# Finance

*label*Mathematics

*timer*Asked: Apr 11th, 2018

*account_balance_wallet*$50

### 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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## Tutor Answer

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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