Finance i

Finding Solutions to 13 Questions

Course Information

Professor Information

Question 1

1. Bank A:

1. Bank B:

1. Bank D:

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

Question 2

Savings for overseas holidays

 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

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
.

Present value of the remaining 2 years:

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

Question 4

Borrowed:

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

Balance:

New repayment:

Question 5

Value of a bond:

Question 6

Calculating YTM:

Question 7

Calculating intrinsic value

Question 8

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

Question 9

Question 10

Question 11

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

Applying interpolation formula shown below:

1. Payback period

1. Discounted payback:

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

Reference

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