FNCE 623 Trinity Western University Compute the Yearly Interest Rate Case Study Ques

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Economics

FNCE 623

Trinity Western University

FNCE

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answer the following questions based on financing course

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FNCE 623 Financial Management: Final Exam 6th July 2020 (Monday) Time: 6:30 p.m. to 9:30 p.m. There are 3 sections of questions. Section 1: Choose 7 out of 10 questions. (3 points for each question), total 21 points. Section 2: Choose 2 out of 3 questions. (4.5 points for each question), total 9 points. Section 3: Answer as many questions as you want and earn bonus points. Please type your answers in a Microsoft Word file and upload it to Turn-it-in link in week 11. Please type your chosen question numbers and answers only. Do not copy your chosen question text. You are required to upload your answers only at Turn-it-in by 9:30 p.m. No submission by email allowed. If you answer more than 7 questions from Section 1, and 2 from Section 2, only the first 7 attempted answers from Section 1, and first 2 attempted answers from Section 2 will be marked. You may consider showing your work to obtain appropriate credit for demonstrating your understanding. Please write down your assumption, if any required. You own attempt please. May the force be with you! 1|Page Section 1 Question 1: “If I try to increase the market share of the company’s products, I am doing the best interest of my company’s shareholders” says Sarah, a fresh graduate who recently joined the finance team of a public listed company. Do you agree? Please explain. Financial managers are required to make important decisions for the best interest of the shareholders of the company. In your own words, please describe those decisions with examples. Question 2: LuLuLime (LLL) is a company that sells modern equipment. To purchase a new equipment for your company from LLL, you as a financial manager have narrowed down two equipment models which meet your performance requirements equally. However, the schedule of payments of two models are different. Model A requires yearly payment of $15,000 for 5 years with the first payment to be made today. Model B requires yearly payment of $15,500 for 5 years with the first payment to be made end of year 1. Given yearly interest rate of 5.5%, which model would you recommend to purchase and why? Question 3: Your favorite bank is offering to lend $10,000 to you with the agreement to make monthly payment of $250 over 4 years. What is the effective annual rate the bank is charging you? If you agree to borrow $10,000 with the above payment schedule, what would be the loan balance at the end of year 1. 2|Page Question 4: You are considering an investment by depositing $25,000 to an account today and making monthly contributions of $300 into the account for 10 years. If you want to have $100,000 in the account after 10 years, what annual interest rate must you earn from the account? If you go ahead with the investment and decide to increase the monthly contribution to $400 after 5 years (deposit $25,000 today, $300 monthly for the first 5 years), how much will you have in the account at the end of 10 years. Question 5: Yah Yah Corporations (YY) issues a bond that pays 10% semi-annual coupon, have a $1,000 face value, and mature in 10 years. If YY bonds are sold to yield 8%, what is the price of YY bond at the end of year 2. If YY issue the same bond (same coupon rate, face value and maturity) with ‘callable’ feature, would the price of YY bond be lower or higher? Explain. Callable bond: A bond that the issuer has the option to redeem before it reaches its stated maturity, and it allows the issuing company to pay off the debt early. Question 6: Boom and Fall (B&F) expects to grow its business in the first 3 years and then the business expects the growth to decline after. The company just paid its annual dividend of $1 per share and is planning to increase its annual dividend by 10% for the next 3 years, and then the dividend will decline at an annual rate of 4% forever. What is the value of B&F stock in one year if the required return is 12%? What would be the impact on B&F stock price if the business growth will not decline after 3 years, therefore management would maintain the same dividend as that of year 3? Explain. 3|Page Question 7: Sales COGS Interest Dividends Depreciation Cash Receivables Current liabilities Inventory Long-term debt Net fixed assets Retained earnings Tax rate 2017 $ 2,900 2,030 410 56 290 250 242 900 1,015 3,200 6,000 1,050 34% 2018 3,300 2,310 420 79 330 150 412 1,100 900 3,100 5,700 ? 34% Given the above information, what is the operating cash flow and retained earnings balance for 2018? Question 8: Ricardo Rocks (RR) is a public listed manufacturing company and we can calculate financial ratios from its financial statements. What financial ratio(s) would you analyze and why, if you are: 1. A supplier that requires payment of amount due in 2 weeks and looking to extend credits to RR 2. A new investor interested to invest in RR 3. A banker looking to extend a long-term loan to finance RR for a new investment project Please explain in your own words. 4|Page Question 9: Justin Beaver (JB) is evaluating 2 investment options, project 1 (P1) or project 2 (P2), both giving the same amount of positive NPV. The following annual cash flows are expected, and JB expects 10% return from each investment. Each project requires an initial investment in Year 0, and JB has a limited investment fund. Which project JB should choose and why? Year 1 2 3 Cash Flow (P1) $6,000 6,000 6,000 Cash Flow (P2) $5,000 7,000 6,000 Question 10: “By investing in diversified portfolio of stocks in different industries or sectors, you can remove all the risks associated with a stock” - Do you agree with statement? Explain using your own words. How do we measure the risk associated with a particular stock? Explain using your own words. 5|Page Section 2 Question 11: Alicia (first time home buyer) is looking to buy one bed-room condo, and she needs your advice on the maximum price she can afford to offer for her condo purchase when she buys one. She plans to use her savings to pay for the down payment at 20% of purchase amount, and she will get a mortgage for the remaining. The following info is available: • • • • 1. 2. 3. Mortgage interest rate: 2.40% compounded semi-annually (25-year mortgage amortization with fixed rate for 5 years with same monthly mortgage payment) Alicia’s annual income is CAD 90,000. Alicia qualifies for Gross Debt Ratio (GDS) of 35%, and with this GDS ratio she can afford CAD 2,250 for her monthly mortgage payment. Financial institutions use stress test rate of 4.94% to qualify for maximum mortgage loan one can borrow. What maximum price Alicia can afford to offer for her condo purchase, assuming there is no stress test. If Alicia buys a condo with her maximum amount calculated in 1, what would be the total interest for the first year? Do you think stress test is helpful for Alicia? Explain. Question 12: Ring Ring… your good friend, Mo Saleh (MS), is calling you! MS: You: MS: You: MS: You: MS: 1. 2. 3. Hello friend! I have a strategic project to invest, and I want to know if I should go ahead with it or not. Oh nice. Tell me more about your project. Operating Cash Flow in Year 1: 130,000, Year 2: 130,000, Year 3: 130,000. I need to buy a machine in the beginning, and I can sell it for 50,000 at the end of useful life in year 3. Oh ok! What rate of return are you expecting from this project? It is 11%. What else do you know about this project? In the beginning, I need to invest...Oops! My phone battery is dead. If you know the IRR of the project is 10.5%, what would be the initial investment MS would need to make in the beginning? Should MS invest in this project? Why or why not? Please advise MS. MS called you again and said, the project would pay back in less than 3 years, and it is a good deal to invest. What will you say to MS? 6|Page Question 13: Given the above financial statements: 1. Calculate cash flow from assets using operating cash flow, net capital spending and additions to net working capital (NWC), cash flow to shareholder and creditors for 2015. 2. Kuiper wants to get additional long-term loan from a bank to finance its strategic project. As a banker, what questions will you ask the company and what analysis will you do to make your decision on the request for loan? 7|Page Section 3 Bonus questions (Optional): You may answer all if you wish. 1. As 2020 Vancouver summer progresses, your friend is thinking of opening up an ice cream shop called ‘Rain, Snow or Shine’. Your friend heard that you completed the Financial Management course, and count on you to advise financial aspect of the ice cream shop adventure. What questions would you ask your friend and what advice would you offer? 2. You are a financial advisor at a reputable bank. You are knowledgeable about the financial instruments including stocks and bonds. A customer made an appointment with you today to seek investment advice. What questions would you ask the customer, and what advice would you offer? [End of questions] 8|Page
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Explanation & Answer

