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Topic 1 – What is Finance? 1. Capital = Debt + Equity so... Calculating WACC is applying a simple weighted average to the Cost of Debt (Kd) and the Cost of Equity (Ke) to calculate the overall Cost of Capital. To understand a weighted average, consider the average of two numbers: 5 and 5, which is calculated by (5 + 5)/2. The same calculation is 1/2 x 5 + 1/2 x 5; where a weight of 1/2 is applied to each number. For three numbers: 5, 5 and 5, the average is (5 + 5 + 5)/3 OR 1/3 x 5 + 1/3 x 5 + 1/3 x 5. In this example a weight of 1/3 is applied to each number. The weights applied to Kd and Ke come from the capital structure of the business, where the proportion of equity to capital is the weight for K e while the proportion of debt to capital is the weight for Kd. The complete formula for WACC is: E/V x Ke + D/V x Kd ...where E is the $ value of equity, D is the $ value of debt and V is the $ value of total capital in the company. Using the WACC formula, answer the following question: BHP has a total of $100 million of capital; of which $60 million is Equity and $40 million is debt. Shareholders expect a return (Ke) of 12% per annum, while debt holders are paid overall 7% per annum in interest (Kd). Calculate the Weighted Average Cost of Capital for BHP. (Enter your answer without the %, e,g, if WACC is 8%, type in "8". Leave out the "%" or you will be marked wrong. All answers can be up to 2 decimal places. If WACC is an integer, leave out the decimal places.) 10 2.

Telstra has $20 million of debt and total capital of $50 million. If creditors require a 6% return (Kd) from Telstra debt and shareholders require a 8% return (Ke), what is the WACC? Hint: Remember there are only 2 types of capital and Total Capital = Debt + Equity. Study tip: When practicing homework, you learn the different expressions for formula notation. e.g. Ke can be referred to as shareholders require a X% return or in Question 1, shareholders expect a return of Y% per annum. For Kd, the expressions used have been debt holders are paid overall X% per annum in interest in Question 1 or creditors require a Y% return in this question. Other expressions can be used to indicate the cost of debt and equity. Note: In the test and exam, no hint of notation will be given, i.e. you will not see any K d or Ke in brackets to tell you which expression is for what notation. If any percentage is given without a period, always assume it is per annum. e.g. 8%, assume it is 8% per annum.

(Enter in your answer as a number only without the "%". Answer to 2 decimal places) 7.20 3. Monash & Co has $10 million in capital of which half is equity. Shareholders need to earn 10% while creditors require a yield of 6%. Relevant formula in Unit are provided in the formula sheet in the Moodle section Additional Resources. The WACC formula can be found there. Which of the following projects should Monash & Co. choose to send capital on? Select one project only and the best project. Study tip: The term rate of return, return or yield are used commonly and interchangeably in business literature. They all mean the same thing; a percentage return on capital invested. Build a new parking lot for students, costing $10 million with E(R) = 11% 4. Originally, Monash & Co had $10 million in capital of which half is equity. An additional $2 million of equity capital has been injected. Due to less risk in the international student market, shareholders now need to earn 8% while creditors require a yield of 4%. Which of the following projects should Monash & Co. choose to send capital on? You can select multiple projects that allow Monash to spend all of it's capital but the combination of projects should earn a greatest return and you cannot over-spend. Hint: Be careful in re-working out WACC. Write out the WACC formula, write out the new Total Capital, Equity and Debt, before you do your substitutions into the formula. A new short course which costs $2 million and will yield 9%, Build a new parking lot for students, costing $10 million with E(R) = 11.5% 5.A student wishing to borrow money to buy a car would be accessing ... Debt market, Retail market, Private market, Capital market 6.Calculate the risk premium of Qantas acquiring a A380 Airbus which has an E(R) = 15% where the yield on 10 year Government bonds is 5%. 10

Topic 2 – Introduction to Valuation & Financial Math .e. why do we prefer 1. Briefly eexplain xplain the economic reason why money has time value; ii.e. to earn money sooner and pay money later? The economic reason as to why money has time value is due to the [utility] of money or satisfaction it provides when it is [consumed] or invested. The sooner money is earned; the [greater] the satisfaction is as we can choose to spend/invest that money earlier. The later money is paid, the [greater] the satisfaction as we consequently have more money sooner to consume/invest.

