Financial Management - Assignment

Thèmes abordés

Finance ; Iseg ; Assignment ; TIME VALUE OF MONEY ; BONDS ; STOCKS ; NET PRESENT VALUE ; PERSONAL QUESTIONS

Résumé du document

1) TIME VALUE OF MONEY

a) You have taken out a car loan that you will repay over five years in equal annual payments. Calculate the amount of your annual payments.

b) Calculate how much you still owe on your car loan after you have made four annual payments.

c) You have saved a large sum for your retirement. Calculate your age when your retirement account will be empty.

d) Explain the meaning of the Time Value of Money. Include a discussion of the three reasons discussed in class about why you would rather receive €100 today instead of waiting one year.


2) BONDS

a) A company has issued ten year, $1000 bonds that make annual coupon payments. Calculate the coupon rate on these bonds.

b) Five years later the market interest have changed. Calculate the premium or discount on this bond.

c) Recalculate your answer to b) above if these bonds paid interest semi-annually.

d) Discuss why bonds sometimes sell at a premium or at a discount from their face value.


3) STOCKS

a) Calculate the value of stock A.

b) Calculate the price of stock B.

c) Calculate the growth rate of stock B.

d) Discuss the role of investment banks, the primary and secondary markets, and initial public offerings in helping companies raise money.


4) NET PRESENT VALUE

a) Calculate the Discounted Payback of this project.

b) Calculate the Net Present Value of this project. Should you continue with this project?

c) Explain why IRR cannot be used to value this project.

d) Explain the rules of NPV that were discussed in class. Give examples of each.

Extraits

[...] Calculate the amount of your annual payments. Amount of car loan: $40,000 and Interest Rate: PVA = PMT (PVIFA;I;n) = $40,000=PVA/PVIFA;7%.5 = 40000/4,10 = $9,756 My annual payment will be of: $9,756 for my loan of 5 years. Calculate how much you still owe on your car loan after you have made four annual payments. Year Beginning balance Interest Payment Repayment of principal Ending balance 1 $40,000 $2,800 $9,756 $6,956 $ $33,044 $2,313 $9,756 $7,443 $ $25,601 $1,792 $9,756 $7,964 $ $17,637 $1,235 $9,756 $8,522 $9,115 After four year, I still owe of $9,115. [...]

[...] Include opportunity costs I have a machine which worth $500,000 that I'm not using, Should I sell it or should I do the project? -500 +100 +100 +100 = -500 + 249 = -251 =100/ 1.1 = 90.91 =100/ 1.1 = 82.64 =100/ 1.1 = 75.13 +249 +249I=10% NPV -251 So we should not do the project and we should sell the machine Forget sunk costs Sunk cost represents expenditures which a company has already spent on a project and they are not factor in an NPV equation. [...]

[...] We notice that the bond has appreciated from $500 per year to $750 per year, so the bond has to be sold at a premium price. The market price is better than its face value so it is sell at a premium price. The premium or the discount value could help investors to know if they will purchase their bond with a better or bellow price of its face value. STOCKS Calculate the value of Stock A Dividend just paid $ 1.00 /share; This year's expected dividend growth rate=10% and Constant dividend growth rate after one year=5%; Required return=10% D1= ( 1.00 x = $ 1.21 – For the Dividend of the year 1 we will have 1.21 Dividend of year 1 is $ 1.21 P0 = D1 / = 1.21 / ( 0.10 - 0.05 ) = 1.21 / 0.05 = $ 24.2 So the value of Stock 1 is $ 24.2 Calculate the price of Stock B Total earnings=€100 million; number of shares=10 million; P/E ratio=25; Total equity=€200 million; Total dividends=€10 million The P/E ratio is the Price/EPS Price=P/E ratio x EPS And EPS=Total earnings/Number of shares = 100 million/10 million = €10 per share The EPS is €10 per share Price=P/E ratio x EPS = 25 x 10 = €250 So, the price of Stock B is €250. [...]

[...] Year Cash Flow -20 Discounted PayBack - Cash Flow and Discounted Payback are in million $ Discounted payback: Year 4/1,20 Year 4/1,20^2 Year 4/1,20^3 Year 4/1,20^4 Year 4/1,20^5 Year -1/1,20^6 Year 4/1,20^7 Year 4/1,20^8 Year 4/1,20^9 Year 10: 4/1,20^10 Sum of Discounted Payback = $15,1 million After 10 years, the discounted payback will not cover our investment. Calculate the Net Present Value of this project. Should you continue with this project? NPV = Discounted payback –investment NPV= 15,100,000 – 20,000,00 = -4,900,000 The Net Present Value of this project is $-4,900,000 The net Present Value is negative, so we should not continue with this project because we will not make profits and moreover after 10 years there will be a nuclear war. [...]

[...] The risk of inflation could appear because if I see a product with a price of €100 today, it is possible next year he costs €150 with an inflation of 50% so it will be more expensive and I will not buy it. I could deposit/invest my €100 today in a saving account; its sum will growth and I will earn interests that will give me more than €100 and also a potential earning power. You also could spend this sum to buy something that you want now. BONDS A company has issued ten years, $1,000 bonds that make annual coupon payments. Calculate the coupon rate on these bonds. [...]