loan repayment schedule in Activity 3.2A.
Activity 3.2C Calculate loan outstanding balance (prospective method)
Required
1. Find the loan outstanding balance at the end of year 3 using the prospective method.
You may use your answers in the previous activities. (Correct to the nearest cent.)

Activity 3.2D Calculate principal paid between 2 dates
Required
1. Calculate the principal paid between the end of year 1 and the end of year 3. You
may use your answers in the previous activities. (Correct to the nearest cent.)

Activity 3.2E Calculate interest paid between 2 dates
Required
1. Calculate the interest paid between the end of year 1 and the end of the 3. You may
use your answers in the previous activities. (Correct to the nearest cent.)
Activity 3.2F Loan with changing interest rates
Kate takes out a 30-year home loan of $600,000 and will repay the loan by month-end
repayments. The interest rate is 5.4% p.a. compounded monthly.
Required
1. Calculate the repayment per month. (Correct to the nearest cent.)

2. Calculate the loan outstanding balance after 3 years using the prospective method.
3. At the end of year 3, the interest rate becomes 6.6% p.a. compounded monthly.
Calculate the increased monthly repayment after 3 years. (Correct to the nearest
cent.)
Activity 3.2G Interest-only loans
I borrow $500,000 on a 30-year home loan at 5% p.a. compounding monthly. The loan
provides for interest-only payments for 5 years and then reverts to principal and interest
repayments sufficient to repay the loan within the original 30-year period.
Required
1. Calculate the monthly repayment for the first 5 years.

2. Calculate the new monthly repayment after 5 years.
3. Calculate the total repayments over the life of the loan.
4. How would I calculate the amount of the loan that remains outstanding at the end of
15 years?

Topic 3.2 Mortgage Loan

Exercise 3.2A Loan repayment schedule
A loan of $14,000 is to be repaid by level annual instalments over 5 years. Interest is at 8%

p.a. effective.
1. Calculate the annual instalment. (Correct to the nearest cent)
2. Draw up a loan repayment schedule for the 5 years. (Correct to the nearest cent)
Opening balance Ending balance of
Time Interest paid Principal paid
of the loan the loan

Exercise 3.2B Loan outstanding balance
1. A loan of $30,000 is charged interest at 6% p.a. compounded monthly and is being

repaid with level monthly instalments of $700. Calculate the balance of the loan
outstanding at the end of year 2 (Correct to the nearest cent).
2. A loan is to be repaid over 30 years, with level monthly instalments of $250. If

interest is at 12% p.a. compounded monthly, which of the following is the correct
balance of the loan outstanding at the end of year 10 (Correct to the nearest cent)?

Exercise 3.2C Principal paid & interest paid between 2 dates
Jack has a $60,000 loan from Bank A, repayable by equal monthly instalments over 20
years. Interest is 12% p.a. compounded monthly.
1. Calculate the monthly instalment (Correct to the nearest cent).
2. Calculate the total interest payable over the 20 years (Correct to the nearest cent).
3. Calculate the total principal repaid in Year 3 (Correct to the nearest cent).

4. Calculate the total interest paid in Year 3 (Correct to the nearest cent).
Exercise 3.2D Loan with changing interest rate
Chloe borrows $600,000 from the bank to pay for her property. She will make month end
repayments for 30 years.
1. Calculate the monthly repayment if the bank charges interest at 5.4% p.a.
compounding monthly. (Correct to the nearest cent.)

2. Calculate the loan outstanding at the end of year 3, immediately after Kathy makes
the 36th repayment. (Correct to the nearest cent.)
3. The interest rate increases to 7.2% at the end of year three and Chole still needs to
repay the loan on the original date. Calculate her new monthly repayment to apply
after 3 years. (Correct to the nearest cent.)

Exercise 3.2E Interest only loan
Lisa borrows $800,000 on a 25-year home loan at 6%p.a. compounding monthly. The loan
provides for interest-only payments for 10 years and then reverts to principal and interest
repayments sufficient to repay the loan within the original 25-year period. Assume rates don’t
change.
1. Calculate the monthly repayment for the first 10 years (Correct to the nearest cent).
2. Calculate the new monthly repayment after 10 years (Correct to the nearest cent).

