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FINA2360 Summer I 2020 Assignment #2
Total 52 marks Due Friday June 5, 2020 at 6:00 pm
Atlantic Daylight Savings Time.
are expected to grow at 1% forever. If interest rates are expected to be 6.125% forever,
what is this investment worth today? HINT: be sure to include a time line in your
explanation to your parents. Show your work, time line and explain your answer.
(4
marks)
Problem 2 (10 marks)
You have been very successful in business and it is time to buy the big boat so you can sail the
blue seas of the Bedford basin and entertain your friends. You do your research and find the
boat you want in Portugal. The price of the boat is $300,000 and it will cost $20,000 to have
the boat delivered to Halifax. You go to the bank to borrow the entire amount of the purchase
and the bank offers you a loan with a 20 year amortization at 5% with a 5 year term. You plan
on making monthly payment on this loan.
a.
Calculate your monthly payment

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It's due tommorow and need help with these following problems.

Please solve the following problems. Show all relevant time lines and calculations and make sure to highlight the final answer to the question. Where MS Excel is required, please either cut and paste the spreadsheet where it belongs or staple the printout directly from MS Excel. For spreadsheets that are too long to print, just include a sample printout of the first and last pages. Note that some questions require a written answer, not just a number.

Vanilla Ice Co. bonds pay an annual coupon rate of 10% and have 5 years to maturity. If investors' required rate of return is now 8% on these bonds…

Will the bonds be selling at a premium or a discount with respect to their $1000 face value? Why?

b. What is the price of the bonds?

Austin Power Co. bonds have a 14% annual coupon rate. Interest is paid semi-annually. The bonds have a par value of $1,000 and will mature 10 years from now. If the (annual) required rate of return is 12%, what is the price of the Austin Power bonds? [Hint: you need to convert your coupon rate, your number of periods, n, and your req. rate of ret. to a semi-annual basis.]

Consider a $1,000 par value bond with a 9 percent annual coupon that is currently selling for $943. The bond pays interest annually. There are 15 years remaining until maturity.

What is the size of the annual coupon payments?

What is the current yield on the bond?

A preferred share of Phillips, Co. is currently selling for $65.00 on the New York Stock Exchange. If this instrument pays a dividend of $5 a year, what is its yield?

Assume that you plan to buy a share of IBM stock today and to hold it for 2 years. Your expectations are that you’ll receive a dividend of 19.00 at the end of Year 1 and a dividend of $19.25 at the end of Year 2. In addition, you expect to sell the stock for $150 at the end of Year 2. If your expected rate of return is 11 percent, how much should you be willing to pay for this stock today?

A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 15 percent, and if investors require a 19 percent rate of return, what is the price of the stock?

What would be the interest earned on a $6,000 deposit during the second year of its life if no money is withdrawn from the bank during that time, and the deposit pays an annual interest rate of 2.5 percent, with annual compounding?

Using excel, build a monthly amortization table for a 30-year mortgage on a $350,000 home, no money down. Use 7% as the yearly interest on the loan.

Using the amortization table you built for Question 8, answer the following questions.

How much money will you still owe on the loan after making one full year of payments?

How much money will you still owe on the loan after making 10 full years of payments?

If you want to refinance after 15 years of making payments, how much financing would you need to secure from your bank to do so?

How much money can you expect to pay in interests alone during the 30 year life of the mortgage?

You plan to purchase a $100,000 house using a 30-year mortgage obtained from local credit union. The mortgage rate offered to you is 8.25%. You will make a down payment of 20% of the purchase price.

Calculate your monthly payments on this mortgage.

Calculate the amount of interest and, separately, principal paid in the 25th payment.

Calculate the amount of interest and, separately, principal paid in the 225th payment.

Calculate the amount of interest paid over the life of this mortgage.

You plan to purchase a house for $115,000 using a 30-year mortgage from your local bank. You will make a down payment of 20% of the purchase price.

Your bank offers you the following two options for payment:

Option 1: Mortgage rate of 9% and zero discount points.

Option 2: Mortgage rate of 8.85% and two discount points.

