FIN303: Mr. Tan, 42, is Thinking of Upgrading his Residence for his Family of Four: Financial Management Assignment, SUSS, Singapore

Question 1

Analyze the following:

Mr. Tan, 42, is thinking of upgrading his residence for his family of four. He earns $25,000 monthly as a businessman. There are two properties he is considering; one in prime district valued at $2.5 million and another non-prime unit valued at $1.8 million. Calculate the down-payments and monthly installments for both the properties under what the two (2) banks offer.

• Prime property

Down-payment
Monthly installment

• Non-prime property

Down-payment
Monthly installment

b. Given that the property market has turned buoyant, a new rule has been imposed on all new mortgage loans. The Total Debt Servicing Ratio (TDSR) shall not exceed 60% on a borrower’s monthly income. The rule includes all monthly outstandings. As a businessman, Mr Tan has average credit card debt of $7,500 and a car loan of $2,100 monthly.

Based on this new criterion, compute the TDSR based on Mr Tan’s options and determine which property and bank loan can he take up?

c. If Mr. Tan really aspires to upgrade to prime property, suggest three (3) ways so that he may qualify for a loan.

d. If Mr. Tan chooses to maintain his lifestyle but still aspires to upgrade to prime property, how much must he minimally top up on his down-payment and with which bank from part (a) to secure his dream home?

e. In business, opportunities may arise that warrant liquidity at short notice. Based on this need, which bank will Mr. Tan prefer to borrow from? Please DO NOT consider this point in the previous parts of this question. No calculations are required.

Question 2
A firm has just announced Earnings per share (EPS) of $10 on 1 Apr 20XX. Like before, it is expected to pay 20% as dividends to its shareholders but only for the coming five years when earnings are expected to be flat. Thereafter, dividends are set to grow by 10% annually for the subsequent 5 years when overseas production kicks in. Dividends are to set to remain static as
overseas markets mature from that point. The cost of capital is 15%.

(a) Based on the above, appraise the value of the firm’s stock on 1 Apr 20XX?

b. On 1 May 20XX, there is a great sell-off of the firm’s stock. Shortly after, the firm announces that overseas production will be delayed because of the pandemic. Is arbitrage possible? Which form of market efficiency best explains the scenario? Discuss.

(c) If the 10-year Treasury bond yields a return of 4%, the market portfolio yields a return of 5% and the firm’s stock beta is 1.2, calculate the return of the firm’s stock.

(d) ‘Investors are rewarded for relevant risk that they bear.’ What is a good measure of this relevant risk? Discuss with the aid of a graph and the
relevant axes a theory you have learned in class.

(e) Using the same graph in part (c), mark where Stock A, which is overvalued by the market, will appear on the graph. Illustrate where Stock B, which is undervalued by the market, will appear

Question 3

John is putting some of his savings into bonds. As John’s advisor, you have identified the following bonds for John to consider:

a. Determine which of these bonds you should recommend John to invest based on the highest returns.

b. Describe three (3) further factors that John must consider in making the final choice among Bonds A, B, and C?

Question 4

• Solve the rate of return for each of the investment assets. Fill in the table below.
• Based on the scenarios below, recommend an investment asset for a novice investor and give one (1) reason respectively.
• Describe one (1) important disclaimer that you must highlight to prospective investors before you give them financial advice?