3. Calculate the total interest over the life of the loan (Correct to the nearest cent)..
4. Calculate the amount of the loan that remains outstanding at the end of 15 years
(Correct to the nearest cent)?

Topic 4.1 Bond Valuation
In-class Activities

Activity 4.1A Bond valuation – annual coupon bonds
Henry bought a 10-year bond paying annual coupon at 4% p.a. The face value of the bond is
$1,000 and Henry paid a price that gives him a yield to maturity of 6% p.a. Calculate Henry’s
purchase price (to the nearest cent).
Step 1 Identify the elements needed for the valuation:
Step 2 Draw a timeline to map the cash flows
Step 3 Apply the formula to value the bond

Activity 4.1B Bond valuation – semi-annual coupon bonds
You are interested in investing in a $1,000 5-year bond that pays 7.80% p.a. (nominal)
coupon with interest to be received semi-annually. Your required rate of return is 8.40% p.a.
(nominal). What is the most you would be willing to pay for this bond? Give your answer to
the nearest cent.
Step 1 Identify the elements needed for the valuation:
Step 2 Draw a timeline to map the cash flows
Step 3 Apply the formula to value the bond

Activity 4.1C Bond valuation – zero coupon bonds
Your company seeks to raise $10 million by issuing 5-year zero coupon bonds with a face
value of $1,000 each. If the yield-to-maturity on similar bonds is 7% p.a. how many bonds
must you issue (ignoring transaction costs)? (Assume comparable-risk coupon bonds
normally pay semi-annual coupons)
Activity 4.1D Bond valuation – the equation of value to find bond yield
A 5-year bond with a face value of $1,000 pays a semi-annual coupon of 6% p.a. (nominal).
Kate purchased the bond at a price of $900. Write down the equation of value that can be
used to find the yield to maturity p.a. (nominal) Kate earned. You do not need to solve the
equation.

Activity 4.1E Price and yield – Bond theorems
A 15-year bond with face value of $1,000 pays interest at j2 = 8.75%. If an investor offers to
pay less than $1,000 for this bond, which of the following statements is TRUE?
a) the investor’s yield is less than j2 = 8.75%

b) the investor’s yield is j2 = 8.75%
c) the investor’s yield is greater than j2 = 8.75%
d) the investor cannot purchase the bond for less than $1,000. The bond must always
be purchased for the face value of $1,000.
e) the investor needs more information before they can estimate their yield
Activity 4.1F The interest rate risk of a bond
Consider the following bonds A to E which all have a YTM of 5% p.a. and a face value of
$1,000. Which bond has highest interest rate risk? Which bond has the lowest interest rate
risk?
• Bond A. 20-year zero coupon bond

• Bond B. 20-year 10% annual coupons
• Bond C. 3-year 10% coupon bond
• Bond D. 3-year zero coupon
• Bond E: 3-year 2% coupon bond

Activity 4.1G Bond theorems – application
The following three bonds all have a face value of $1,000 and a yield to maturity of 5% p.a.
They all pay annual coupons starting in one year’s time.
• Bond A is a 20-year zero coupon bond.

• Bond B is 20-year 10% coupon bond.
• Bond C is a 5-year 10% coupon bond.
One year later, the yield to maturity changes to 4% p.a. Calculate the percent change in the
price for all the three bonds.
Bond A
Bond B

Bond C

Topic 4.1 Bond Valuation

Exercise 4.1A Bond valuation – coupon bonds
1. Lifestyle Pty Ltd, has issued a 3-year bond with a face value of $1,000 that pays a
coupon of 6.10% p.a. Coupon payments are made semi-annually. Given the market
rate of interest of 5.80%, what is the market value of the bond? Give your answer to
the nearest cent.
2. You buy a 7-year bond with $1,000 face value, which pays an annual coupon of 6%
p.a. The YTM is 8% p.a. at purchase. Assume there is no change in the YTM over
the next year but that you sell the bond in 1 year from today, immediately after the
coupon payment. Calculate your percentage capital gain/loss (percentage change in
price). Give your answer as a percentage with 2 decimal places.

