Financial Management Problems and Solutions

FINANCIAL
MANAGEMENT
STUDENT ID:
[Pick the date]

Problem 1
Price of mobile house = $66,515
Down-payment made = $10,000
Total principal borrowed for the mobile house = $66,515 - $10,000 = $56,515
Total duration of loan = 84 months
APR = 4.5% or (4.5/12) = 0.375% per month
The formula for equal monthly instalment (EMI) is indicated as follows.
EMI = [P x R x (1+R)N]/[(1+R)N-1]
Here, P = $56,515, R = 0.00375, N= 84
EMI = 56515*0.00375*(1.00375)84/(1.0037584-1) = $ 785.57
Hence, end of month payment on loan is $ 785.57
Problem 2
(a)Sanchez gets the $500,000 number by taking the undiscounted value of all the cashflows
expected from the two contracts.
Total undiscounted cash flow from Yankees deal = 4.5*8 = $36 million
Total discounted cash flow from Betance deal = 3.5*6 + 7 + 8.5 = $36.5 million
The difference between the above two amounts is $500,000.
b) In order to compare the two offers, the present value for each of the two offers needs to be
computed using the given data.
Yankees deal present value = (4.5/1.05) + (4.5/1.052) + (4.5/1.053) + (4.5/1.054) + (4.5/1.055)
+ (4.5/1.056) + (4.5/1.057) + (4.5/1.058) = $ 29.08 million
Dellin Betance deal present value = (3.5/1.05) + (3.5/1.052) + (3.5/1.053) + (3.5/1.054) +
(3.5/1.055) + (3.5/1.056) + (7/1.057) + (8/1.058) = $ 28.49 million

Based on the above computation, it is evident that the offer from Yankees is superior when
compared with the offer from Betance.
Problem 3
Par value of bond = $1,000
Coupon rate = 4.16% p.a.
Coupon amount = (4.16/100)*1000 = $ 41.6 p.a.
Time to maturity = 26 years
Current price of the bond = $1061.62
The objective is to determine YTM so that when the future expected cashflows from the bond
are discounted, it results in the current price of $ 1,061.62. The relevant computations are
performed in Excel using RATE function.
Syntax = RATE (26,41.6,-1061.62,1000)
Problem 4
It is evident that an interest of $11 has been earned on a principal of $ 550 in a 20 day period.
Hence, interest rate charged = (11/550)*100 = 2% per 20 days
Effective annual rate charged = (1+ (2/100))360/20 -1 = 42.82%
Hence, the effective annual rate for the given scenario is 42.82%.