Hey there, hope you're doing great! Attached is the file. Let me know if you have any questions or edits. Thanks! :)

Section 1
Question 1
Yes, I agree with Sarah. Her statement aligns to the best interest of the company’s shareholders.
Increasing the market share of the company’s products can help the company gain an upper hand
in dominating the industry it operates in. This dominance allows the company to have a greater
bargaining power and improve its profitability.
Increasing the market share of a company is one of the important decisions a financial manager
can make for the best interest of the shareholders of the company. As mentioned above, increasing
market share allows a company to have an upper hand and improve its profitability. Other decisions
a financial manager can make aside from increasing the market share is acquisition and boosting
the reputation of the company. The best interest of the shareholders is to see the company grow its
operations and profitability. The decision to acquire a competitor can help the company increase
its dominance in the industry. Enhancing the company's reputation is an important decision that
must not be taken for granted. This can be done by strengthening customer relationships.

Question 2
With the yearly interest rate of 5.5%, I would recommend Model A to purchase from LLL. My
company will pay less with Model A than with Model B. Below are the computations used to made
the decision.
Model A:
𝑃𝑉
[{1 − (1 + 𝑟)−𝑛 } × (1 + 𝑟)]
$15,000
𝐴𝑛𝑛𝑢𝑖𝑡𝑦 𝑑𝑢𝑒 = 0.055 ×
[{1 − (1 + 0.055)−5 } × (1 + 0.055)]
𝐴𝑛𝑛𝑢𝑖𝑡𝑦 𝑑𝑢𝑒 = 𝑟 ×

𝐴𝑛𝑛𝑢𝑖𝑡𝑦 𝑑𝑢𝑒 = $3,329.52

Model B:
𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑎𝑛𝑛𝑢𝑖𝑡𝑦 = 𝑟 ×

𝑃𝑉
[1 − (1 + 𝑟)−𝑛 ]

𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑎𝑛𝑛𝑢𝑖𝑡𝑦 = 0.055 ×

$15,500
[1 − (1 + 0.055)−5 ]

𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑎𝑛𝑛𝑢𝑖𝑡𝑦 = $3,629.73

Question 3
The annual interest rate is 9.2418% while the eff...


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Just what I needed…Fantastic!

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