Winter 2014

ADM 2350 Prof. William F. Rentz FINANCIAL MANAG M N! A""i#nment $1 Re%i"e& 'an(ar) 22* 2014

G N RAL IN+!R,C!I-N+. Your assignment must be "ent ele/troni/all) in &o/* &o/0* or 1&f format to t2e !,!-R for )o(r "e/tion. Your t(tor m("t R C I3 your assignment by no later t2an 1 PM on +at(r&a)* 'an(ar) 25* 2014 . Late assignments will N-! be accepted. To ensure that your tutor receives the assignment on time, it i" +!R-NGL4 re/ommen&e& t2at )o( ele/troni/all) "(5mit )o(r a""i#nment 5efore mi&ni#2t on t2e e%enin# of Fri&a)* 'an(ar) 24* 2014 at t2e late"t. Unless there are system problems with C-NN C!, the professors solution set will be posted on C-NN C! by no later than 6 P of the due date. This assignment counts 6.!"# of your course grade. You are encouraged to wor$ on this assignment in teams of up to " students from t2e "ame "e/tion of t2i" /o(r"e. However, you may turn in an individual assignment if you prefer. %ach assignment must be typed and contain the student name&s' and student number&s' on each page. ( scanned )tatement of *ntegrity must be electronically attached to each assignment &)ee pages ++,+! of the course syllabus'. a/2 in&i%i&(al 62o"e name a11ear" on t2e a""i#nment m("t "i#n t2e +tatement of Inte#rit). Li%e Lin7" for !(tor"8 9mail A&&re""e". )ection )ection )ection P )ection . lliott :o(r#eoi" <iao '(n =>enr)? Wan# &na Ga%an @a/2 C2retien 5o(r#eo;(otta6a./a <6an#141;(otta6a./a #a%a012;(otta6a./a @/2re0A4;(otta6a./a

+. &!/ mar$s' .obert is a fourth,year business student who wants to go on a graduation celebration0vacation in Panama, but he has no money to pay for the trip. (fter the vacation, .obert will start his career. 1is 2ob will re3uire moving to a new town and buying professional clothes and a used car. 1e as$s his parents to lend him BC*000, which he figures he will be able to pay bac$ in fo(r years as a single payment. 1is parents agree to lend him the money but will charge 3 percent interest per year with annual compounding. a. &" mar$s' 4hat amount will .obert need to pay bac$ at the end of four years5 b. &" mar$s' 1ow much interest will .obert pay at the end of four years5 c. &" mar$s' .oberts parents want to give him an incentive to pay off the loan as 3uic$ly as possible. They structure the loan so that they charge 3 1er/ent intere"t t2e fir"t )ear and in/rea"e t2e rate 1 1er/enta#e 1oint AC> )ear until the loan is paid off. -ow what will be the amount that .obert needs to pay bac$ at the end of four years5

