Case 1 (50 marks)

The Assessment Year would be 2018/19. Notes on computation of Salaries Tax / Personal Assessment are attached.

May and Peter, both are 32, have been married for 4 years. Peter, a sale manager in an international retail store at a monthly salary of $28,000 and monthly commission of $6000. May is a full-time clerk of a trading company with a monthly salary of $18000. They only make mandatory contributions to their MPF schemes.

Currently, they have no children but plan to have a baby next year, after giving birth May will not work for several years. They presently rent an apartment in Yuen Long for $13,000 inclusive per month, but they would like to purchase a flat before having a baby. The family's other monthly expenses total at $16,000. Besides the aforementioned expenses, Peter gives his parents (aged 64 and 58) $4,000 allowance monthly while Mary's parents (aged 62 and 56) are living with them.

Both Peter's and May's employers provided basic medical insurance. Both Peter and May purchased a whole life insurance for each other. The beneficiary of Peter's life insurance is May; while the beneficiary of May's life insurance is Peter. The insured amount of Peter is $3,000,000 while the insured amount of May is $1,000,000. Currently they have no will. They appreciate the importance of such estate planning tool, especially when they have a baby.

Peter and May current have $1,200,000 in their bank account, they do not have much investment experiences. They plan to use a major portion of this cash for down payment for a flat of $4,500,000. Eric and Mary plan to use another, relatively smaller, portion of this cash for investment.

Question 1 (30 marks)

(i)If Peter and May purchased the flat worth $4,500,000, with a 20% down payment and the mortgage would be for 30 years, how much would be the initial monthly payment if the interest rate is at HIBOR +1% and the HIBOR is fixed at 1.4%? (6 marks)

(ii)What would you advise Peter and May on insurance and investment aspects? (12 marks)

(iii) If Peter and May consider buying an investment-linked insurance policy with annual premium payment of $50,000 for 30 years, how much would be the maturity value after 30 years if the expected rate of return is assumed to be 9% p.a.? (6 marks)

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((iv)If Peter died today, how much would May get from Peter's life insurance? Would that be

enough for her and the family? Explain why. (6 marks)

Question 2 (20 marks)

(i)What is the amount of MPF contribution for May and Peter? Explain.(6 marks)

(ii)Using the above information of May and Peter for tax assessment year 2018/19, compute the amount of salaries tax payable if they elect joint assessment (excluding provisional tax and tax reduction). (14 marks)

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(Case 2 (50 marks)

World's largest oil traders investing in climate friendly projects, but profits remain a

big question mark1

The world's largest oil traders are pouring hundreds of millions of dollars into climate- friendly projects: including wind farms, cow manure plants, and blue hydrogen: as they seek to match the profits they make from trading oil.

The energy industry as a whole faces an existential

threat from the shift to a lower carbon future and faces growing pressure from investors, governments, activists and financiers to find a sustainable business model. For oil trading houses, the challenge is more acute, as their profit margins have already shrunk due to increased competition, regulatory scrutiny and growing industry transparency.

Trading firms such as Vitol and Trafigura have already put money into wind farms, hydrogen,

solar, EV technology, biofuels and biomethane as potential replacements for oil, traditionally their big profit driver. But like the big international oil companies they have yet to figure out what could become their new business model for an environmentally-friendly future.

Vitol is an energy and commodities company and sits at the heart of the world's energy flows. Every day we use our expertise and logistical networks to distribute energy around the world, efficiently and responsibly.2

Trafigura is one of the world's largest independent traders of oil and petroleum products - one of the few with a global presence and comprehensive product coverage handling over 6 million barrels per day.3

(1

Source: https://en.mercopress.com/2020/02/12/world-s-largest-oil-traders-investing-in-climate-friendly-

(projects-but-profits-remain-a-big-question-mark

(2

3

Source: https://www.vitol.com/who-we-are/

Source: https://www.trafigura.com/products-and-services/oil-and-petroleum-products/

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(Question 1 (30 marks)

As discussed above, the oil trading companies faces challenges on sustainable development. Suppose the trading companies are considering further environmental-friendly development and they have the following two mutually exclusive development plan, Plan A and Plan B. The financial managers have prepared estimates of the initial investment, evaluation of the two possibilities produces the following cash flows and internal rates of return (IRR), they are shown in the table below. The financial managers believe that the two plans carry similar risks and the acceptance of either of them will not change the group's overall risk. Suppose the companies requires a return of 8% on the development plans.

Year

Plan A (US$)

Plan B (US$)

0

(3,300,000)

(2,600,000)

1

1,200,000

700,000

2

900,000

700,000

3

800,000

700,000

4

700,000

700,000

5

500,000

700,000

IRR

9%

11%

(i)Which project will you recommend by applying the internal rates of return (IRR) criterion? Why? (3 marks)

(ii)Apply the Net Present Value (NPV) method to determine which plan should be adopted. Explain. (8 marks)

(iii)Apply the payback criterion to determine which plan should be adopted. Explain. (6 marks)

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((iv)Apply the Profitability Index (PI) criterion to determine which plan should be adopted.

Explain. (7 marks)

(v) Based on your answers in parts (i) through (iv), which plan will you finally recommend? Why? (6 marks)

Question 2 (20 marks)

Suppose the financial manager of Vitol suggests either issuing bonds or shares to raise capital for the environmental-friendly development plan. Assuming there is no fees or costs for the securities.

(i)Suppose Vitol plans to issue bonds with $10,000 par value, 20 years of term to maturity, 12% coupon to be paid semi-annually, investors require 6% of return on the bond with similar risk. Calculate the price of the bonds. (4 marks)

(ii)Suppose Vitol's preferred stock is expected to pay a $1 dividend every year and the required return is 9%. Calculate the price of the preferred stock. (3 marks)

(iii)Suppose Vitol just paid a dividend of $0.5 a share. It is expected its dividend to be grown by 4% per year. If the market requires a return of 12%, calculate the fair value of the stock.

(3 marks)

(iv)Why the require returns in the part (i) through (iii) are different even though the issuer is

the same? (10 marks)