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1

Finance

1.Mr Jones on his 59 th birthday wants to borrow some money. He can repay the loan with two payments of $5000 made at different times. The first payment when he turns 62 and the second when he turns 65. The current leading rate at the time of his 59 th birthday is 6.1%.

(a) How much will they lend Mr Jones?

(b) If he repays the loan in full, what rate of interest was realized?

2.

As a firm grows, it must support increases in revenue with new investments in assets. The self-supporting, or sustainable, growth model helps a firm assess how rapidly it can grow, while maintaining a balance between its cash outflows (increases in noncash assets) and inflows (funds resulting from increases in liabilities or equity).

Consider the following case of Fuzzy Button Clothing Company:

Fuzzy Button Clothing Company has no debt in its capital structure and has $300,000,000 in assets. Its sales revenues last year were $150,000,000 with a net income of $5,000,000. The company distributed $105,000 as dividends to its shareholders last year.

Given the information above, what is Fuzzy Button Clothing Company’s sustainable growth rate?

1.66%

2.7318006%

0.7314494%

0.0349772%

Which of the following are assumptions of the sustainable (self-supporting) growth model? Check all that apply.

A. The firm maintains a constant net profit margin.

B. The firm maintains a constant ratio of assets to equity.

C. Common stock is the firm’s only form of equity.

D. The firm uses all equity and no debt financing.

3. Consider a quote from a 2016 academic working paper entitled "Multifaceted Aid for Low-Income Students and College Outcomes: Evidence from North Carolina." The quote is: "Launched in 2004, the Carolina Covenant combines grant-heavy financial aid with an array of non-financial supports for low-income students at an elite public university. We find that the program increased four-year graduation rates by about 8 percentage points for eligible students in the cohorts who experienced the fully developed program." Suppose the graduation rate for eligible students had been 32 percent before the program. Fill in the blank for this alternate conclusion: "We find that the program increased four-year graduation rates by about _-_- percent for eligible students in the cohorts who experienced the fully developed program." (Record your answer as an integer.)

4.

  1. An annuity pays $10 per month for 50 years. What is the future value (FV) of this annuity at the end of that 50 years given that the interest rate is 5%?

 

  1. Since your first birthday, your grandparents have been depositing $1000 into a savings account on every one of your birthdays. The account pays 4% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, what will be the amount of money in your savings account?

 

  1. You are considering purchasing a new home. You will need to borrow $250,000 to purchase the home. A mortgage company offers you a 15-year fixed rate mortgage (180 months) at 9% annual rate. If you borrow the money from this mortgage company, what will be your monthly mortgage payment? Make the amortization plan for this loan.

 

  1. You have just agreed to work for PriceWaterhouseCoopers as an external consultant for the next 6 years. In your contract you specified that in one year time Price will pay you $36,000 for your consultant services. For your services in the following three years you will receive $50,000 each year. Compensation for the last two years of your contract will be $60,000 per year. The opportunity cost of capital is 8%.

 

  1. How much is your contract worth today?
  2. If you decide to save the proceeds from your contract, how much will you have at the end of the 6th year?

 

  1. You are borrowing money to buy a car. If you can make payments of $300 per month starting one month from now at an interest rate of 4%, how much will you be able to borrow for the car today if you finance the amount over four years?

 

  1. You are planning to borrow $100,000 on a 5-year to invest in your start-up firm. Interest rate stated by the bank is 9%. You plan to make payments quarterly. What will be your quarterly payment? Make an amortization plan for this loan.

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1.

(a) How much will they lend Mr Jones?

We need to find the present value of his payments

PV = CF62/(1 + r)^3 + CF65/(1 + r)^6

PV = 5,000/(1 + 0.061)^3 + 5,000/(1 + 0.061)^6

PV = 4,186.2373927599 + 3,504.9167017083

PV = $7,691.1540944682

This is the amount they will lend to Mr Jones

(b) The realized rate of return will be equal to the lending rate = 6.1% when he repays the loan in full.

2.

Sustainable growth rate= ROE*b/(1-ROE*b)

Where

ROE= Return on Equity= Net Income/Equity.

Since there is no debt, Equity= Assets= $300,000,000

b= Plowback ratio= 1-(Dividend/Net income)

Given,

Net income= $5,000,000

Dividend= $105,000

Plugging the values,

ROE= 5,000,000/300,000,000= 0.016667

Plowback ratio= 1-105,000/5,000,000 = 0.979

Sustainable growth rate= 0.016667*0.979/(1-0.016667*0.979) = 1.66% (rounded)

Answer is the first choice given.

The following, among the choices given, are assumptions of the sustainable (self-supporting) growth model:

A. The firm maintains a constant net profit margin.

B. The firm maintains a constant ratio of assets to equity.

Regarding others which are not correct:

There is no assumption of zero debt. The assumption is that the capital structure shall be constant.

