Assignment -
Question 1: James' parents are planning to send him first to LAU to finish his BS in finance and then to Wharton School at the University of Pennsylvania 10 get a Master's degree in Finance. They need your help to prepare a financial plan to 40 pay his tuitions at both universities.
a. James' parents opened a savings account on their son's behalf at BLOM Bank. On James 11th birthday the value of the account skewed $30,000.
b. James is expecting to join LAU on his 18th birthday on September 1, 2018 and graduate on his 21st birthday.
c. He is expecting to join Wharton School on his 24 birthday (after working for three years in a financial institution to earn some required business experience) and graduate on his 26th birthday.
d. The tuition at LAU will be $25,000 per year during the first year and will grow at an annual rate of 4 percent.
e. The tuition at Wharton School will be $90,000 per year during the first year and will grow at an annual rate of 5 percent.
f. On January 1, 2012 James' parents started depositing monthly amounts in the savings account at BLOM Bank to accumulate his tuitions. The last monthly deposit will be on August 1, 2018.
g. The bank pays an annual interest rate of 6 percent compounded monthly.
h. Annual tuition is paid on James' birthdays at the beginning of the academic year.
Determine the value of the monthly amounts that the parents of James are depositing to be able to meet all the tuition payments.
Question 2: You applied at BankMed for a loan of $800,000 to buy a new home. The loan committee at the bank approved your request and decided to charge you an annual interest rate of 9 percent compounded monthly. The loan will be repaid in monthly installments for 30 years.
a. Determine the value of each monthly payment.
b. Determine the beginning balance, interest charges, and fraction of the principal paid, and ending balance as they appear in the payment.
c. Assume that after paying for 16 years the interest rate on similar loans falls to 6 percent annually (compounded monthly). You are contemplating refinancing the loan to benefit from the low rate of 6 percent. Assume that the bank will accept your request with one condition that is to pay a penalty equal to 3 percent of the remaining balance.
Will it be beneficial to pay the balance plus the penalty?
Question 3: Five years ago, Watmart issued bond with ongoing time to maturity of ten years.
You purchased the bond when it was issued for at that time. The yield to maturity of the bond was 10 percent. Coupon payments are paid annually. Bond's face value is $1,000.
a. Determine the bond's coupon rate.
b. Determine the current price of the bond if the yield to maturity on the bond dropped by SO basis points.
Question 4: Determine the total annual rate of return you are expecting to earn next year if you are planning to sell the bond one year from now and that the YTM is expected to be 8 percent at that time. Raad Industries is in the process of choosing the better of two mutually exclusive projects A and B. The relevant cash flows for each project are shown below. The firm cost of capital (K) is 14 percent.
|
Time
|
Project A's Cash Flows
|
Project B's Cash Flows
|
|
0
|
($28,500)
|
($27,000)
|
|
1
|
$10,000
|
11,000
|
|
2
|
10,000
|
10,000
|
|
3
|
10,000
|
9,000
|
|
4
|
10,000
|
8,000
|
a. Calculate the net present value of each project.
b. Calculate the Internal Rate of Return (IRR) for each project.
c. Calculate the Modified Internal Rate of Return (MIRR) for each project.
d. Calculate the Profitability Index of each project.
e. Indicate which project you would recommend under each of the four techniques.
Question 5: Raad and Associates are evaluating the following two mutually exclusive projects A and B, which have the following projected cash flows:
|
Year
|
Project A's Cash Flows
|
Project B's Cash Flows
|
|
0
|
($200,000)
|
($287,106)
|
|
1
|
$40,000
|
$60,000
|
|
2
|
$40,000
|
$60,000
|
|
3
|
$40,000
|
$60,000
|
|
4
|
$40,000
|
$60,000
|
|
5
|
$40,000
|
$60,000
|
|
6
|
$40,000
|
$60,000
|
1. Draw the net present value profiles for the two projects on the same set of axes and calculate the crossover rate.
2. Explain the circumstances under which a conflict will exist between the decisions to accept or reject the projects based on the NPV and IRR.
Question 6: James & Associates asked for your help to evaluate the following two mutually exclusive projects, A and B, which have the following projected cash flows:
|
Time
|
Project A's Cash Flows
|
Project B's Cash Flows
|
|
0
|
($190,000)
|
($150,000)
|
|
1
|
$36,000
|
$41,000
|
|
2
|
$36,000
|
$41,000
|
|
3
|
$36,000
|
$41,000
|
|
4
|
$36,000
|
$41,000
|
|
5
|
$36,000
|
|
|
6
|
$36,000
|
|
The firm is using a discount rate of 10 percent.
Using the Equivalent Annual Annuity (EAA) method, which project would you recommend?
Question 7: Projects A and B each has an initial cost of $15,000, followed by a series of positive cash inflows. Project A has a net present value of $30,000 when the discount rate (K) is zero, while B has a net present value of $35,000. Further, at a discount rate of 10 percent, the two projects have identical NPVs.
Which project's NPV will be more sensitive to changes in the interest rate? You must explain your answer.
a. Project A
b. Project B
c. Both projects are equally sensitive
d. Neither project is sensitive to changes in the discount rate
e. The solution cannot be determined
Question 8: Projects A and B have the same NPV when the interest rate, K is zero. However, Project A has greater IRR than B. Therefore, we can say that at all interest rates greater than zero, project A will have a greater NPV than B.
You must explain your answer.
a. True
b. False