Financial Management - Solved Assignments and Essays

FINANCIAL MANAGEMENT
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Question 1A
a) Current price of dream house = $ 200,000
Inflation rate = 5% per year
The relevant formula is stated below (Damodaran, 2015).
FV = PV (1+r)n
In the given case, PV = $ 200,000, r = 5% , n = 25 years
Hence, value of dream house after 25 years = 200000*(1.05)25 = $ 677,271
b) The future value of the annuity must be equal to the price of the house after 25 years.
The relevant formula is stated below (Arnold, 2015).
In the given scenario, FV of annuity = $ 677,271, r = 9% p.a., n =25 years
Hence, $ 677,271 = P (1.0925-1)/0.09
Solving the above, we get P = $ 7,996.03
Thus, every year till her retirement Jessica would have to deposit $ 7,996.03 to buy her dream
house.
c) The relevant formula would have been modified as follows (Northington, 2015).

In the given scenario, FV of annuity = $ 677,271, r = 9% p.a., n =25 years
Hence, $ 677,271 = (1.09)P (1.0925-1)/0.09
Solving the above, we get P = $ 7,335.81
Question 1B
a) Weight of A = 20000/100000 = 0.2
Weight of B = 35000/100000 = 0.35
Weight of C = 30000/100000 = 0.3
Weight of D = 15000/100000 = 0.15
Beta of portfolio = 0.2*0.8 + 0.35*0.95 + 0.3*1.50 + 0.15*1.25 = 1.13
b) The relevant formula for asset return is shown below.
Returns (%) = [(P1 + I – P0)/P0]*100
Here, P1= Price Today, P0 =, I = yearly income
Return (%) for asset A = [(20000 [phone])/20000]*100 = 8%
Return (%) for asset B = [(36000 [phone])/35000]*100 = 6.86%
Return (%) for asset C = [(34500 +0 -30000)/30000]*100 = 15%
Return (%) for asset D = [(16500 [phone])/15000]*100 = 12.50%