3. Bond A is a 7-year 6% p.a. coupon bond, with semi-annual coupons, trading at par. If
news today means interest rates fall by 1% p.a., what is the percentage change in
the bond’s price. Give your answer as a percentage with 2 decimal places.
Exercise 4.1B Bond valuation – zero-coupon bonds
A 7-year bond has a face value of $1,000 which pays no coupon. Assume comparable-risk
coupon bonds normally pay semi-annual coupons. Calculate the price of the bond if the yield
to maturity is 5% p.a. (nominal). (Correct to the nearest cent.)

Exercise 4.1C Bond valuation – bond yield
A 10-year bond with a face value of $1,000 is going to be mature in 7 years. The price of the
bond is $900. The bond pays an annual coupon of 5% p.a. Create an equation of value that
could be used to find the yield to maturity p.a. of this bond. You are not required to solve the
equation.

Topic 4.2 Share Valuation
In-class Activities

Activity 4.2A Share valuation: Finite dividends
You hold a share in a company that expects to pay out all of its value in dividends over the
next 5 years. You expect to receive a dividend of $3 in one year. The annual dividend will
grow by 10% p.a. until the end of year 3. The growth rate will then become 5% p.a. from the
end of year 3 to the end of year 5. Calculate the value of this share today if the rate of return
is 15% p.a. (Give your answer to the nearest cent.)
Required
1. Draw a timeline showing all dividends:
2. Calculate the value of the share today:
Activity 4.2B Share valuation: Constant growth rate
You are currently thinking about investing in a share with a market price of $24.00. The
share will pay an annual dividend of $2.25 in a year and is expected to grow at a rate of 5%
p.a. for the foreseeable future. You require a return of 14% p.a. on shares of similar risk. Is
the share overpriced, underpriced, or correctly priced?

Activity 4.2C Share valuation: Constant growth rate
A share is expected to pay a dividend of $2.5 in one year. The annual dividend is expected
to grow at a constant rate of 5% p.a. forever. Find the price of the share in 2 years if the rate
of return is 13% p.a. Round your answer to 2 decimal places.
Required
1. Draw a timeline showing the first 4 dividends.
2. Calculate the value of the share in 2 years.

Activity 4.2D DDM - Mixed growth
What is the value of a stock, today, which pays no dividend but expects to pay a dividend of
$0.50 per share in exactly 3 years, a dividend of $1 in year 4, and then expects the dividend
to grow at 3% p.a. indefinitely? The required return is 12% p.a.. Give your answer to 2
decimal places.
Required
1. Draw the timeline showing the first 5 dividends.
2. Calculate the share value today.

Activity 4.2E A challenge question (mixed growth)
A share is expected to pay a dividend of $2 in one year, $3 in two years and $4 in three
years. From the end of year three, the annual dividend keeps unchanged until the end of
year 13. After that the annual dividend starts to grow at a constant rate of 4% p.a. forever.
Calculate the share price today if the rate of return is 14% p.a. Round your final answer to 2
decimal places.
Activity 4.2F Share valuation – preference shares
Acuity Investments plans to pay yearly dividends of $0.2 per share starting in 3 years’ time in
perpetuity. (There is no dividend payment in the first 2 years.) These dividends are not
expected to grow. The implied rate of return on the stocks is currently 8% p.a. effective.
Calculate the share price today. Round you answer to 2 decimal places.