Market ket Pr Price, ice, how does calculating Value establish an Implied Price of 2. While Value ≠ Mar an asset or liabili liability? ty? Value, particularly present value, can be defined as what an asset is worth today based on what it earns in the [future] holding period, discounted to the current period. This differs from the market price; which is what the asset trades at given [supply] and demand. Nonetheless, the value of an asset, by establishing what the asset is worth, sets the [maximum] price that a buyer would be willing to pay. If an asset has $10 of value, a buyer would not be willing to pay [more] than $10. Likewise a seller would have to receive a price of at least [$10] for an asset that is worth $10. Thus, value sets a maximum implied price for a buyer and a minimum implied price for a seller. Value can be thought of helping to establish a [break-even] price. This is the reason why some financial literature seems to state that value = price. Technically, value = implied price. 3. You are thinking of buying a house in 3 yea years rs time and price of houses that you can afford then wil willl be approximately $600,000. The bank will lend you 80% of the price. This is called the LVR (Loan to Value Ratio). The remainder will be a deposit that you will have to contribute out of your own equity. To save up fo forr the d deposit, eposit, you ccan an invest a lump sum now into a 3 year term deposit which calculates and pays iinterest nterest monthly at 4% p.a p.a.. How much will you have to invest now to aaccum ccum ccumulat ulat ulatee a sufficient deposit in 3 years time?

Hint: First, work out the amount of the deposit you will have to accumulate to. Do your interest rate working to 4 decimal places and your final answer to 2 decimal places. 106452.97 4. While at the Telstra sshop, hop, purchasing the iPhone X, the salespers salesperson on offers y you ou two new deferred payment opti options. ons. Deferred Payment 1: Pay $1,000 in 6 months from now. Deferred Payment 2: Pay $1,100 in 1.5 yea years rs from now.

Using a discount rate of 5% p.a., the PV cost of Defer Deferred red Payment 1 is (select the closest answer) [$975.90] while the PV cost of Deferred Payment 2 is [$1022.37]. The cheapest is [Deferred Payment 1].

5. You are considering the following investment alternatives: Term Deposit A: You invest $888 now for 2 years, where interest is calculated and paid monthly at 3% p.a. Term Deposit B: In 1 years time, y you ou invest $888 for 2 years, where interest is calculated and paid monthly at 3% p.a. Calculate the Future Value of each deposit at maturity. Comparing the Fut Future ure Value of each deposit at maturity, which h has as the higher Value? a. Term Deposit A b. Term Deposit B c. They are the same d. N None one of the above 6. This is a HD level question and is an excellent example of how you may have to apply financial math in the Test or Exam. You spend $40 on coffee a month but decide to cut that in half and put the savings into your internet bank account at the end of every month. You starting saving now so in a month, you have savings to invest. If your account earns 3% p.a., ccalculated alculated and paid at the end of eve every ry month, what will your reduction in spending have aaccum ccum ccumulated ulated to in 3 months from now?

Hint: As with any complex financial math problem, the 1st step is to draw a time line. Below is a sample time line, to show you how to interpret the wording of the question into correct periods and where cash flow is to be placed.

Your objective is to calculate what your savings will have accumulated to in 3 months, which will include your regular contributions and interest earned. Note: in the test or exam, no such guidance for timelines and hints will be given.

$60.15 7. The COVID19 pandemic is having a devastating economic impact, with up to [6%] of global economic activity lost and share markets falling by [35%] in late May. In a recession, central banks attempt to stimulate the economy by lowering the interest cost of debt to enourage more borrowing for consumption and investment. However. with interest rates already near zero, central banks in major economies are now attempting to increase economic growth by using unconventional monetary policy tools like [negative] interest rates, extended liquidity operations, asset purchase programmes (quantitative easing) and forward guidance, thus departing from their established policy frameworks. This is combined with historic amounts of fiscal stimulas where government spending attempts to replace the loss in private spending and investment. However, until a [vacinne] for COVID19 is developed, a true economic recovery seems remote.

