__Introduction to Finance Assignment__

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__Question 1__

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RIO Limited offers its customers a discount of 2.5% if they pay immediately, or alternatively credit terms of 31 days to pay the full amount.

- What is the effective interest rate for the credit period of 31 days?
- What is the effective annual rate?

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__Question 2__

__CWN Limited just paid a dividend of $1 per share which represents 40% of its profit after tax. Its return on shareholder’s equity is expected to remain constant at 14% per annum for ever. CWN stock is listed on a stock exchange and is trading at $84 per share.__

a) If the market believes the 40% payout ratio will continue for ever, and if everyone uses the constant growth dividend discount model to value CWN stock, what rate of return are investors apparently requiring? Hint: start by calculating the earnings growth rate.

- b) Suppose you think CWN will pay out 40% for the first two dividends, then increase the payout ratio to 80% from the third dividend onwards. If your required rate of return is 13% per annum, how much would you be willing to pay for CWN stock?

__Question 3__

Series Number | Coupon | Maturity | Closing yield | Gross Price | Accrued Interest | Capital Price |

TB129 | 5.5 | 15/12/2015 | 2.555 | 101.535 | 0.195 | 101.339 |

TB125 | 6.25 | 15/06/2015 | 2.47 | 103.802 | 0.222 | 103.58 |

TB131 | 4.5 | 21/10/2016 | 2.475 | 103.435 | 0.836 | 102.599 |

TB119 | 6.25 | 15/04/2017 | 2.525 | 107.766 | 1.264 | 106.502 |

TB134 | 4.75 | 21/10/2017 | 2.655 | 105.551 | 0.883 | 104.668 |

TB130 | 4.75 | 15/06/2018 | 2.75 | 105.824 | 0.169 | 105.665 |

TB120 | 6 | 15/02/2019 | 2.84 | 113.034 | 2.204 | 110.83 |

TB135 | 4.25 | 21/07/2019 | 2.94 | 106.836 | 1.855 | 104.981 |

TB132 | 5.5 | 31/01/2020 | 3.04 | 112.807 | 2.401 | 110.406 |

Lauren Jackson bought $128,000 of the TB135 series Australian treasury bond on 28 June 2015. This is a fixed coupon bond paying interest every half year.

- Assuming Lauren holds the bond through to maturity, what are her cash flows? List of tabulate the dates and signed cash flows (negative for outflows, positive for inflows)

Confirm these cash flows lead to the yield-to-maturity of 2.9399999999999999 specified for that bond. Show two or more decimal places. If your technique is correct, you should be able to calculate any of the yields given. Hint: use XIRR in Excel and note the yield being quoted is nominal based on a six month period.