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Brendan hopes to retire in 39 years time after a successful career in finance

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Brendan hopes to retire in 39 years time after a successful career in finance. He recently graduated from USQ with a distinction and after getting a job with one of the big four banks at the age of 21 he feels that retiring at 60 years is good enough. Over the next 39 years, he hopes to save $600 per month. He expects that he will need at least $2,000,000 when he retires. His expectation is that interest rate will be 7.5% p.a. (compounding monthly). Will this savings plan allow him to achieve his goal of having at least $2,000,000 upon retirement?

Select one:

a. Yes. The plan is workable because he would have saved some money for retirement any way.

b. No. The plan generates $1,676,675 which is lower than $2,000,000.

c. No. This plan will only generate $280,800

d. Yes. The plan generates $2,794,000 which is higher than $2,000,000.

2. How is the firm value affected by the Debt to Equity ratio?

Select one:

a. As the Debt to Equity ratio rises, the value of the firm reduces to a certain point and then begins to rise

b. The Debt to Equity ratio has no impact on the value of the firm

c. As the Debt to Equity ratio rises, the value of the firm rises until the firm is fully leveraged

d. The Debt to Equity ratio rises and the value of the firm rises to a certain point after which it begins to decline.

3.

There are two companies, Chocolate Co. and Lolly Ltd., in which you are thinking about investing. You have collected the following information:

• Chocolate Co. is generating actual returns of 7%.
• Lolly Ltd. is generating actual returns of 8%.
• Chocolate Co. has a Beta of 0.79.
• Lolly Ltd. has a Beta of 1.30.
• The market's expected rate of return is 8%.
• The risk -free rate of return is 2.50%.

Which company represents the better investment?

Select one:

a. Lolly Ltd. represents the better investment

b. We need more information about the dividend yield to judge

c. Both companies would be equally good investments

d. Chocolate Co. represents the better investment

4.

An investment is expected to start paying $20,000 immediately from today. The investment consists of $20, 000 now and for the next nine years making a total of 10 payments over a nine year period. Interest rate is 5.5%. What type of annuity is this and what is the value of the annuity?

Select one:

a. Annuity deferred, the value is $159,043.54

b. Ordinary annuity, the value is $159,043.54

c. Annuity due, the value is $159,043.54

d. Perpetuity , the value is $159,043.54

5.

What is your view of a company?

Select one:

a. A company is a separate legal entity but all shareholders are responsible for whatever goes wrong in the company and may have to sell all their assets if required to bail the company out.

b. A company is a separate legal ‘personality’ from its owners and the liability of the owners is limited to their shareholdings in the company.

c. A company is a company of people and could be referred to as a person because it is led by a person called the CEO.

d. A company is a separate legal entity and could be referred to as a person because it has many shareholders with different personalities of their own.

6.

Yummy Ice Cream has undertaken an analysis of a new ice cream with some mixed nuts. If the new ice cream is added to the existing portfolio of products, the company’s analysts believe that it will generate an additional operating cash flow of $4,000,000 each year for 7 years. The product will require capital investment of $8,000,000 and additional working capital of $5,000,000 (to be returned at the end of the project). The discount rate is 9%. What is the net present value (NPV) and should the project be undertaken?

Select one:

a. $7,131,811.34; Yes, the project should be undertaken.

b. $7,131,811.34; No, the project should not be undertaken.

c. $9,866,982.56; Yes, the project should be undertaken.

d. $9,866,982.56; No, the project should not be undertaken.