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d. &" mar$s' .oberts parents reali:e that perhaps he may need 5 years to pay off the loan. )o, they give .obert the option to ta$e 5 years. -evertheless, they still want to encourage him to pay as early as possible. )o, the interest rate on the loan will again in/rea"e 5) 1 1er/enta#e 1oint AC> )ear "o t2at it 6ill rea/2 D 1er/ent in )ear 5 . ;ompared to your answer in Part c., how much more will the loan cost .obert if he e<ercises the five, year option5 !. &!" mar$s' =>Y borrows BC0*000 under a t6o9)ear loan a#reement at an annual interest rate of 10 1er/ent. The payment schedule calls for 2 le%el ann(al en&9of9)ear 1a)ment". a. &" mar$s' !o t2e neare"t 1enn), what is the ann(al total 1a)ment that =>Y must ma$e5 b. &+/ mar$s' ;onstruct a loan amorti:ation schedule for this loan that for each year includes &+' the total payment, &!' the interest payment, &9' the principal payment, and &6' the outstanding or remaining balance. Al"o "2o6 t2e total intere"t an& total 1rin/i1al 1ai& o%er t2e life of t2e loan. &>IN!. ?irst, calculate the e3ual total payment ; using the formula for the P@ of an (nnuity Ai.e. your answer to Part a.B and insert that amount for AC> year for !otal Pa)ment on your loan amorti:ation schedule. -e<t, insert the amount originally borrowed as the :e#innin# :alan/e for 4ear 1. -ow, calculate the Intere"t Pai& for this year by multiplying the interest rate times the :e#innin# :alan/e for this year. Then, calculate the Prin/i1al Pai& in this year by subtracting the Intere"t Pai& in this year from the !otal Pa)ment for this year. -e<t, to obtain the n&in# :alan/e for this year, the Prin/i1al Pai& for this year will be subtracted from the :e#innin# :alan/e for this year This n&in# :alan/e will also be the :e#innin# :alan/e for the ne<t year. -ow, for each successive year, repeat the steps for that year to calculate the Intere"t Pai&, Prin/i1al Pai&, and n&in# :alan/e. AYou would also enter the n&in# :alan/e for this year as the :e#innin# :alan/e for the ne<t year whenever the current year is N-! the last year.B -ow chec$ the n&in# :alan/e for the last year. *f it is positive, you must INCR A+ both the !otal Pa)ment and Prin/i1al Pai& in the last year by this balance amount to e<actly amorti:e the loan. *f it is negative, reduce the both the !otal Pa)ment and Prin/i1al Pai& in the last year by the magnitude of the balance amount to e<actly amorti:e the loan. ?inally, sum individually the !otal Pa)ment, Intere"t Pai&, and Prin/i1al Pai& to get the respective !otal" for these items. )ee the amorti:ation schedule on p. +"! for an e<ample of a loan with e3ual principal payments each year. That e<ample has an n&in# :alan/e of ! cents in the last year, which means that the !otal Pa)ment and Prin/i1al Pa)ment in the last year must be INCR A+ D by ! cents to e<actly amorti:e the loan.' c. &+/ mar$s' *nstead of e3ual total payments, suppose that the loan is structured so that =>Y ma$es eE(al 1rin/i1al 1a)ment" at t2e en& of ea/2 )ear alon# 6it2 t2e intere"t 1a)ment for t2e )ear. ;onstruct a loan amorti:ation schedule for this loan that for each year includes &+' the total payment, &!' the interest payment, &9' the principal payment, !