Which option would you choose?

Your bank offers you the following two options for payment:

Option 1: Mortgage rate of 10.25% and 1 discount point.

Option 2: Mortgage rate of 10% and 2.5 discount points.

Which option would you choose? [Hint: consider only the incremental costs and benefits of Option 2 with respect to Option 1]

You just got a promotion and you are now taking home $75,000 a year before taxes. You are thinking about upgrading your home and moving to a nicer neighborhood. You’ve been living for the past six years in a 1,300 square foot, 3 bed/2 bath home, currently valued at $137,000. Thanks to the strong capital appreciation of the past few years, you estimate that after liquidating the mortgage and covering realtor fees, you’ll be able to walk away with $40,000, which you intend to use as down payment on your new home. Your debt payments ratio is only 7% and your credit rating is 700, so qualifying for a loan won’t be a problem. The best bank rate you’ve found is 5.9% fixed for a 30 year mortgage.

Ignoring mortgage insurance premiums, homeowner’s insurance premiums, and property tax obligations, how much of a home could you afford?

Would your mortgage be considered conforming or non-conforming?

Do you think you’ll be required to obtain private mortgage insurance? Why?

please show me calculation/workings

try to solve as many as possible please

5. Your friend is considering investing $5,000 at the end of every quarter in a bank account

paying 8% per annum. The first contribution will be made at the end of the first quarter. If

interest is compounded monthly, the total amount she will have accumulated at the end of ten

years is closest to:

a) $228,338.

b) $289,731.

c) $302,010.

d) $302,886.

6. Banks A, B and C offer the following interest rates on one-year bank deposits.

Bank A: 7.9% p.a. compounded monthly.

Bank B: 8.0% p.a. compounded quarterly.

Bank C: 8.1% p.a. compounded semi-annually.

The best interest rate is offered by:

a) Bank A.

b) Bank B.

c) Bank C.

d) The three banks offer equally attractive interest rates.

7. You are thinking about buying a rare collectible that costs $50,000. The dealer is proposing

the following deal. She will lend you the money and you will repay the loan by making the

same payment every two years for the next 20 years. If the interest rate is 4% p.a.

compounded annually, the amount you will have to pay every two years is closest to:

a) $3,679.

b) $5,153.

c) $6,165.

d) $7,505.

8. BLB Ltd has just issued a “coupon growth bond” with the following terms. Each bond’s face

value is $1,000 and the bonds will mature in 5 years’ time. Coupons will be paid on an annual

basis at the end of each year. The first year’s coupon will be $100 which will then grow at an

annual rate of 10% until the bonds mature. If the bond’s yield to maturity is 8% per annum, its

price today should be closest to:

a) $972.

b) $1,080.

c) $1,161.

d) $1,275.

9. Consider a five-year bond with a face value of $1,000 paying annual coupons at a rate of 12%

which has a current yield to maturity of 10%. If all interest rates remain unchanged, one year

from today the price of this bond:

a) Will be higher.

b) Will be lower.

c) Will be the same.

d) Cannot be determined without additional information.

10. Your favorite aunty has finally agreed to contribute towards funding your retirement.

Specifically, she will start with a contribution of $6,000 today (that is, end of year 0) but this

amount will then decline at a constant rate of 3% p.a. over the foreseeable future. If the

interest rate appropriate for valuing your aunty’s contribution is 12% p.a. its present value

today is closest to:

a) $38,800.

b) $44,800.

c) $56,000.

d) $70,667.

11. The earnings and dividends of XYX Ltd are expected to grow at a rate of 5%, 10% and 15%

p.a. during years 1 through 3 respectively. After that, the earnings and dividends are expected

to stabilize to a long-run growth rate of 5% p.a. forever. The company’s current dividend per

share is $1.50 and the required rate of return on the stock is 12% p.a. Based on this

information, the current price should be closest to:

a) $21.27.

b) $25.48.

c) $28.07.

d) $29.89.

