Finance

Anonymous
timer Asked: Apr 11th, 2018
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Question Description

Question 1 Use Python to answer this question. (a) Select a stock and obtain the stock prices for a one-year period. Create a histogram of its daily returns. (10 marks) (b) Calculate the daily price volatility of the stock and explain its significance. (10 marks) (c) Find the chain of call and put options available on this stock using either Eikon or the internet. Describe what a call option is and explain the information given for each call option. (10 marks) Question 2 Use Excel in your calculations. May purchases a house for $2.5 million and makes a down payment of 40% of the purchase price. She borrows the rest from the bank on a 25-year loan, which charges her 1.2% for the first year and 1-year SIBOR + 0.35% thereafter. The monthly payment of a variable-rate loan is calculated as if it is a fixed-rate loan on the outstanding loan balance and time remaining on the loan, whenever FIN201 Tutor-Marked Assignment SINGAPORE UNIVERSITY OF SOCIAL SCIENCES (SUSS) Page 3 of 4 Question 3 Use Excel in your calculations. The yield on 10 year Singapore Treasury bonds is 3% and the market return is 5%. You are studying UniSUSS stock which has a beta of 1.2. UniSUSS has just paid a dividend of 1.20 and expects dividends to grow at a rate of 4% per annum for the next 5 years, and to slow down to 2% growth per annum thereafter. (a) Calculate the discount rate you should apply to UniSUSS stock. (5 marks) (b) What is the intrinsic value of UniSUSS stock? (10 marks) (c) If dividends stop growing after the first 5 years, what is the intrinsic value of UniSUSS stock? (5 marks) Question 4 Answer the following questions using Python. Trunk Company plans to invest in Project A with the following estimated annual cash flows: Yr 1 $ 20,000 Yr 2 $ 90,000 Yr 3 $ 180,000 Yr 4 $ 220,000 Yr 5 $ 150,000 The project costs $500,000. The required return for this project is 5% compounded quarterly. Trunk Company looks at another Project B which might potentially be better than Project A. Project B has the following cash flows: Yr 1 $ 150,000 Yr 2 $ 220,000 Yr 3 $ 180,000 Yr 4 $ 90,000 Yr 5 $ 20,000 This project also costs $500,000. The required return for this project is 5% compounded quarterly, same as Project A. (a) Compute the IRR of Projects A and B, and propose whether to accept or reject each project, assuming there are unlimited funds. Explain your decision. (10 marks) FIN201 Tutor-Marked Assignment SINGAPORE UNIVERSITY OF SOCIAL SCIENCES (SUSS) Page 4 of 4 (b) Calculate the NPV of each project. Propose whether to accept or reject each project based on NPV, and choose one project, assuming the Company has funds only for one project. Explain your decision. (10 marks) (c) Explain why one of the projects is superior although the cash flows are the same except that they are received in different years. What should the cost of the inferior project be in order to make you indifferent to either project? What is the resulting annual discount rate of the inferior project? (10 marks)

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FIN201 Financial Mathematics Tutor-Marked Assignment/TMA01 January 2018 Presentation FIN201 Tutor-Marked Assignment TUTOR-MARKED ASSIGNMENT (TMA) This assignment is worth 25% of the final mark for FIN201, Financial Mathematics. The cut-off date for this assignment is 9 April 2018, 2355 hours. Question 1 Use Python to answer this question. (a) Select a stock and obtain the stock prices for a one-year period. Create a histogram of its daily returns. (10 marks) (b) Calculate the daily price volatility of the stock and explain its significance. (10 marks) (c) Find the chain of call and put options available on this stock using either Eikon or the internet. Describe what a call option is and explain the information given for each call option. (10 marks) Question 2 Use Excel in your calculations. May purchases a house for $2.5 million and makes a down payment of 40% of the purchase price. She borrows the rest from the bank on a 25-year loan, which charges her 1.2% for the first year and 1-year SIBOR + 0.35% thereafter. The monthly payment of a variable-rate loan is calculated as if it is a fixed-rate loan on the outstanding loan balance and time remaining on the loan, whenever the variable rate is changed. (a) Compute the monthly payment she has to make in the first year. What is the loan balance remaining at the end of one year? (8 marks) (b) Calculate the monthly payment she has to make in the second year assuming the 1year SIBOR is 1.7%. What is the loan balance remaining at the end of two years? How much was the interest and principal repayment made at the end of two years? (8 marks) (c) What is SIBOR? From your understanding of SIBOR, explain if the (mortgage) loan rate can ever be less than SIBOR? (4 marks) SINGAPORE UNIVERSITY OF SOCIAL SCIENCES (SUSS) Page 2 of 4 FIN201 Tutor-Marked Assignment Question 3 Use Excel in your calculations. The yield on 10 year Singapore Treasury bonds is 3% and the market return is 5%. You are studying UniSUSS stock which has a beta of 1.2. UniSUSS has just paid a dividend of 1.20 and expects dividends to grow at a rate of 4% per annum for the next 5 years, and to slow down to 2% growth per annum thereafter. (a) Calculate the discount rate you should apply to UniSUSS stock. (5 marks) (b) What is the intrinsic value of UniSUSS stock? (10 marks) (c) If dividends stop growing after the first 5 years, what is the intrinsic value of UniSUSS stock? (5 marks) Question 4 Answer the following questions using Python. Trunk Company plans to invest in Project A with the following estimated annual cash flows: Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 $ $ $ $ $ 20,000 90,000 180,000 220,000 150,000 The project costs $500,000. The required return for this project is 5% compounded quarterly. Trunk Company looks at another Project B which might potentially be better than Project A. Project B has the following cash flows: Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 $ $ $ $ $ 150,000 220,000 180,000 90,000 20,000 This project also costs $500,000. The required return for this project is 5% compounded quarterly, same as Project A. (a) Compute the IRR of Projects A and B, and propose whether to accept or reject each project, assuming there are unlimited funds. Explain your decision. (10 marks) SINGAPORE UNIVERSITY OF SOCIAL SCIENCES (SUSS) Page 3 of 4 FIN201 Tutor-Marked Assignment (b) Calculate the NPV of each project. Propose whether to accept or reject each project based on NPV, and choose one project, assuming the Company has funds only for one project. Explain your decision. (10 marks) (c) Explain why one of the projects is superior although the cash flows are the same except that they are received in different years. What should the cost of the inferior project be in order to make you indifferent to either project? What is the resulting annual discount rate of the inferior project? (10 marks) ---- END OF ASSIGNMENT ---- SINGAPORE UNIVERSITY OF SOCIAL SCIENCES (SUSS) Page 4 of 4 ...
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Tutor Answer