3.Earlier rate before the program= 32% i.e. .32

increase in graduation rate by 8%

Hence the four year program experinced an incease = .32*1.08= .3456

hence the increase is about = .3456-.32=.0256 i.e. 2.56% or 2.56 in integer term.

4.

1. This needs working ut the future value of ordinary annuity of
Pmt.= $10
at an interest rate , r= 5%/12=0.4167% or 0.004167p.m.
for n= 50*12= 600 months
Using the formula for FVOA & plugging in the above values,
FVOA=Pmt.*((1+r)^n-1)/r
ie. 10*((1+0.4167%)^600-1)/0.4167%=
26690.18
(Answer)
2.Formula to be used is
Future value of ordinary annuity
FVOA=Pmt.*((1+r)^n-1)/r
where,
FVOA-----needs to be found out----??
Pmt.= $ 1000 at end of yrs. 1 to 17
r= interest rate, 4% or 0.04 p.a.
n= no.of pmts.= 17
Using the above formula for FVOA & plugging in the above values,
ie.(1000*((1+0.04)^17-1)/0.04)
23697.51
(ANSWER)
Amount of money in your savings account, Immediately after your grandparents make the deposit on your 18th birthday = $ 23697.51
The mortgage amortisation table for 1st 10 pmts. Have been shown , as under ---due to space constraints-----in the answer tab
No.of mth. Mthly.pmt. Tow. Int. Tow. Mortgage Mortgage Bal.
0       250000
1 2535.7 1875 660.67 249339.33
2 2535.7 1870.045 665.625 248673.7
3 2535.7 1865.053 670.6172 248003.09
4 2535.7 1860.023 675.6468 247327.44
5 2535.7 1854.956 680.7142 246646.73
6 2535.7 1849.85 685.8195 245960.91
7 2535.7 1844.707 690.9632 245269.94
8 2535.7 1839.525 696.1454 244573.8
9 2535.7 1834.303 701.3665 243872.43
10 2535.7 1829.043 706.6268 243165.81
4..Contract's worth today
is the sum of the present values of all the amounts at 8% cost of capital
ie.(36000/(1+0.08)^1)+(50000/1.08^2)+(50000/1.08^3)+(50000/1.08^4)+(60000/1.08^5)+(60000/1.08^6)=
231288.55
 
If all the above are saved for end of Yr. 6,
we can direcly, find the Future of this single sum of $ 231288. 55 (PV at t=0) , at 8% per period , for 6 periods
ie. 231288.55*(1+0.08)^6=
367025.86
5. Amount you will be able to borrow for the car today
is the Present value of the end-of monthly payments of $ 300 p.m.
at r=4%/12=0.3333% or 0.0033 p.m.
for n= 4 yrs.*12= 48 no.of mthly. Pmts.
So, using the Present value of ordinary annuity
PVOA=Pmt.*(1-(1+r)^-n)/r
PVOA=300*(1-(1+0.0033)^-48)/0.0033=
13297.19
ie. The amount you will be able to borrow for the car today= $ 13297.19
6. Using the PV of ordinary annuity formula,
PVOA=Pmt.*(1-(1+r)^-n)/r
where, PVOA= $ 100000
Pmt.= the quarterly pmt.--to be found out----??
r= rateof interest per quarter, ie. 9%/4=0.0225 or 2.25% per qtr.
n= no.of pmt.- qtrs., ie. 5*4= 20
So, using the Present value of ordinary annuity formula,
100000=Pmt.*(1-(1+0.0225)^-20)/0.0225
The qtrly. Pmt.=100000/((1-(1+0.0225)^-20)/0.0225)
6264.21
 
The amortisation table is as follows
No.of Qtrs. Qtrly. Pmt. Tow. Int. Tow. Loan Loan Bal.
1 2 3=Prev. 5*2.25% 4=2-3 5=Prev. 5-Currrent 4
0       100000
1 6264.21 2250 4014.21 95985.79
2 6264.21 2159.68 4104.53 91881.26
3 6264.21 2067.33 4196.88 87684.38
4 6264.21 1972.90 4291.31 83393.07
5 6264.21 1876.34 4387.87 79005.20
6 6264.21 1777.62 4486.59 74518.61
7 6264.21 1676.67 4587.54 69931.07
8 6264.21 1573.45 4690.76 65240.31
9 6264.21 1467.91 4796.30 60444.00
10 6264.21 1359.99 4904.22 55539.78
11 6264.21 1249.65 5014.56 50525.22
12 6264.21 1136.82 5127.39 45397.83
13 6264.21 1021.45 5242.76 40155.07
14 6264.21 903.49 5360.72 34794.35
15 6264.21 782.87 5481.34 29313.01
16 6264.21 659.54 5604.67 23708.34
17 6264.21 533.44 5730.77 17977.57
18 6264.21 404.50 5859.71 12117.85
19 6264.21 272.65 5991.56 6126.30
20 6264.21 137.84 6126.37 -0.07
  125284.20 25284.13 100000.07