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problem

Dr. C. Raymond of International Medical University (IMC) was thrilled with the response he had received from drug companies for his latest discovery, a type of traditional herb that could cure the Influenza A (H1N1).  The process had yet to pass rigorous Federal Drug Administration (FDA) testing and was still in the early stages of development, but the interest was intense.  He received the three offers described below:

Offer 1   $10,000 now plus $20,000 from year 6 through 15.  Also if the product receives tremendous demand and sales keep increasing over the end of year 15, he would receive an additional $300,000.  Dr. Raymond thought there was a 100 percent probability this would happen.

Offer 2   Thirty percent of the buyer's gross profit on the product for the next four years.  The buyer in this case was Zbay Pharmaceutical.  Zbay's gross profit margin was 60 percent.  Sales in year one were projected to be $0.2 million and then expected to grow by 40 percent per year.

Offer 3   A trust fund would be set up for the next 8 years.  At the end of that period, Dr. Raymond would receive the proceeds.  The trust fund called for semiannual payments for the next 8 years of $20,000.

Assuming the annual interest rate on this annuity is 10 percent, determine each of the three offers and indicate which one is the best for Dr. Raymond.

problem

Consider Jay Sean, a new freshman who has just received a study loan and started college.  He plans to obtain the maximum loan at the beginning of each year.  Although Jay Sean does not have to make any payments while he is still in school, the 6.5 percent interest owed accrued and is added to the balance of the loan.

Study Loan Limits

Freshman

$26,250

Sophomore

$35,000

Junior

$55,000

Senior

$55,000

After graduation, Jay Sean gets a six-month grace period.  This means that monthly payments are still not required, but interest is still accruing.  After the grace period, the standard repayment plan is to amortize the debt using monthly payments for 10 years.

(a)    Show a time line of when the loans will be taken.

(b)   What will be the loan balance when Jay Sean graduates after his fourth year of school?

(c)    What is the loan balance six months after graduation?

(d)   Using the standard repayment plan and a 6.8 percent APR interest rate, compute the monthly payments Jay Sean owes after the grace period.

problem

Loan Inc is currently considering a major capital investment project which additional finance will be required. It is not currently feasible to raise additional equity finance, consequently debt finance is being considered. The decision has not yet been finalized whether this debt finance will be short or long term and if it is to be at fixed or variable rates. One of the directors has suggested that debt finance be raised by a loan note (debenture) issue. The managing director is not sure what exactly a loan note (debenture) issue means. The financial controller has asked you for your assistance in the preparation of a report for a forthcoming meeting of the Board of Directors.Prepare a draft report to the Board of Directors which identifies and briefly describe the main factors to be considered when deciding on the appropriate mix of short-, medium- or long-term debt finance for Loan Inc.

 Assessment for the individual assignment:

Guideline below for this assignment:

The Harvard Referencing system must be used for this assignment.

Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M9497
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