Revision Questions - Finance

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Revisions Questions – ACFI2005

Question One
Banks invest in financial securities that they hold in their securities portfolio. A proportion of these securities may be government securities. Government securities are regarded as essentially risk-free and therefore pay a low rate of return. Why then do banks invest in this type of security? • primary source of liquidity—government securities easily converted into cash • invest short-term surplus funds—securities provide a return, cash does not • augment investment earnings—another source of income

• use as collateral for future borrowings—security to support bank’s own borrowings • use for repurchase agreements to raise exchange settlement account funds—sell securities back to central bank and receive cleared funds • improve the quality of the overall balance sheet—lower risk government securities offset higher risk loans to customers • manage the maturity structure of the overall balance sheet—average maturity structure of government security portfolio will be less than the loan portfolio • manage the interest rate sensitivity of the overall balance sheet—purchase government securities with interest rate structures that offset interest rate risk within the overall loan portfolio

Question Two
Scratchleys Ltd just paid a dividend of $1.20 per share. This dividend is expected to grow at a constant rate of 2 per cent per annum. An investor has determined that the required rate of return for this type of investment should be 8 per cent per annum. a) Calculate the price that the investor would be willing to pay for this share. $20.40

b) Describe what is meant by the ex-dividend date of a share. What is the theoretical impact on share price when a share goes ex-dividend? The ex-div date is when the dividend becomes separated from the share. Theoretically, share price decreases by the value of the dividend.

c) Immediately following the ex-dividend date, the company announces a...
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