Topic 4.2 Share Valuation

Exercise 4.2 A Share valuation – constant growth
1. Mordialloc Optical Pty Ltd declared a dividend of $2.15 yesterday. The company’s
dividend is expected to grow at a steady rate of 5 per cent per annum in perpetuity. If
shares such as these require a rate of return of 15 per cent, what should be the
market value (to 2 decimal places) of this share?
2. A share has a market value of $34.5 today. The share is expected to pay dividends
growing at 5% p.a. constant. Find the share value in 3 years. (Correct to the nearest
cent.)
3. Exego Pty Ltd is expected to pay a dividend of $2.25 next year. The forecast for the
share price a year from now is $37.50. The required rate of return is 14% p.a.
Assume the annual dividend grows at a constant growth rate.
a. What is the current share price (to 2 decimal places)?

b. What would be the price 3 years from now (to 2 decimal places)?
Exercise 4.2 B Share valuation – mixed growth
1. What is the price of a stock, today, which pays no dividend in year 1, $0.35 per share
in 2 years, $0.50 per share in 3 years, a dividend of $1 in year 4 and then expects
the dividend to grow at 3% per annum indefinitely? The required return is 12% per
annum. (Correct to the nearest cent.)

2. A share has just paid a dividend of $2. The growth rates of the annual dividend for
the next 4 years are expected to be 10% p.a., 15% p.a. 20% p.a. and 25% p.a. From
the end of year 4, the annual dividend will grow at a constant rate of 4% p.a. for the
foreseeable future. Calculate the share price today if the rate of return is 14% p.a.
(round the answer to the nearest cent.)
Exercise 4.2C Share valuation – preference share
Smart Inc issued preference shares paying $1.20 in dividends at a price of $20.40. What is
the preference shareholders’ required rate of return? (Correct to the nearest 0.01%.)

Topic 5.1 Capital Budgeting
In-class Activities

Activity 5.1A Net present value (NPV)
A project will require an initial outlay of $20,000 and a further outlay of $10,000 after 1 year.
There will be estimated inflows of $6000 p.a. at the end of years 3 to 12 inclusive and a final
inflow of $10,000 when the project ends in 13 years’ time. The cost of capital is 10% p.a.
Required
1. Draw a timeline.
2. Calculate the net present value for this project and suggest whether the project
should be accepted.
Activity 5.1B Net present value (NPV)
Pizza factory evaluates project to produce ‘pocket’ pizza for use as mini meal or entrée.
• Plant manager estimates cost to modify the production line is $300,000.

• Sales manager believes sales will increase by $300,000 per year.
• Marketing estimates annual marketing costs will increase by $220,000 per year.
• Product’s life is 5 years.
• Salvage value of the production plant components is $30,000 at end of 5 years.
• Cost of Capital is 10%p.a.

Required
1. Draw a timeline.
2. Calculate the net present value of this project and make your suggestions.
Activity 5.1C Calculate the payback period
Oliver Limited is setting up a new production line, which may cost $280,000. The company’s
management expects the production line will generate cash flows of $80,000 in one year,
$110,000 in two years and $150,000 in three years. What is the payback period? (Correct to
2 decimal places.)

Activity 5.1D Calculate the discounted payback period
Zeus Ltd is investing in a project that costs $350,000. They expect to make the following
cash flows over the next three years as seen in the table below. The cost of capital is 12%
p.a.
Years 0 1 2 3
Cashflows -350,000 195,000 215,000 267,000
Required
1. Calculate the payback period for this project. (Answer in years with 2 decimal
places.)
2. Calculate the discounted payback period for this project. (Answer in years with 2
decimal places.)

Activity 5.1E To calculate the IRR
A project generates the following cash flows:

Year 0 1 2 3 4 5 6 7
CFs ($) -96,000 25,300 15,800 15,800 15,800 15,800 15,800 32,500
Required
1. Write down the equation of value that can be used to find IRR. You do not need to
solve the equation.
2. Is the IRR higher or lower than 10% p.a.?
Activity 5.1F Mutually exclusive projects
Project A and project B have the following cash flows. The cost of capital is 10% p.a. The
payback period threshold is 3.50 years for both projects.
Year 0 1 2 3 4
Project A -$5,000.00 $600.00 $1,200.00 $2,200.00 $5,000.00
Project B -$5,000.00 $3,500.00 $1,200.00 $1,500.00 $1,800.00

a) Calculate the NPV for both projects. (Round your answer to the nearest cent.)
b) Which project would you choose using the NPV method? Provide your reasons.
c) Calculate the Payback Period in years for both projects. (Round your answer to 2
decimal places.)

