assignment5 fundamentals of corporate finance, 4th edition brealey

AK/ADMS3530 3.0 Summer 2007 Assignment #1 Instructions: (1) This assignment is to be done individually You must sign and submit the standard cover page supplied as the last page of this assignment (2) This assignment is due at the start of class, the week of June 4, 2007 This assignment can be typewritten or handwritten Work that is too difficult to read due to messiness and poor handwriting will receive zero credit You must show your work to receive full credit (3) This assignment carries a total mark of 100 points Question - Ch.4 TVM (15 marks) You issue debt of $30,000 on October 1, 2007 You decide to payback this debt by making equal payments every three months during the next years The first payment was starts on January 1, 2008 (a) If the effective annual rate (EAR) was 12%, what was the amount of each payment? (5 marks) (b) What is the outstanding debt just after the 6th payment? (5 marks) (c) If just after the 6th payment, the effective annual rate increases to 14% and you decide to keep the same payments except for the last one which has to be greater What would be the amount of the last payment? (5 marks) Question – Ch.4 TVM (15 marks) Consider the following monthly cash flows (see the diagram below): - Cash flows of an amount X are made for months 1, 3, 5, …, 17 and 19 (the 10 odd-numbered months) - Cash flows of an amount Z are made for months 2, 4, 6, …, 18 and 20 (the 10 even-numbered months) Today X Z X Z X Z 19 20 ADMS3530 3.0 Assignment #1 Question (cont.) The APR is 6% and is compounded on a monthly basis (a) How much money will be accumulated 20 months from now if X = $2,000 and Z = $0? (5 marks) (b) What is the present value of these cash flows today if X = $2,000 and Z = - $700? (5 marks) (c) If the present value of these cash flows today is $14,000, and the future value of the Z’s cash flows 20 months from now is $5000, what is the value of X? (5 marks) Question - Ch.4 TVM (20 marks) You’ve decided to fund an orphanage today so that society could benefit from that service forever The orphanage is to open its operations a year from today and you are wiling to commit $5,000,000 towards this effort You’ve been informed that it would cost approximately $250,000 a year to maintain the operations (assume for now that there is no inflation) (a) Based on the above information is $5,000,000 sufficient to meet the annual operating needs of the orphanage forever? Assume the interest rate is 6% per annum Provide supporting analysis (4 marks) (b) If the interest rate was 5% and you committed $4,000,000 instead of $5,000,000 would it be enough to sustain the operations? If not what would be the maximum amount that would be available annually? Provide supporting analysis (6 marks) (c) As with everything the cost of operating the orphanage is expected to go up annually The interest rate is 5% and you expect the annual costs to grow at a constant rate of 1% (inflation) starting in year Would you be able to fund this increase with your $5,000,000 commitment? If not what would be the maximum available amount? Provide supporting analysis (5 marks) (d) What would your commitment have to be to accommodate annual operating costs of $300,000 with inflation of 1% annually? Assume the int rate is 5% Provide supporting analysis (5 marks) Page ADMS3530 3.0 Assignment #1 Question - Ch.4 Mortgages (20 marks) You have recently graduated from York University and have landed a terrific job near Barrie You have been reading up on the potential growth of the Barrie area and have decided to buy a home before prices increase further You are looking at a house worth $250,000 and you are able (with the help from a rich aunt) to make a down-payment of 10% The posted mortgage rate from ING Direct is 6.5% for a year-term and a 25 year amortization period a) What will be your monthly mortgage payment? (5 marks) b) You earned an “A” in your ADMS 3530 course and have decided to go with a 20 year (instead of the regular 25 year) amortization period What will be the total interest savings over the life of the mortgage by reducing the amortization period to 20 years from 25 years? (7 marks) c) Suppose in 2010 (3 years from today),you decided to re-finance your mortgage as posted mortgage rates for a year term have decreased to 5.75% Also, you would like to have a weekly payment plan instead of monthly What will be your weekly payment on the mortgage in 2010? (assume there are 52 weeks in a year and you originally went with the 20 year amortization period in 2007) (8 marks) Question - Ch.5 Bonds (20 marks) In 1998, Algoma Inc issued 20-year bonds at par value with a coupon rate of 9% In 2004, Algoma was granted court protection under the CCAA due to a looming liquidity crisis and the yield to maturity of the bonds increased to 19% The bonds pay interest semi-annually (a) What happened to the price of the bonds in 2004? (4 marks) (b) Compute the current yield in 1998 and in 2004 Why is the current yield not an appropriate measure of the return for the Algoma bonds? (6 marks) (c) In 2007 merger mania continued in Canada and Algoma became the target of a takeover bid by India-based Essar Global Ltd for $56 per share The yield to maturity of the bonds decreased to 7% What was a bondholder’s annual rate of return from 1998 to 2007? (Assume the coupons are not reinvested.) (6 marks) (d) What is the rate of return for a bondholder who purchased the bond in 2004 and sold it in 2007? (Assume the coupons are not reinvested.) Page ADMS3530 3.0 Assignment #1 (4 marks) Question – Ch.6 Bonds (10 marks) This question has the following three parts, (a), (b), and (c) (a) Compute the yield to maturity on a 20-year bond that was issued one year ago and has a coupon rate of 8%, a face value of $1,000, and currently sells at $1,104.21 The bond pays coupons semi-annually (3 marks) (b) Suppose the real rate of return on the bond in part (a) is expected to be 3.25% annually What is the implied annual inflation rate, given the nominal yield to maturity in part (a)? (2 marks) (c) Sometimes bonds may be issued with a face value other than $1,000 Suppose a 20-year 7% coupon bond with semi-annual coupon payments is currently priced at $901.95, yielding 9% annually What is the face value of this bond? Suppose you are trying to raise $1.5 million with this bond, how many bonds you need to issue? (5 marks) _End of Assignment Page ADMS3530 3.0 Assignment #1 Atkinson Faculty of Liberal and Professional Studies YORK UNIVERSITY Toronto, Ontario ADMS3530 3.0 Finance Professor Section Assignment #1 Due Date: Start of class, week of June 4, 2007 Personal Work Statement I, the undersigned: • warrant that the work submitted herein is my work and not the work of others • acknowledge that I have read and understood the Senate Policy on Academic Honesty • acknowledge that it is a breach of the University Regulations to give and receive unauthorized assistance on a graded piece of work Name (typed or printed) York Student # Signature Page ... is the present value of these cash flows today if X = $2,000 and Z = - $700? (5 marks) (c) If the present value of these cash flows today is $14,000, and the future value of the Z’s cash flows... to maturity on a 20-year bond that was issued one year ago and has a coupon rate of 8%, a face value of $1,000, and currently sells at $1,104.21 The bond pays coupons semi-annually (3 marks)... _End of Assignment Page ADMS3530 3.0 Assignment #1 Atkinson Faculty of Liberal and Professional Studies YORK UNIVERSITY Toronto, Ontario ADMS3530 3.0 Finance Professor Section