Home Loan & Mortgage

    Peter just started his 4-year bachelor life in Brisbane. His brother also lives in Brisbane, and he is considering whether he should buy a place together or rent. Peter and his brother have also dreamt of living near the coast. So, they are not sure if Peter would buy in Brisbane or buy near the Redcliffe. They study and work mostly from home and would only need to commute to Brisbane 2 times a week. Peter and his brother have both worked a few years prior and have each saved around $50,000. If they decide to buy, they will provide a down payment of $100,000. In addition, they would receive $1,600 from the bond on their current rental place. They had a look around and have found two options that interest themselves. • Option 1: Small house in the Moreton Bay. A piece of land in the Moreton Bay (443m2) where they want to put two small portable houses, one for each of them. This option will give themselves a wonderful view and just a short drive away from the beautiful coast. This option is also aligned with living off-grid and has solar and batteries already installed, an option they both value. • Property Cost: Land ($240,000) + tiny houses (2*$95,000) = $430,000 • Other costs when buying the property: Legal fees ($1300), Deed transfer tax (@4% of land value). • Ongoing costs: Public transport (+$80/month), Repairs and maintenance fees (+$150/month), Savings on electricity (-$80/month), Sewage and water (+40/month), council fees (+$120/month). • Selling in 4 years: They expect to sell the land and tiny houses for $480,000 in 4 years. They would pay off mortgage loan at that time. They would also have to pay selling fees to their real estate agent (@3% of the selling price) • Option 2: A unit in the Brisbane suburbs. A 2-bedroom unit in Yeronga. This option is close to the place they study and work. However, there is no option to install solar panels. Additionally, there is a strict body corporate that they need to ask permission for pets, major alterations, etc. • Property cost: $450,000 (Advertised for offers above $430,000, they think they can get it for $450,000) • Other costs when buying the property: Legal fees ($1500), Deed transfer tax (@4% of property value). • Ongoing costs: Repairs and maintenance fees (+$50/month), Council fees (+$120/month), Sewage and water (+40/month), body corporate fees (+$250/month). • Selling in 4 years: They expect to sell the unit for $480,000 in 4 years (this is because they think house prices are inflated at the moment). They would pay off their loan at that time. They would also have to pay selling fees to their real estate agent (@4% of the selling price) If Peter and his brother are not going to buy a property, they will stay at the place they are now, which is very similar to option 2 in terms of size and location. They have a nice landlord. The landlord charges them $1600 in rent a month and has promised not to increase it as long as they decide to stay there. The landlord pays for any repairs and maintenance costs. Assume that they can save at the same rate as they can borrow. They are allowed to borrow up to 80% of the transaction value from the following identified lender (assume the current rates apply for the whole 30-year mortgage): Westpac Bank (https://www.westpac.com.au/personal-banking/home-loans/fixed/) Use a 30-year loan, use 2-year fixed rates, principal & interest payment loan (assume rates are compounded monthly). Based on financial factors, please evaluate two buy and rental options and provide suggestions to Peter and his brother. You can solve this problem following the 3 steps: 1. (i) Go to the bank’s website and find the current APR for a home loan and find relevant fees for the home mortgage. 2. (ii) Calculate the monthly payment for the buy-options (mortgage payments + any other cash flows); 3. (iii) Calculate the PV of the two buy options and the rent option. Provide detailed working / calculation process and relevant assumptions (Please don’t just copy / paste your outcomes from Excel directly to a pdf file) Question 2 Share Valuation You are required to value the share price for the following 2 firms (1) REA Group Ltd (REA);and (2) Domain Holdings Australia Limited (DHG) at 30/06/2021 using 2 valuation methods: dividend discount model and Multiple based approach. You can solve this problem following the 5 steps: (i) estimating future dividends for the first 3 years -- Find both companies’ reported earnings per share (EPS) for the current year and the consensus EPS forecast for the next three years. 1 You should use the S&P Capital IQ website (https://www.capitaliq.com/CIQDotNet/Registration/signup.aspx) to obtain the information; then forecast a dividend using a forecasted EPS and a dividend payout ratio. Assume current year dividend payout ratio will apply to forecast the future dividend for the first 3 years. (ii) estimating cost of equity-- using regression method to work out the equity beta with past 1 year historical daily stock return and market (ASX200 index) daily return data (adjusted closing price data can be download from Yahoo Finance); risk free rate is Australian Government 10-year bond yield (https://www.rba.gov.au/statistics/tables/) (iii) estimating share prices using 2 stage dividend discount model – forecast a perpetual (long- term) growth rate and provide justifications; Assume the company’s dividends will grow in perpetuity at a constant rate from year 3 afterwards. (iv) estimating share prices using PE benchmarking -- value both companies using the PE ratio method (assume a valuation date of 30/06/2021). Calculate the industry average PE ratio as the benchmark to estimate share price. (v) Investment decisions and Assumptions of the models -- For both valuation approaches, what assumptions were made and how realistic are they? What’s your overall investment decision on REA and DHG Provide detailed working / calculation process and relevant assumptions. (Please don’t just copy / paste your outcomes from Excel directly to a pdf file)       Question 3 Fund Management 1. (i) Demonstrate / illustrate the impact of COVID-19 on the Australian stock markets using the data from 2020/1/1 to 2021/8/31 (data can be download from Yahoo Finance or S&P Capital IQ). 2. (ii) If you are hired as a research analyst for a hedge fund in Sydney, responsible for Australian equity market, based on your above analysis, what advice would you give to the directors of hedge fund on the investment strategies about Australian equity market and provide justifications. The discussion for Question 3 is strictly limited to 2 pages (600 words). 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