Homework answers / question archive / BUSI 2503 INTRODUCTION TO FINANCE WINTER 2020 ASSIGNMENT 1 Instructions: • This assignment can be done individually or in a group (of no more than 4); Only one assignment should be submitted by your group

BUSI 2503 INTRODUCTION TO FINANCE WINTER 2020 ASSIGNMENT 1 Instructions: • This assignment can be done individually or in a group (of no more than 4); Only one assignment should be submitted by your group

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BUSI 2503
INTRODUCTION TO FINANCE
WINTER 2020
ASSIGNMENT 1
Instructions:
• This assignment can be done individually or in a group (of no more than 4); Only one
assignment should be submitted by your group.
• The cover page should contain the name and student number of each group member.
• Answer all questions.
• The assignment is due by Saturday 8 February 2020 at 11.45pm. NB: You will lose 10 marks
for everyday the assignment is late.
• Assignment should be submitted in Culearn (into the Assignment dropbox).
Question 1: (20 marks)
(a) Assuming you work for a multinational company. You manager tells you that different
stakeholders would like to know how the firm is performing, relative to the competitors.
Identify five potential users of financial ratios, and explain each user’s focus (i.e., the aspect
of the company’s operations that will be of interest to them). (10 marks)
(b) Distinguish between a firm's capital budgeting decision and financing decision. Give
examples. (10 marks)
Question 2: Application of Time Value of Money (25 marks)
a) You are planning to buy a car worth $20,000. Which of the two deals described below would
you choose, both with a 48-month term? (NB: estimate the monthly payment of each offer).
i) the dealer offers to take 10% off the price, then lend you the balance at an annual
percentage rate (APR) of 9%, monthly compounding.
ii) the dealer offers to lend you $20,000 (i.e. no discount) at an APR of 3%, monthly
compounding. (9 marks)
b) You have won a lottery worth $1,000,000. The amount will be paid to you in equal installments
over 20 years. If the interest rate is 10% compounded annually, how much will you be paid at
the end of each year? (6 marks)
c) You have just joined the investment banking firm of Mckenzie & Co. They have offered you
two different salary arrangements. You can have $75,000 per year for the next two years, or
you can have $55,000 per year for the next two years, along with a $30,000 signing bonus
today. If the interest rate is 12% compounded monthly, which is a better offer? NB: first convert
the annual percentage rate of 12% to EAR and use the EAR as the discount rate. (10 marks).

Question 3: Time Value of Money and application (25 marks)
a) You are 35 years old today and are considering your retirement needs. You expect to retire at age
65 (in 30 years) and you plan to live to age 99. You want to buy a house costing $300,000 on
your 65th birthday and your living expenses will be $30,000 a year after that (starting at the end
of year 65 and continuing through the end of year 99, i.e. for 35 years). Assume an annual
interest rate of 8%, annual compounding:
i) How much will you need to have saved by your retirement date to be able to
afford this course of action?
ii) Suppose you already have $50,000 in savings today. If you can invest money at
8% a year, how much would you need to save at the end of each year for the next
30 years to be able to afford this retirement plan?
(5+10=15 marks)
b) You have been hired to run a pension fund for Mackay Inc, a small manufacturing firm. The
firm currently has $5 million in the fund and expects to have cash inflows (receipts) of $2
million a year for the first 5 years followed by cash outflows (payments) of $3 million a year
for the next 5 years. Assume that interest rates are at 8%.
(i) How much money will be left in the fund at the end of the tenth year?
(ii) If you were required to pay a perpetuity after the tenth year (starting in year 11 and
going through infinity) out of the balance left in the pension fund, how much could you
afford to pay every year? (10 marks)
Question 4: Application of Time Value of Money to Mortgages (30 marks)
Shanna wants to buy a house costing $325,000 and has obtained a loan from TD Bank. A minimum
down payment of 15% would be required and the bank will provide the difference. Her grandparent
have told her that they will cover her down payment.
a. TD Bank has quoted her mortgage interest rate is 4.5%; this rate would be compounded semi-
annually, while her payments would be made monthly. What is the effective monthly interest
rate (EMR) that she would pay? (5 marks)
b. Calculate her monthly mortgage payment, assuming 15% down payment from her
grandparents and a mortgage maturity of 25 years. (5 marks)
c. Given (b) above, how much of her payment in the 2nd
month will go toward repayment of
principal and how much is interest payment? (5 marks)
d. Assuming that five years later, interest rates drop to 3.2% and Shanna decides to refinance
the mortgage. How much would she have paid in interest and how much of the original loan
have you paid over the five years? (5 marks)
e. Suppose she decides to refinance your mortgage to take advantage of the reduced interest
rate. How would her monthly payments change if she could refinance her mortgage at 3.2%
(with a 20-year term loan)? (5 marks)
f. Suppose she kept her monthly payments at the original amount found in (b) above at 4.5%,
but refinanced the at 3.2%, how long would it take her to pay off the mortgage? (5 marks)