Week 1

1. ASE as an Auction Market:

Auction market is a place where the buyers and sellers enter into competitive offers. The bids and offers are matched and paired together to arrive at the price that is accepted by both buyers and sellers  (Theissen, 2010). The stock exchanges are considered to be auction markets as the stocks are traded after matching the highest price that a buyer is willing to pay with the lowest price on which the seller is willing to sell the stocks. The Australian Stock Exchange (ASX) works as a continuous auction market where the buyers and sellers consummate the transactions either via open outcry at locations like floor of stock exchange or by using the electronic platform where stocks can be traded (Aitken, et al., 2007). The open outcry is traditionally known as auction market trading through which the buying and selling of the stocks and shares are conducted at ASX (Aitken, et al., 2007).

 

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2. Difference between Auction and Dealer Market:

An auction market is a place where the buyers indicate the highest price that they are willing to pay for a product/service and the sellers set out the lowest price that they are willing to sell their goods/services at. Whereas, the deal market is a financial market where many dealers simultaneously post the prices at which they are willing to sell or buy their specific instrument/security  (Theissen, 2010).

In the dealer market, the dealer is the market maker who provides the transparency and liquidity by electronically displaying the prices of the security including the bid price. In the auction market, the share’s current price is the match between highest buyer price and lowest seller price  (Theissen, 2010).

The government security markets and over the counter markets is dealers market where the future markets are the auction markets. The dealer market is quote driven while the auction market is order-driven (Theissen, 2010).

3. Forms of Business Organizations:

Form	Advantages	Disadvantages
Sole Trader	–          Low start-up cost –          Decision making freedom –          Tax advantages to owner –          All profits attributable to owner –          Minimal working capital required	–          Unlimited liability –          Lacks continuity –          Difficulty in raising capital –          Not suitable for large scale operations
Partnerships	–          Easy to form and incorporate for LLP. It can be formed without expenses or formalities. –          Partners can combine their expertise. –          The capital burden is combined and it’s easier to raise funds. –          Tax breaks and advantages	–          General partners have the unlimited liability. –          Disagreements can occur. –          Partnership can be dissolved if the partner dies. –          Limited partnerships must register with the secretary of state. –          Limited partners have no decision-making power.
Corporation	–          Public ownership –          Limited liability of Shareholders –          Ease of transferring the ownership through shares –          Ease in raising the cash or equity for capital funding –          Unlimited life of the business	–          Follow the strict regulations and needs heavy paper work –          Double-taxation issues (corporation and dividend taxes) –          Public reports are available to competitors posing threat to confidentiality

Source: (Miller, 2001)

Week 2

1. Worth of Gift Today

Gift Value after 10 Years	$100,000
Discount Rate	5%
PVF	0.613913
Gift Worth Today	$61,390

Note: The formulas used for PVF and Gift worth today are;

PVF                             =

=  = 0.6139

Gift Value Today        = FV × PVF = $100,000 × 0.613913  = $61,390

2. ARR on Investment

Future Value	FV	$35,000
Present Value	PV	$20,000
Years	n	5
Rate		11.84%

Note: Formula used for Rate is

= ^(1/n) – 1

= ^(1/5) – 1

= 1.118427 – 1

= 11.84%

Annual Rate of 11.84% is required every year for making $35,000 from $20,000 in 5 years.

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Week 3

1. Amount to be Paid

Given Receipts for Every Year (P)                 = $7,500

Required Rate of Return (r)                            = 6% or 0.06

No. of years (n)                                               = 8 years

Amounts to be Paid will be calculated by PV of Annuity Formula

                                                                        = p ×

                                                                        = 7,500 ×

                                                                        = 7,500 ×

                                                                        = 7,500 ×

                                                                        = 7,500 × 6.209794

                                                                        = $46,573.45

So, $46,573.45 should be invested today to earn $7,500 per annum at 6% rate of return for 8 years.

2. Effective Annual Yield

	N	i	1+(i/n)	1+(i/n)^n	Annual Yield
A: Annual Compounding	1	0.090	1.090	1.09	0.09 or 9%
B: Semi-Annual Compounding	2	0.089	1.045	1.09098	0.09098 or 9.1 %
C: Monthly Compounding	12	0.0895	1.007	1.093264	0.093264 or 9.3%

 Note: the following formula is used:

EY (Asset A)              =  – 1

                                    =  – 1

                                    = (1 + 1.09) ¹ – 1

                                    = 0.09 or 9%

EY (Asset B)               =  – 1

                                    =  – 1

                                    = (1 + 0.0445) ² – 1

                                    = 0.09098 or 9.1%

EY (Asset C)               =  – 1

                                    =  – 1

                                    = (1 + 0.0075) ¹² – 1

                                    = 0.093264 or 9.3%

 Based on the above calculations, Asset C must be chosen as it has higher yield.

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