d) Which project would you choose using the Payback Period method? Provide you
reasons.
e) Calculate the Discounted Payback Period in years for both projects. (Round your
answer to 2 decimal places.)
f) Why is the discounted payback period different from the payback period? Which one
is a better method for capital budgeting decisions?

g) Write down the equations of value that can be used to find the IRRs for both projects.
h) Use the above equation of value to confirm that the IRR for project A is 20.14% p.a.
and the IRR for project B is 25.97% p.a.
i) Which project would you choose using the IRR method? Provide your reasons.

j) Which project would you choose after considering all methods? Provide your
reasons.

Topic 5.1 Capital Budgeting

Exercise 5.1A NPV
1. A company is considering investing in a project that will cost $10,000 today and is
expected to generate $2,000 in one year, $8,000 in 2 years and $4,000 in 3 years.
Should the company accept the project at the cost of capital of 10%? Why?
2. Champlain Ltd is investigating two computer systems.
The Alpha 8300 costs $3,122,300 and will generate annual cost savings of
$1 345 500 over the next 5 years.
The Beta 2100 system costs $3 750 000 and will produce cost savings of $1 125 000
in the first 3 years and then $2 million for the next 2 years.
If the company’s discount rate for similar projects is 14 per cent, what is the NPV for
the two systems? Which one should be chosen based on the NPV?

3. Henry is considering a $200,000 investment in either Project A or Project B.
Project A will return $50,000 at the end of each year for the next 5 years.
Project B will return nothing for the next 2 years then $100,000 at the end of years 3,
4 and 5.
Which project should Bob choose if the cost of capital is 4% p.a.?
Exercise 5.1B Payback period & IRR
Quant Ltd is purchasing machinery at a cost of $3.77 million. The company expects to
receive the following cash flows:
Years 1 2 3 4 5
Cash flows $0 $980,000 $1,160,000 $1,880,000 $1,500,000
a) What is the payback period in years (to 2 decimal places)?

b) If the appropriate cost of capital is 10% p.a. what is the discounted payback period
(to 2 decimal places) in years of the project?
c) Which method above is superior for capital budgeting decisions, and why? What is
your decision?
d) Write the equation of value that can be used to find the IRR of this project. You do
not need to solve the equation.

e) Should the IRR be greater or smaller than 15% p.a.? Provide your reasons.

Topic 5.2 Risk and Return
In-class Activities

Activity 5.2A Total holding period return
One year ago, you purchased a share at $4.00. Today you received a dividend and sold the
share. The total holding period return on this share was 9.0%. Income yield (return on
income) was 2.5%.
Required
1. Calculate the capital yield (return on capital appreciation) as a percentage.
2. Calculate the price at which you sold the share.
3. Calculate the amount of the dividend you received.
Activity 5.2B Expected return
Larry has bought 100 Galactic Ltd shares for $20 each. He is aware that the return on that
investment is particularly sensitive to how the economy is performing. His analysis suggests
that four states of the economy can affect the return on the investment. Larry has detailed
his expectation of possible share prices in one year’s time, in four possible states of the
economy, along with probabilities.
State Boom Good Level Slump

Probability 10% 40% 30% 20%
Price $25 $23 $22 $19

Required
Calculate the expected return of these shares (round to 0.01%):
Activity 5.2C Variance and standard deviation
Larry has bought 100 Galactic Ltd shares for $20 each. He is aware that the return on that
investment is particularly sensitive to how the economy is performing. His analysis suggests
that four states of the economy can affect the return on the investment. Larry has detailed
his expectation of possible share prices in one year’s time, in four possible states of the
economy, along with probabilities.
State Boom Good Level Slump

Probability 10% 40% 30% 20%
Price $25 $23 $22 $19
Required
Calculate the variance and the standard deviation of the expected return. You may use the
answers of Activity 5.2B.