Topic 3 – Valuation II, Annuity Financial Math 1. When shopping for a new iPhone X today, you are considering buying it outright or on a 24 month plan (without data and sim plan). Buying it outright costs $999 while on a 24 month plan, the repayments are $43/month. The opportunity cost of capital can be used as a discount rate and by purchasing the phone, you give up investing in shares which earn you 6% p.a. Which is cheaper, buying the ph phone one outright or the installment plan? [24 month plan] How much do you save by choosing the cheaper option? [$28.80]

2. A $888 bill for council rates has just arrived. Reading through the payment options, you can choose to pay it upfront, or over two types of installment plans. Plan A: $222 paid quarterly in arrears for 4 quarters Plan B: $74 paid monthly in advance for 12 months A discount rate of 16% p.a. applies. Which is the cheapest option? [Plan A] Which is the most expensive option? [Pay Upfront] How much more would you pay if you pic picked ked the most expensive option compared to the cheapest option? [$82.16]

3. Starting a 5 year double degree at Monash, student services offers a choice between 2 ways of paying for your school fees. The first choice is for a fixed payments of $30,000 paid at the beginning of each year for 5 years. The second choice is for a first payment of $25,000 paid at the end of your first year, increasing by 7% each year till your final year. Using a discount rate of 10% p.a., which should you choose and what is the cost of that choice? I would prefer to the [2nd choice] as it would ccost ost [$107,604.77].

5. After your first rigourous acquisitions meeting at Berkshire Hathaway, you've been seconded to evaluate two business leases in a famous shopping centre in Australia, Chadstone. A 200 square meter retail shop space, currently occupied by Louis Vuitton is up renewal today. Louis Vuitton wants to renew the lease today and is offering $1.2 mil p.a. in advance for 5 years. Chadstone property management has another bid for the space by Prada, who wishes to move to LVs space today. In return for not renewing LV's lease, Prada is willing to pay a compensation fee now of $300,000 in addition to offering a premium lease of $1 mil p.a. in arrears for 6 years. Chadstone has a WACC of 8%. Which tenant should Chadstone pick?

Hint: The WACC can be used as a discount rate and when it is expressed without any period, assume it is per annuum. The value of L LV's V's proposed lease is: [$5,174,552.21] The value of Prada's p proposed roposed lease is: [$4,922,879.66] Chadstone should choose: [Louis Vuitton]

6. After completing your secondment to Chadstone, your next day of work involves share analysis. Today, Berkshire Hathaway is considering setting aside capital to invest in either... BHP is expected to pay a next dividend of $0.40/share Rio Tinto is expected to pay a next dividend of $0.20/share growing by 3% p.a. into perpetuity. The holding period of the shares in indefinate and the fund's WACC is 8%. The value of BHP today is: [$5] The value of Rio today is: [$4] Which has a higher value today?: [BHP]

Topic 4 – Capital Budgeting 1. The correct answer is:

You are evaluating the potential acquisition ooff Mo MonashTe nashTe nashTech, ch, a small app developer, by tech giant Google. In a sudden turn of ev events, ents, a credit rrating ating agency, Standard & Poors, downgrades the credit worth of MonashTech fr from om BB- to CCC. The risk of investing iin n MonashTech has [increased [increased]. ]. Fr From om Google's perspective, this would [lower] the value an and d price to be paid for tthe he company. This would provide [a higher] return, holding all else equal. To reflect the greate greaterr risk risk,, a [higher] discount rate should be used in the valuation.

equity ty holders must be ppaid. aid. It is important to understand tthe he 2. The cost of debt and equi simple relationship between Ke and Kd. In a company, tthe he cost of debt is [lower] than the cost of equity. Based on the pecking order of pay payments ments in a company, equity holders get paid [after] debt holders. Thus equity holders take [[higher] higher] rris is isk k for which they wil willl required a [higher] return. 3. Before the credit downg downgrade, rade, MonashTech creditors rrequire equire a 8% return while it's equity holders need a 3% premium on what creditors earn. The balan balance ce sh sheet eet of MonashTech is as follows:

The required rate of return to be use used d in MonashTech capital budgeting is [10%] After the credit downgrade, creditors n need eed a 1% p premium remium on the original Kd. The new WACC of M MonashTech onashTech is [11%].

