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##### 3 questions from our finance class. Provide clear statements and-(Answered)

Description

Question

3 questions from our finance class.?Provide clear statements and analyses. State your assumptions whenever you need them.?

1.You?re given with a 5-year auto loan from your credit union. Suppose the total loan

you have is \$32,000 and the current market interest rate is 4.6% for the short-term

loans with the same creditability as yours. Answer the following questions:

a) Given that the APR (namely the Annual Percentage Rate. That is, the stated

interest agreed on the loan) of the loan is 4.6% per year, what is the monthly

payment if you?re intended to have the loan for 5 years?

b) What is the effective annual rate if the loan is compounded monthly?

c) Suppose the credit union says that if you?d like to retire the loan earlier, say at

the end of the 3rd year, you need to pay (say) \$18,000 for the rest of the loan,

would you take it given that you have no difficulty to generate the cash flow?

Why or why not?

d) Suppose the original agreement that you signed with credit union is to have a

3-year loan and pay back the loan with \$21,200 at the end of year 3, how

much will be your monthly payment now?

e) Given that the present value of the loan which is \$25,000 now, what is the

Internal Rate of Return (IRR) for this loan? Is this rate different from the

4.6% market interest rate? Why or why not?

2. You are given with the following information of two proposals of financing

programs for your home loan. Suppose the new house costs you \$672,400 (sales

taxes and others are included). One program is asking you to deposit a 20% down

payment on the \$672,400 and it provides you with 2.4% interest rate for 15-year

monthly payments of the remaining balance, the other program is a 100%

financing program which gives a 1.2% for the first 5 year plus the PMI (property

mortgage insurance) as \$150 per month with a balloon payment as \$650,000, (that

is, a lump-sum payment at the end of 5 th year). The mortgage rate increases to

4.8% afterward for a 30-year mortgage if the balloon payment is not paid and

refinancing is applied (That is, the extended program for refinancing is for 30

years and it?s not for the 25 years leftover only). Let there be no prepayment

penalty. That is, you may pay off the loan should you have some extra cash later

on. The brokerage fees and commissions are already taken into account in all the

numbers given. Answer the following questions:

a) What is the monthly payment for each program in the first 5 years? Which one

more favorable to you if your monthly income is \$6,000 before tax? (Notice that

most lenders will require the borrower to have the ratio between mortgage

payment and monthly gross income no greater than 33%).

b) Suppose 4 years later, the market price of your house is \$768,000. The tax rate

on gains/losses on house sales is 6%. Will you consider selling this house and buy

a bigger one if your income has gained to \$8500 per month? What is the

annualized rate of return net of your financing cost in your housing investment

for each financing program?

c) Suppose there is a 12% income tax on your gain in selling your house, how

much is the after-tax return now for each financing program?

3. You have the following information for the company ?Spy?. The ?beta? coefficient

for ?Spy? is 1.05 based on the past information. The 5-year average of 30-day T-bill

rate is 2%, the average market return of (say, S&amp;P 500 index) in the same period is

a) What is the required rate of return for ?Spy?? Why do we call it ?required?

rate of return?

b) Suppose the current dividend for ?Spy? is \$3.12 per share with possible

expected growth rate as 7% per year from now on, what is your assessment for

the value of Spy?s stock?

c) Suppose without using the information of ?beta?, the current market price for

the ?Spy?s stock is \$26.50 per share. Let the capital market be efficient as

ideally assumed. That is, the current stock price is equal to the stock?s present

value. What is the required rate of return for this stock now if the information

in (b) still applies? What is the ?beta? associated with this stock now?

d) ?Spy? has the following capital structure: the firm issued 6 million shares of

common stock with the stock price given in c) and dividend in b), the firm

also issued 2 million shares of preferred stock with \$1.09 preferred dividend

per share, and currently, ?Spy? has \$90 million in debts with interest rate as

6%. Suppose the current preferred stock price is \$6.72 per share. The

corporate tax rate is 30% and the common stock price is as given in c), what is

the (after-tax) weighted average cost of capital (after tax) for ?Spy??

e) What is meaning of ?Weighted Average Cost of Capital (after tax)?? Why do

we usually apply it as the discount rate for expected future cash flows in

capital budgeting decisions?

Paper#9209287 | Written in 27-Jul-2016

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