Discussion Questions and Practical Exercises
Case Study 1
(Total marks for this question = 23)
Mr. Vinnie Totti is seeking to purchase an apartment for $200,000. The Wakpak Bank is prepared to lend Vinnie 75%
of the purchase price with the remaining amount to be funded from personal savings. The loan repayments to
Wakpak are to be made monthly (with the first payment due one month after the loan is provided) for a term of 15
years, and the stated annual interest rate quoted by Wakpak is 9.25% p.a. compounded monthly.
No. Question Marks
a What will be the amount of Vinnies monthly loan repayments? 2
b Immediately after paying the 36th loan repayment, Vinnie wishes to pay out the loan in
full. How much will be needed to pay out the loan at this time? 2
(i) Discuss whether there are benefits to Vinnie from changing the frequency of loan
repayments from monthly to fortnightly (with each repayment now being 50% of the
monthly payment calculated in part a) of this question), as has been suggested by his
colleagues at the local produce market where he works on a casual basis as a delivery
driver. (Students should write no more than 100 words for this part of the question).
(ii) Would there be any disadvantages to Vinnie arising from increasing the frequency
of making loan repayments from monthly to fortnightly as indicated in part c) (i) of this
question? (Students should write no more than 100 words for this part of the question).
(i) Using the information provided at the start of this question (including the interest rate
of 9.25% p.a. compounded monthly), however Vinnie commences to make loan repayments which were now equal to an amount of 50% of the repayment calculated in part
a) of this question. Also, the loan repayments were now made at the commencement of
each fortnight (that is, the first repayment would be made at the date of the loan and
fortnightly thereafter). Given this information, over what approximate total term (expressed in years and months) would Vinnie now repay the loan in full?
(ii) Ignoring the amount of the final loan repayment to reduce the loan balance to nil,
approximately how much interest would Vinnie save (expressed in nominal dollars) by
undertaking the repayment strategy in part d) i) of this question, as compared to making
end-of-month loan repayments over a term of 15 years
(as calculated in part a) of this question)?
(iii) Given the new loan repayment strategy in part d) i) of this question, what would be
the amount of the final repayment required to reduce the loan balance to nil? Assume
that the final repayment will be made 1 fortnight after the last regular fortnightly repayment amount.
MBA 6002 Corporate Finance 9
Case Study 2
(Total marks for this question = 10)
Sales for the Australian trading company Rooney Enterprises Ltd. during the last financial year (2008) amounted
to $3.5 million. The company has a 5-year contract to provide the plastic studs that are screwed into the bottom of
football boots to all government primary schools in Australia.
The direct costs of Rooney Enterprises Ltd. operations were $2.5 million and other operating expenses totalled
$700,000. In addition, the company also earned Australian sourced interest income from investments of $45,000
and incurred interest expenses on borrowings of $30,000.
Dividends paid to shareholders in the 2008 financial year (arising from profits earned in financial years prior to
the 2008 year) totalled $87,000. There is also a loan of $395,000 currently owing to the bank as at the end of the
2008 financial year. The company tax rate is 30%.
Case Study 3
(Total marks for this question = 9)
Mr. R.I.P. Cobain is offered the following alternatives for a lottery winning:
Option 1: A lump sum payment of $10,000, 12 years from now, or
Option 2: A lump sum payment of $25,000, 25 years from now, or
Option 3: $3,500 today.
No. Question Marks
(i) Calculate the tax liability of Rooney Enterprises Ltd. for the 2008 financial year.
(ii) Briefly justify the financial transactions listed above that you have not included in
your calculation of the 2008 tax liability of Rooney Enterprises Ltd. (Students should write
no more than 100 words for this part of the question).
b What is the maximum amount of fully franked dividends that the company could pay
from its 2008 financial year net income? 2
c What would be the amount of imputation credits associated with the maximum dividend
payment possible in part b) of this question? 2
No. Question Marks
Showing all calculations, and assuming that Mr. Cobain can otherwise earn a fixed rate of
8% p.a. on his money over each of the next 25 years, which of the options included above
would you recommend him to choose based on only financial mathematics principles?
(Students should write no more than 75 words for this part of the question).
What implicit assumptions are included in your recommendations made in part a) of this
question, which may be unrealistic when applied to real-world issues and factors? (Students should write no more than 150 words for this part of the question).
10 MBA 6002 Corporate Finance
No. Question Marks
Briefly discuss the following statement by providing an informed analysis of the comments made and including your perspective as to which is most appropriate:
All right, I accept that the objective of a firm is the maximisation of its market value
to shareholders, but what does this actually mean as I am confused? Does it mean that
the firm should maximise todays share price, todays dividends, tomorrows share price,
tomorrows dividends, or alternatively the share price at some distant time in the future
when the shareholder actually decides to sell their shares? (Students should write no
more than 200 words for this question).