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and &6' the outstanding or remaining balance. Al"o "2o6 t2e total intere"t an& total 1rin/i1al 1ai& o%er t2e life of t2e loan. &>IN!. ?irst, calculate the e3ual annual principal payment and insert that amount for AC> year for Prin/i1al Pai& on your loan amorti:ation schedule by dividing the amount originally borrowed by the number of years of payments. -e<t, calculate the :e#innin# :alan/e and n&in# :alan/e for each year, starting with the :e#innin# :alan/e for 4ear 1 as the amount originally borrowed. The Prin/i1al Pai& for AC> year will be subtracted from the :e#innin# :alan/e for that year to obtain the n&in# :alan/e for that year, which will be the :e#innin# :alan/e for the ne<t year. -ow, calculate the Intere"t Pai& for AC> year by multiplying the interest rate times the :e#innin# :alan/e for that year. Then, calculate the !otal Pa)ment for AC> year by summing the Intere"t Pai& and Prin/i1al Pai& for that year. ?inally, sum individually the !otal Pa)ment, Intere"t Pai&, and Prin/i1al Pai& to get the respective !otal" for these items. )ee the amorti:ation schedule on p. +"+ for an e<ample of a loan with e3ual principal payments each year.' 9. &" mar$s' )uppose that the mar$eting manager for %dgars .etail (ppliance )tore proposes a sale. ;ustomers can buy now but dont have to pay for their appliance purchases for t6ent)9 fo(r months. ?rom a time value of money perspective, selling appliances at full price with payment in t6ent)9fo(r months is e3uivalent to selling appliances at a sale, or discounted, price with immediate payment. )uppose that the interest rate is 1C percent per year with mont2l) compounding. 4hat is the eE(i%alent "ale 1ri/e to&a) of a B2*2CD.20 washer0dryer combo when the customer ta$es the full t6ent)9fo(r months to pay for it5 6. &" mar$s' )uppose that we e<pect interest rates to increase over the ne<t few years, from 1 percent this year, to 2 percent ne<t year, to 3 percent in year 9, and to 4 percent in year 6. *n this environment, what is the present value of a B200*000*000 cash flow re/ei%e& fo(r )ear" from to&a)5 ". &" mar$s' ;onsider a four,year pro2ect that /o"t" B20*000 to&a) that is e<pected to generate B0 at the end of year one, B12*000 at the end of the year two, BC*000 at the end of year three, and B4*000 at the end of year four. The pro2ects /o"t of /a1ital or reE(ire& rate of ret(rn i" F 1er/ent. 4hat is the pro2ects NP35 6. &+" mar$s' (nita Celanger wants to send her daughter ;laudette to university. ;laudette is celebrating only her si<th birthday today, but (nita feels that she needs to start saving soon. ;laudette will need BF0*000 for university e<penses on her 1Ct2* 1At2* 20t2* an& 21"t 5irt2&a)". (nita e<pects each deposit that she ma$es in ;laudettes savings account will earn 3 percent compounded annually for as long as the account remains open. a. &" mar$s' !o t2e neare"t 1enn), how much does (nita need to accumulate in ;laudettes savings account by age 1C : F-R ;laudette withdraws the first D6/,///5 b. &" mar$s' (nita plans to ma$e annual deposits on ;laudettes "e%ent2 through ei#2teent2 birthdays. 4hat is the amount of these annual deposits in order for (nita to achieve the necessary savings by ;laudettes eighteenth birthday5 9

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c. &" mar$s' )uppose that (nita wishes to buy ;laudette a 1onda ;ivic as a graduation present on her 22n& 5irt2&a). The estimated cost of the ;ivic is B25*000. !o t2e neare"t 1enn), how much larger must each annual deposit be so that (nita will be able to buy ;laudette the ;ivic on her !!nd birthday5 E. &" mar$s' ?ran$ F (ssociates had sales of B1*000*000 for fi"/al 200C. ?ran$s sales for its most recent fi"/al )ear 2013 were B1*F10*510. 4hat is ?ran$s /om1o(n& ann(al #ro6t2 rate of sales over this fi%e9)ear 1erio&5

G. &!/ mar$s' Hohn and Carbara Cet: have found the home of their dreams in (lmonte, Intario. The home costs D6//,///. The ;*C; is offering Hohn and Carbara a mortgage with a 9 percent 3uoted rate based on semi,annual compounding. The ban$ re3uires a down payment of !/# or D+!/,///, ?ortunately, the couple have the re3uired D+!/,///. The term of the loan is four years based on an amorti:ation period of !/ years. a. &" mar$s' !o t2e neare"t 1enn), what will be the 1erio&i/ total 1a)ment if the couple ma$es mont2l) payments &i.e. 12 payments per year'5 b. &" mar$s' !o t2e neare"t 1enn), what will be the 1erio&i/ total 1a)ment if the couple ma$es "emi9mont2l) payments &i.e. 24 payments per year'5 c. &" mar$s' !o t2e neare"t 1enn), what will be the 1erio&i/ total 1a)ment if the couple ma$es 5i96ee7l) payments &i.e. 2F payments per year'5 d. &" mar$s' !o t2e neare"t 1enn), what will be the 1erio&i/ total 1a)ment if the couple ma$es 6ee7l) payments &i.e. 52 payments per year'5