Financial Management Assignment 1 Solution - C540 Fall 2019

This document presents a comprehensive solution to a financial management assignment, addressing various problems and concepts. It includes detailed calculations and explanations for loan amortization (EMI), bond valuation, and the determination of the effective annual rate. The solution also covers retirement planning, involving the calculation of required retirement corpus and monthly contributions. Furthermore, the assignment analyzes stock valuation, cash flow from assets and creditors, and the interpretation of financial statements, including operating income, net income, and cash flow. The document provides a complete guide to solving the assignment problems, using formulas and methods to arrive at accurate financial results. It provides a step-by-step approach to financial problem-solving.

FINANCIAL MANAGEMENT
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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%.

Problem 5
It is known that Eddie wishes to obtain $10,200 pm for a period of 27 years after retirement.
Hence, the amount of retirement corpus which is required by the time Eddie retires is the
present value of retirement annuity at the time of retirement. This can be computed using the
following formula.
In the given case, C = $10,200, n = 27*12 = 324 months, i = (7.2%/12) =0.6% per month
Corpus required at retirement = 10200*(1-1.006-324)/0.006 = $1,455,261
The amount available at the time of retirement from the current investment of $ 100,000
needs to be computed so as to estimate the shortfall.
Amount of current investment at the time of retirement = 100000*(1.006)(13*12) = $254,264
Hence, shortfall in the retirement corpus = $1,455,261 - $254,264 = $1,200,997
The future value of the annuity at the time of retirement based on the monthly deposit should
be $1,200,997
Let the monthly amount to be deposited be $ X
The relevant formula to be used is indicated as follows.
Here, C = X, i=0.006, n=13*12 = 156, FV= $1,200,997
Hence, $1,200,997 = X *(1.006156-1)/0.006
Solving the above, X = $4,671.20
Therefore, a month payment of $ 4,671.20 should be made by Eddie to fulfil his retirement
goal.

Problem 6
Time duration of loan = 15 year or 60 quarters
Quarterly payment = $1867.50
Loan interest rate = (5.1/4) = 1.275% per quarter
a) Let the loan amount be X
1867.5 = X*0.01275*1.0127560/(1.0127560-1)
Solving the above, X = $77,982.46
b) Effective annual rate = [(1.012754) -1]*100 = 5.20%
c) At the end of the 39th payment, the outstanding balance would be equal to the present value
of the following 21 quarterly payments.
Hence loan amount = 1867.50*(1-1.01275-21)/0.01275
Solving the above, loan balance = $34,216.25
Problem 7
Given interest rate = 9% p.a. or 0.75% per month
Effective half yearly rate = 1.00756 -1 = 4.5852%
The future value of the cash flows is $ 38,000. The future value of $ 800 invested after every
6 months is shown below.
FV = 800*(1.04585214-1)/0.045852 = $15,235
Hence, future value of the initial amount = $38,000-$15,235 = $22,765
Let the initial amount be X
Then $22,765 = X*1.04585214

Hence, X = $12.153
Problem 8
The current stock price of Amazon will be equal to the present value of the future dividends
discounted at the 11% rate expected by investors.
Dividend at the end of 6th year = $91
Dividend at the end of 7th year = 91*1.14 = $103.74
Dividend at the end of 8th year = 103.74*1.14 = $118.26
Dividend at the end of 9th year = 118.26*1.14 = $134.82
Dividend at the end of 10th year = 134.82*1.14 = $153.70
Dividend at the end of 11th year = 153.7*1.14 = $175.21
Dividend at the end of 12th year = 175.21*1.07 = $187.48
Hence, price of Amazon stock = (91/1.116) + (103.74/1.117)+ (118.26/1.118) + (134.82/1.119)
+ (153.70/1.1110) + (175.21/1.1111) + ((187.48/(0.11-0.07))/1.1111 = $1.652.08
Problem 9
a) Operating income (2018) = 3700-1950-890-340 = 520 or $520,000
Taxable income (2018) = 520 + 60 – 100 = 480 or $ 480,000
Net income (2018) = 480 – 96 = 384 or $384,000
Addition to retained earnings (2018) = 384-114 = 270 or $240,000
Retained earnings for 2018 = 40 + 270 = 310 or $310,000
Total assets (2017) = 4900 + 620 + 2000 + 2700 = 10,220 or $10,220,000
Total assets (2018) = 8447 + 440 + 320 +2280 = 11,487 or $11,487,000

Total liabilities & Owner’s equity (2017) = 2080 + 2000 +6100 + 40 = 10,220 or
$10,220,000
Total liabilities & Owner’s equity (2018) = 3037 + 1570 +6570 + 310 = 11,487 or
$11,487,000
b) The operating cash flow from 2018 period can be computed using the indirect method.
Operating cash flow (2018) = 384 + 340 + (620-440) + (2000-320) –(2080-3037) = 1627 or
$ 1,627,000
c) Net working capital for 2017 = Current Assets – Current Liabilities = (4900+620+2000-
2080) = 5440
Net working capital for 2018= Current Assets – Current Liabilities = (8447+440+320-3037)
= 6170
Change in net working capital = 6170 – 5440 = 730 or $ 730,000
d) Net capital spending = 2800 -3000 = -200 or -$200,000
e) Cash flow from assets = Total assets (2018) – Total assets (2017) = 11487-10220 = 1267
There is a cash outflow of $1,267,000 from assets.
f) Cash flow to creditors for 2018 = 3037 – 2080 = 957 or $ 957,000
g) Cash flow to stockholders for 2018 = 114 or $114,000
h) The cash flow identify does hold as there is balancing of the components as is apparent
from the above values.
i) A significant amount of cash flows are generated by operating activities which to an extent
for used to fund the outflow on assets but majorly has been used to enhance the retained
earnings and provide dividends to investors.
j) The requisite table is shown below.

BONUS Question
(a1) C(pmt) = $10, r(rate) = 2% or 0.02, N(nper) = 48*12 = 576
(a2) C(pmt) = $30, r(rate) = 2% or 0.02, N(nper) = 20*12 = 240
(a3) C(pmt) = $50, r(rate) = 2% or 0.02, N(nper) = 30*12 = 360
(b1) X = (30/0.02)(1-1/1.02240)
(b2) Z = (50/0.02)(1-1/1.02360)
(b3) PV = 1000/(1.02)1176