Activity 5.2D Return and risk of a portfolio
Bianca has the following investment portfolio. She invested 30% of her money in the share
and 70% of her money in the bond.
Possible Scenarios Probability Share E(R) Bond E(R)
Good 20% 23% -5%
Normal 50% 10% 7%
Bad 30% -5% 4%
1. Calculate the expected return of the share. (round to the nearest 0.01%.)
2. Calculate the standard deviation of the share. (round to the nearest 0.01%.)
3. Calculate the expected return of the bond. (round to the nearest 0.01%.)

4. Calculate the standard deviation of the bond. (round to the nearest 0.01%.)
5. Calculate the expected return of this portfolio. (round to the nearest 0.01%.)


Exercise 5.2A Total holding period return
1. Chloe bought a share 2 years ago at $26. She held the share for 2 years and sold it
at $32. Chloe received half yearly dividend payments of $2.3, $2.9, $3.1 and $3.5
during the 2 years. Calculate her total holding period return. (Round to 0.01%.)
2. Alison buys an 8-year government bond with face value of $1,000. The bond pays
half-yearly coupon at 6% p.a. Alison buys the bond on the issue date and her yield to
maturity is 8% p.a. After holding the bond for 4 years, Alison sells the bond to Daniel
whose yield to maturity is 7% p.a. Assume Alison sells the bond immediately after
she gets the coupon payment at the end of year 4.
a) Calculate Alison’s purchase price for the bond. (Correct to the nearest cent.)
b) Calculate Alison’s selling price for the bond. (Correct to the nearest cent.)

c) Calculate the total holding period return for Alison. (Correct to 0.01%.)
Exercise 5.2B Expected return and standard deviation
1. Vivienne bought a share today at the market price of $25. She expects the share will
trade in one year’s time, at $29 with probability of 60%, $35 with probability of 25%
and $16 with probability of 15%. Assume she will receive a dividend of $4 during the
year.
a) Calculate the expected return of the share. (Correct to 0.01%.)
b) Calculate the standard deviation of the share’s return. (Correct to 0.01%.)

Exercise 5.2C Return of a portfolio
A managed fund has invested $10 million and allocated $2 million into bonds, $4 million into
stocks, $3 million into properties and the remaining into cash. If the expected return on cash
is 2% p.a., 3.5% p.a. for bonds, 7% p.a. for stocks and 5% p.a. for properties.
Calculate the expected return p.a. for this portfolio. giving your answer as a % correct to 1
decimal place.

Topic 6.1 Raising Capital
In-class Activities

Activity 6.1A Raising capital
Hitech Ltd plans to raise $5 million for a business expansion. The company plans to sell
shares that will pay a dividend of $3 in one year. The dividend will then grow at an annual
rate of 20% for 2 years, 10% for one year and 3% for the foreseeable future. The rate of
return is 13% p.a. Assume there is no cost to issue the shares, how many shares should the
company sell to get enough money?
Required
1. Draw a timeline showing the first 5 dividends.
2. Calculate the share price.
3. Calculate the number of shares required.

Activity 6.1B Underwriting
Company A needs to raise $95 million for business expansion through an IPO. (This is the
net amount required by the company) The share offering is underwritten by an investment
bank on stand-by basis. The banks charges a commission of 5%. The offer price is $25 per
share to the public.
1. If the IPO is successful, what are the total proceeds of the share offering?
2. If the IPO is successful, how many shares should the company sell?
3. How much commission does the bank earn?

4. For a stand-by underwriting, if the IPO is unsuccessful and the company only gets
subscriptions for 96% of total numbers of shares. What are the total proceedings of
the share offering?
subscriptions for 96% of total numbers of shares. How much money would the
company receive?
subscriptions for 96% of total numbers of shares. How much commission does the
investment bank earn?

Activity 6.1C Costs of an IPO
Myriad Biotech plans a $114 million IPO [This is the value of the offer in total before costs
come off] with an offer price of $5.10 per share, underwritten at $4.30. The company’s legal
fees, ASIC registration fees, and other administrative costs total $525,000. The company’s
share price increases to $5.81 on the first day. What is the company’s total cost of issuing
the securities?