Merdav
School: Boston College

Attached.

Monthly Payment of a Loan
Purchase price of the house
$2,500,000
Down payment
$1,000,000
Loan amount
$1,500,000
Loan period (years)
25
Interest rate
1.20%
Loan payment
.= amount/discount factor

Discount factor =

1+𝑟 ⁿ−1
𝑟(1 + 𝑟)ⁿ

n
300
r
0.1%
Discount factor
259.0707
Monthly payment =loan amount/discount factor
Monthly payment
$5,790
Loan balance
$1,430,521
Second Year
Interest rate = SIBOR + 0.35%
SIBOR
Interest rate
n
r
Discount factor
Monthly payment
Loan balance

1.70%
2.0500%
288
0.1708%
227.3215204
$6,292.94
$1,355,005.61

Interest for the first year
Total amount paid
Principal paid

$18,000
$69,479
$51,479

Interest for the second year
Total amount paid
Principle paid

$29,326
$75,515
$46,190

Calculating discount rate of a stock
Market rate
5%
Yield (risk free rate
3%
Beta
1.2
Discount rate = Rf + B*(Rm-Rf)
Discount rate
5.40%
Intrinsic value of stock
Dividend
1.2
Growth rate for first 5 Yrs
4%
Growth rate thereafter
2%
Discount rate
5.40%
Yr 0
Yr 1
Yr 2
Yr 3
Yr 4
Yr 5
Yr 6
Dividend paid
1.2
1.248 1.29792 1.34984 1.40383 1.45998
1.48918
Present value
1.2 1.184061 1.168333 1.152815 1.137502 1.122393
1.08619
Intrinsic value of stock
39.9980
If the dividend stops growing at year 5.
Yr 0
Yr 1
Yr 2
Yr 3
Yr 4
Yr 5
Price
Dividend paid
1.2
1.248 1.29792 1.34984 1.40383 1.45998 104.2845345
Present value
1.2 1.184061 1.168333 1.152815 1.137502 1.122393 80.17091725
Intrinsic value of stock
87.1360

Price
43.79950
31.94667

Calculating IRR
Initial outlay
After Tax Cashflow
Present Value factor
Present Value
Sum of present value
Less: Initial outlay
NPV
IRR

Project A
YR 0
YR 1
YR 2
YR 3
YR 4
$ (500,000.00)
$ 20,000.00 $ 90,000.00 $ 180,000.00 $ 220,000.00
1.25% 1.050945337 1.104486101 1.160754518 1.219889548
$ 19,030.49 $ 81,485.86 $ 155,071.55 $ 180,344.20
$ 552,933.37
$ (500,000.00)
$ 52,933.37
8.14557%

Calculating IRR
Initial outlay
After Tax Cashflow
Present Value factor
Present Value
Sum of present value
Less: Initial outlay
NPV
IRR

Project B
YR 2

YR 0
YR 1
YR 3
YR 4
$ (500,000.00)
$ 150,000.00 $ 220,000.00 $ 180,000.00 $ 90,000.00
1.25% 1.050945337 1.104486101 1.160754518 1.219889548
$ 142,728.64 $ 199,187.66 $ 155,071.55 $ 73,777.17
$ 586,365.19
$ (500,000.00)
$ 86,365.19
12.58549%

Decision Criteria
Both projects (A&B) should be pursued. This is because the internal rate of return is higher than the minimum req
NPV for project A
NPV for project B

$
$

52,933.37
86,365.19

Decision Criteria
Select Project B. This is because project B has a higher NPV than project A. The anticipated future return are mor

The reason why one of the project is superior than the other is because of time value for money. Project A receives the small
Projec B receives the large amounts of the cashflows in the recent years. The time value for money for project B would be hig
Additionlly, the cash flows received can be re-invsted back to yield higher returns in the subsequent years.
The cost of the inferior project to make it indefferent would be
The resulting annual discount rate would be calcualted as follows;
NPV for project B
$ 86,365.19
NPV for project A
$ 52,933.37
NPV (B) - NPV (A)
$ 33,431.8...

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Review

Anonymous
awesome work thanks

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