4. Sarah Lee iiss con considering sidering establis establishing hing a new pancake mix which is forcasted to have revenue in the first yea yearr of $1,000,000. Revenue is projected to increase at 5% p.a., operating costs are 20% of annual revenue and the product life is 5 years. In the 4th yea yearr of opera operatio tio tion, n, the pancake machines are expected to undergo maintenance which is eexpected xpected tto o cost $850,000. The initial invest investment ment is $2mil and Sarah Lee has a cost of capital of 12% Should Sara Sarah h Lee ahead with the new product? [Yes] The NPV of the new pro product duct is [$611,850.39]. The IRR is [24.46%] which is [greater] than the required rate of return

5. Rio Tinto is considering buying in a new rare earth mine which is forec forecasted asted to start earning $3,330,000 of re revenue venue in the 3rd year of operation (3yrs from today). Pr Production oduction of rare earth is expected tto o incr increease by 20%p.a. after after,, having a consequent impact on revenue. Operating costs are 30% of annual re revenue. venue. The mine is ke kept pt fo forr 4 years of production, after which the rare earth is exh exhausted austed and is expected to fetch a sale price of only $500,000. Setting up the mine requires $4mil today and $2mil in the first year. 60% of Rio's capital is financed through debt which has a ccost ost of 7% and shareholders require a 55% % prem premiu iu ium m on what creditors earn. Does the new iron ore mine add to shareh shareholders olders wealth? [Yes] The NPV of the mine is [$2,828,169.37] and the IRR is [19.48%].

6.

FCF stands for Free Cash Flow, an estimate of Net Cash flow that is available to service capital costs. I would recommend buyi buying ng [2] [747] , where the IRR of such an acquisition is [14.4%].

7. Universal basic income, or UBI, is a payment made by the government to [all] adult individuals of a country to allow people to meet their basic needs; it is not means tested and is called by some as “social security for all”. The idea was popularised in the mainstream of US policial conversation by [Andrew Yang], a candidate for the 2020 Democratic Presidential nominee. UBI is now often

discussed in US media as a potential solution to the enormous income [inequality] in the US; by using a Value Added Tax (VAT) to distribute wealth from the technology companies that pay no tax while profiting from AI and automation. A 2013 study by Oxford University concluded that around 47% of American jobs are at high risk of being automated and similarly the Committee for Economic Development of Australia found that around [40%] of Australian jobs are at a high risk of being automated in the next 10 to 15 years. Proponents believe that a UBI will assist people whose job has been lost due to structural economic changes (like automation), to find work or start a business that is more aligned to their work interest. The US state of [Alaska] already has a form of UBI funded by oil revenue which distributes between US $1,000 - $2,000 per annum to each person in the state. Critics suggest that the plan will disincentivise work and argue that capital market mechanisms should be left to reallocate labour affected by structural changs.

Topic 5 – Applications of Finance 1. Bob and Jill look at each other and say ... "OK, we now understand why super is

mandatory and so important." "Lets start talking retirement. I want to have $100,000 at the end of each year, to spend every year from when I retire at age 67 for 20 years. I don't think I'll be around past then. How much will I need to have in Super when I retire? Bob has just presented you with a common but sophisticated question that many retirees ask. When Bob retires, he wishes to take out his money, ending his super fund. You are quite confident that there are products that will pay 3% p.a. on Bob's Super lump sum when he retires. There are annuity investment products in the market to cater for needs just like this, offered by investment companies, like Challenger. (https://www.challenger.com.au/). These annuity products are purchased upon retirement and pay a fixed sum each year for a fixed time, to simulate an income/wage. Time for you to crunch the numbers and give Bob his answer...

Hint: What Bob wants, a fixed payment, paid regularly for a fixed time, is an annuity. ID the correct annuity formula, and like your mortgage math, ID which variable you are solving for and then the values for the remaining others. See staff in consults if you need help.

Enter your answer as to 2 decimal places, without any $ or , e.g. if you answer is $2,888,888.1212 it is to be entered as 2888888.12 1487747.49

2. Bob says ... "Now, that we know how much I'll need to have in Super when I retire at

67, will I be able to reach that target amount?" Bob has just presented you with another common financial planning question. Pulling out his personal information, you see that Bob is currently 23, has just started work and has $0 in Super. His salary is $40,000 p.a. and he expects his salary to grow by at least an annual inflation rate of 2%. As per the Superannuation Guarantee Scheme, Bob has to put 9.5% of his salary into super each year and his super fund has long-term return expectations of 7% p.a. Time to do the math ... you will need to use your answer in Q1. After finishing the math, you reply to Bob ... "Bob, I've got [b [bad] ad] news. You [will not] have enough tto o reach yo you ur target super level that will allow you to spend $100,000 each year during retirement. This is because, at current projection's, you'll ac accumulate cumulate [$1,310,118.89]."

Hint: as with all annuity work, ID the right formula, write it down, ID wha...