+1 862 207 3288 - An investor invests $2,000 per year at the end of each year, with the first deposit at age 20 and the last deposit at age 30. Assume an interest rate of 10% per annum compounded annually. No more deposits are made after age 30 and the investor accesses the money at age 60. Another investor begins investing at age 30 and invests $2,000 per year at the end of each year, with the last deposit at age 60. Assume an interest rate of 10% per annum compounded annually.
(a) How much does each investor deposit?
(b) Calculate the future value (FV) of each investment.
(c) Who has the larger amount of money at age 60? Why is it important to start investing at an early age?
- The rate of return for bonds issued by the Australian Commonwealth Government Treasury is given as 2% per annum. The return for the Australian share market is given as 12% per annum. Suppose a listed company has a beta value of 0.8. The dividend payments for the company are expected to grow at 6% per year.
(a) Calculate the market premium.
(b) Calculate an investor’s required rate of return for the company’s shares.
(c) Calculate the intrinsic value of a share in the company if this year’s dividend (the current dividend) is $3 per share.
(d) Using your answer to part (c), if the market price of a share in the company is $70, would you buy shares in the company? Explain your answer.
(e) Calculate the intrinsic value of a share in the company if last year’s dividend was $3 per share.
(f) Calculate the intrinsic value of a share in the company if next year’s dividend is predicted to be $3 per share.
(g) Explain why Australian Commonwealth Government Treasury Bonds are considered to be risk-free.
- Consider the stream of unequal cash flows in the table below:
| Year | Cash Flow |
| 0 | $(100,000) |
| 1 | $20,000 |
| 2 | $(10,000) |
| 3 | $50,000 |
| 4 | $40,000 |
| 5 | $30,000 |
(a) Calculate the present value (PV) of this stream with a 5% discount rate.
(b) Calculate the present value of this stream with a 10% discount rate.
(c) Why does the present value decrease as the discount rate increases? Explain your answer.
(d) How long would it take to recover the initial outlay?
- Suppose you bought shares in a listed company on the Australian stock market in March 2014 for $10,000, and you sold these shares for $15,000 in March 2016.
(a) What is the assessable capital gain from selling these shares?
(b) What is the net assessable capital gain that you will need to include in your tax return in Australia for the 2015-2016 financial year?
