Accounting & Finance: Solved Questions and Examples

ACCOUNTING & FINANCE
STUDENT ID:
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Question 1
(a) (i) The appropriate payment option would be decided based on the effective annual rate
(EAR).
EAR for option 1
Nominal interest rate (Compounded weekly) = 4.55% p.a.
EAR= {1+( 4.55
5200 ) }52
−1=4.65 %
EAR for option 2
Nominal interest rate (Compounded weekly) = 4.75% p.a.
EAR= {1+( 4.75
5200 ) }52
−1=4.86 %
It is apparent from the above that effective annual interest rate is lower for option 1 with
nominal interest rate 4.55% compounding annually and hence, it would be a suitable payment
option for Jayne.
(ii) Repayment instalment
Instalment= P∗R∗( 1+ R ) N
[ ( 1+ R ) N −1 ]
P=$ 500,000
R=( 4.55 %
52 ) per week
Instalment=$ 1000
N=?
Now,
1000=
500,000∗( 4.55 %
52 )∗( 1+ ( 4.55 %
52 ) )
N
[ ( 1+( 4.55 %
52 )) N
−1 ]
N=657.85 weeks
(b) (i)Let X is the total contribution from every month
1

Future value of annuity at the end of 18 years period = $200,000
Now,
Periodic payment needs to be determined with the help of formula given below (Parrino &
Kidwell, 2014).
P=? r= ( 2.5
12 ) % n= ( 18∗12 ) =216 months , FV of annuity=$ 200,000
200,000=P
[ (1+( 2.5
12 )% )216
−1
( 2.5
12 )% ]P=$ 734.11
It is given that Jennifer would contribute 30% and hence, monthly payment amount would be
30% of the periodic payment amount.
Monthly payment amount=30 %∗734.11=$ 220.23
(ii) Present value of annuity
P=$ 1000 r =( 4
12 )% per month n= ( 3∗12 )=36 months , Present value of annuity=$ 200,000
PV of annuity=1000+1000
[ 1−( (1+ 4
12 % ))−( 36−1 )
( 4
12 )% ]=$ 33,985.60
Money remaining to Jennifer (at her 18th birthday) =200000-100000 -33985.60 = $66,014.39
It is apparent that the money remaining would remain in the bank account till 28 years age.
Amount when the age would be 28 years ¿ ( 1.04 )10∗66,014.39=$ 97,717.43
2

(iii) Loan amount = Cost – Deposit amount
Loan amount=$ 800,000−$ 97,717.43=$ 702,282.57
Monthly Instalment= P∗R∗ (1+ R )N
[ ( 1+ R ) N −1 ]
P=$ 702,282.57
R=( 4.5
12 )% per month
Instalment=$ 1000
N=30∗12=360 months
Now,
Monthly Repayment Instalment=
702,282.57∗( 4.5 %
12 )∗( 1+ ( 4.5 %
12 ) )
360
[ ( 1+( 4.5 %
12 ) )
360
−1 ]
Monthly Repayment Instalment=$ 3,558.27
Question 2
The relevant screenshot for excel computation of the cash flows from ordinary equity coupled
with market value of the various financing instruments is shown below.
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