BUSINESS FINANCE

Finance i

Finding Solutions to 13 Questions

Course Information

Professor Information

Question 1

  1. Bank A:
    Corporate Finance

Corporate Finance 1

Corporate Finance 2

  1. Bank B:
    Corporate Finance 3

Corporate Finance 4

Corporate Finance 5

Corporate Finance 6

Corporate Finance 7

Corporate Finance 8

Corporate Finance 9

Corporate Finance 10

  1. Bank D:
    Corporate Finance 11

Corporate Finance 12

Corporate Finance 13

Corporate Finance 14

According to the evaluations conducted above, Kate should choose investing in bank A since it has the highest future value of
Corporate Finance 15.

Question 2

Savings for overseas holidays

Corporate Finance 16

Cash Deposit

$ 12,000.00

$ 17,169.23

$ 14,000.00

$ 17,776.29

$ 16,000.00

$ 18,029.20

$ 20,000.00

$ 20,000.00

$ 72,974.71

Corporate Finance 17

Question 3

Loan Amortization Schedule

Opening Balance

Repayment

Interest

Principal

Ending Balance

($7,513.69)

($2,400.00)

($5,113.69)

$24,886.31

$24,886.31

($7,513.69)

($1,990.90)

($5,522.79)

$19,363.52

$19,363.52

($7,513.69)

($1,549.08)

($5,964.61)

$13,398.90

$13,398.90

($7,513.69)

($1,071.91)

($6,441.78)

$6,957.12

$6,957.12

($7,513.69)

($556.57)

($6,957.12)

Amount to repay the bank after selling the car is the ending balance in year 3 of
Corporate Finance 18.

Present value of the remaining 2 years:

Corporate Finance 19

Corporate Finance 20

Corporate Finance 21

The amount to repay after selling the car is the same as PV of the remaining 2 years as calculated above.

Question 4

Borrowed:
Corporate Finance 22

Corporate Finance 23

Corporate Finance 24

Corporate Finance 25

Rate increased to 7% p.a after 3 yrs. hence the amount of new repayment is obtained as follows:

Balance:

Corporate Finance 26

Corporate Finance 27

Corporate Finance 28

New repayment:

Corporate Finance 29

Corporate Finance 30

Question 5

Value of a bond:

Corporate Finance 31

Corporate Finance 32

Corporate Finance 33

Corporate Finance 34

Corporate Finance 35

Corporate Finance 36

Question 6

Calculating YTM:

Corporate Finance 37

Corporate Finance 38

Corporate Finance 39

Corporate Finance 40

Corporate Finance 41

Corporate Finance 42

Corporate Finance 43

Corporate Finance 44

Question 7

Calculating intrinsic value

Corporate Finance 45

Corporate Finance 46

Corporate Finance 47

Question 8

Implied RRR on preference share paying dividend of $0.60, currently trading at 4.50 per share:

Corporate Finance 48

Corporate Finance 49

Question 9

Corporate Finance 50

Corporate Finance 51

Corporate Finance 52

Corporate Finance 53

Corporate Finance 54

Corporate Finance 55

Question 10

Corporate Finance 56

Corporate Finance 57

Corporate Finance 58

Corporate Finance 59

Question 11

Corporate Finance 60

Corporate Finance 61

Corporate Finance 62

Corporate Finance 63

Corporate Finance 64

Corporate Finance 65

Corporate Finance 66

Question 12

Cash Flow

Cumulative cash flow

Discount Factor

Present Value of Cash Flow

Cumulative discounted cash flow

Accounting income

0

($25,000)

($25,000)

($25,000.00)

($25,000.00)

($18,000)

0.89285714

$6,250.00

($18,750.00)

($10,000)

0.79719388

$6,377.55

($12,372.45)

0.71178025

$8,541.36

($3,831.09)

0.63551808

$9,532.77

$5,701.69

0.56742686

$9,078.83

$14,780.51

  1. Corporate Finance 67

  2. Corporate Finance 68

  3. Corporate Finance 69

Applying interpolation formula shown below:

Corporate Finance 70

Corporate Finance 71

Corporate Finance 72

Corporate Finance 73

Corporate Finance 74

  1. Payback period

Corporate Finance 75

Corporate Finance 76

  1. Discounted payback:

Corporate Finance 77

Corporate Finance 78

Corporate Finance 79

Corporate Finance 80

Corporate Finance 81

Corporate Finance 82

Recommendation: Accept the project because of the positive NPV. It is also clear that IRR of 30% is greater than cost of capital of. 12%.

Question 13

Projects are independent when decision to accept or reject one project is unaffected by acceptance or rejection of another project (Brigham and Ehrhardt, 2014).

Projects are mutually exclusive when acceptance of one project affects the decision made on another project.

Accept a project whose NPV is positive but reject a project whose NPV is negative

Accept projects whose PVI >1

Accept project whose IRR>Cost of capital, reject project whose IRR is <Cost of capital

Accept project with shorter payback period or a period less than target period

Discounted Payback

Accept project whose discounted payback period is less than pre-determined discounted payback period. Otherwise reject the project

Accept project with a higher ARR

Reference

Brigham, E., & Ehrhardt, M. (2014). Financial Management: Theory & Practice. Mason, OH: Cengage Learning.