Exercise 6.1A Raising capital
Perpetual Capital needs $100,000 to fund an expansion of its business. [This is the amount
it requires net of costs]. To do this it will issue bonds with 20 years to maturity, a face value
of $1,000 and a semi-annual coupon $60. The current yield to maturity is 9% p.a.
a) How many bonds do they need to issue? (remember to round the bond price to two
decimal places and roundup the number of securities to a whole number).
b) How would your answer change if the cost of the bond issue was 2%? (remember to
round the bond price to two decimal places and roundup the number of securities to
a whole number).

Exercise 6.1B Underwriting
Bali-hi Ltd, an online travel service provider is planning to implement a new technology and
needs to raise $20 million (This is the net amount required) to finance it. The company plans
to raise the money through a general cash offering priced at $30.50 a share. Bali-hi’s
underwriters charge a 6 per cent spread. How many shares does the company have to sell
to achieve its goal?
Exercise 6.1C IPO costs
NWH Limited wishes to raise $100 million (This is the net of cost amount required by the
company.) of capital in order to finance their expansion. The board of directors has decided
to raise $70 million of debt capital and the remaining $30 million through equity capital. They
have hired two underwriters to help achieve this, one for debt and the other for equity.
For the debt capital, they are selling 5 year bonds with face value of $1,000 that pay half-
yearly coupons at a yield of 6% p.a. and the yield to maturity of the bonds is set at 7% p.a.
The underwriter for the bond issue charges 2% fee for the total capital raised.
For the equity capital, the underwriter will be selling the new stocks at $1.60, underwritten at
$1.52.
a. Calculate the price for each bond, giving your answer correct to the nearest cent.

b. Calculate the total amount need to be raised by issuing bonds. (Correct to the
nearest cent)
c. Calculate the number of bonds need to be sold.
d. Calculate the number of new stocks sold. (Note that the $30 million is the net of cost
amount required by the company.)

e. The total administration costs for the issue will amount to $400 000. On the first day
of trading after the capital raising, NWH Limited stocks closed the day at $1.63.
Calculate the total cost for the capital raising of $10 million. Give your answer in
dollars to the nearest dollar.

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MACQUARIE UNIVERSITY INTERNATIONAL COLLEGE

Topic 1.1 The Financial System ......................................................................................... 1

Macquarie University International College *WACT1001 Finance 1A 1

2 Macquarie University International College *WACT1001 Finance 1A

Activity 1.1B The Financial System

Macquarie University International College *WACT1001 Finance 1A 3

2. Who are the biggest spenders/borrowers?

Activity 1.1C Determinants of Interest Rate Levels

4 Macquarie University International College *WACT1001 Finance 1A

RBA buys government

Increase in wages following

Activity 1.1D Fisher Equation

1. Using the simplified Fisher Equation?

2. Using the full version of the Fisher Equation?

Macquarie University International College *WACT1001 Finance 1A 5

b. How many hamburgers can you buy today using $1,000?

Number of hamburgers you can buy

Cases Hamburger Price Change in purchasing power

6 Macquarie University International College *WACT1001 Finance 1A

Nominal Inflation (Price change

Macquarie University International College *WACT1001 Finance 1A 7

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Exercise 1.1B Financial system

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Banks Interest Rate (Compound) Years

For each bank, calculate, to the nearest cent,

a) The future value of your money

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c) The interest on interest

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Activity 1.2B FV – compounding more frequently than once per year

a) The effective compound interest rate per period (i) is:

b) The number of periods (n) is:

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a) The compound interest rate per period (i) is:

b) The number of period (n) is:

c) The future value is

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2. Use the EARs to recalculate the future value in Activity 1.2B.

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Activity 1.2E To find number of periods

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Activity 1.2G Changing interest rate-FV

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Exercise 1.2B To find the future value

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Exercise 1.2D To compare the APRs

Banks Interest rates

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Exercise 1.2F To find the compound interest rate

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2. Calculate the future value of Paul’s deposits.

Activity 2.1B Present Value

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Activity 2.1C To compare cash flows

Project A $8,000 $9,000

Project B $10,000 $7,000 $2,000