12. DBD Ltd’s current dividend and price per share are $1.80 and $10.00 respectively. Market

analysts expect the dividend per share to grow at a constant annual rate over the foreseeable

future. If the expected return on this stock is 15% per annum, the constant annual growth rate

implied by this information is closest to:

a) –3.0%.

b) –2.5%.

c) 2.5%.

d) 3.0%.

13. Market analysts expect the earnings per share of JJC Ltd to be $3.00 next year. The company

has typically retained 60% of its earnings and this policy is expected to continue in the

foreseeable future. The return required by investors on companies in JJC’s risk class is 10%

p.a. If the company’s earnings and dividends are expected to grow at a constant rate of 4%

p.a., the current share price is closest to:

a) $20.00.

b) $20.80.

c) $30.00.

d) $31.80.

14. You have just settled a lawsuit in your favor and you will be receiving semi-annual payments

of $25,000 over the next ten years. The first payment will occur six months from today. You

plan on investing these payments and you expect to earn a return of 6% p.a. with the returns

compounded monthly. The present value of this investment is closest to:

a) $329,520.

b) $368,004.

c) $370,642.

d) $371,937.

"Cash is king." Donald Trump made this statement at the end of the 1980s, referring to the climate for real estate investment. Most people would agree that in life, cash is, indeed, king. The management and proper valuation of cash flows is the most important factor in the survival of a business. Almost all businesses receive cash payments in spurts but must make cash payments at regular intervals. Many businesses have failed not for a lack of sales success, but rather for a lack of timely cash. Therefore, the timing of cash flows and implied time value are of utmost importance.

In this assignment, you will evaluate scenarios involving your group’s fictitious firm.

Your firm has a single copy machine for the tenth floor, and it has broken down yet again. Your firm must decide how to proceed in replacing the copier. So far, you have received two competing offers for comparable machines. Both offers are 3-year leases

Option A requires an up-front payment of $1,700 with additional annual payments of $1,200 at the beginning of years 2 and 3. The firm is also charged one-half of 1 cent, ($0.005), for each sheet printed, payable at the end of each year.

Option B has no up-front cost. Its lease payment is $1,300, payable at the beginning of the year, and the per-sheet charge is 1 cent ($0.01), payable at the end of each year. You estimate that monthly use of the copy machine will amount to 1,500 copies.

Determine an appropriate discount rate and discount the cash flows for each lease. Choose the best lease based on which lease costs less in present value terms. Be prepared to defend your choice.

A second option is to purchase the machine outright. In fact, after the lease expires, you are considering buying your firm’s next copier. (1) You need to obtain a minimum of two offers before buying a copy machine. Your needs include a multifunction machine capable of copying, faxing, and printing, with networking capability because all workers on the tenth floor will be sharing it. The purchase price should approximate the present value calculations from part a. In your search, you must consider not only the purchase price of the machine, but also the cost of any warranty/service agreement. In addition, you must adjust the current price for expected inflation. Take the price for the machine today and find out what the price will be in 3 years given a 3% compound annual inflation rate. Alternatively, you could calculate what the price would be given a 5% annual rate of decrease, as that is the observed trend over recent years. (2) Because you want to save for this expenditure (rather than take out a loan for it), you need information about savings rates at a local bank. (Here “bank” refers to any depository institution, including those that are strictly online operations.) After getting a rate for a savings account, calculate what amount you would have to deposit today to have the dollar value of the machine you wish to buy at the end of 3 years. If, instead, you wanted to make annual deposits at the end of each of the next 3 years, how much should you deposit? What if those three equal deposits were made at the beginning of each year?

Your firm plans to upgrade its computer systems. The computers will be financed with a 5-year bank loan totaling $25,000. Your firm can obtain a loan at the prime rate and you are asked to provide this information to your firm’s management. Obtain this information from a local bank and use that interest rate to prepare an amortization schedule for the loan.

A recent court ruling concluded that a competitor had violated one of your patents without properly paying for its use. The court-ordered settlement provides the following annual payments to your firm:

Year Payment
1 $150,000
2 125,000
3 100,000
4 75,000
5 50,000


Find the present value of these cash flows using a 6% discount rate.

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