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Managerial Finance
Discussion Question 1
You are in the process of buying a house. Your mortgage lender reviewed your credit score, employment history, debt-to-income ratio, and available funds you've set aside for the down payment. He quoted you a 2.75% interest rate for a 15-year loan, and a 3.50% rate for a 30-year mortgage loan. The house you want is $200,000 and you can make a 10% down payment. Using Excel, construct an amortization schedule for the amount you need to borrow from your mortgage lender for each loan option. Which of the two is a better financing decision, and why? Show all formulas required to perform these calculations and fully explain your decision making process.
Discussion Question 2
To live comfortably in retirement, you decide you will need to save $2 million by the time you are 65 (you are 30 years old today). You will start a new retirement savings account today and contribute the same amount of money on every birthday up to and including your 65th birthday. Using TVM principles, how much you must set aside each year to make sure that you hit your goal target goal if the interest rate is 5%? What flaws might exist in your calculations, and what variables could lead to different outcomes? What actions could you take ensure you reach your target goal?
On October 5, 2015, you purchase a $12,000 T-note that matures on August 15, 2027 (settlement occurs two days after purchase, so you receive actual ownership of the bond on October 7, 2015). The coupon rate on the T-note is 4.386 percent and the curr..
Bob has $15,000 in credit card debt at 18% annual interest compounded monthly. If he makes no more purchases with the card, and pays $190 on this card at the end of each month, find to the nearest cent his credit card balance six months from now.
You are starting a new business, and you want to open an office in a local mall. You have been offered two alternative rental arrangements. You can pay the landlord 10% of your sales revenue, or you can pay a fixed fee of $1,000 per month. Describe t..
A couple has just given birth to a baby and named him Jimmy. They want to start a college savings account for Jimmy and start saving for his college education. The following facts will help you work this problem
Carter Enterprises can issue floating-rate debt at LIBOR or fixed-rate debt at 9.9 percent. Brence Manufacturing can issue floating-rate debt at LIBOR + 1.5 percent or fixed-rate debt at 10.5 percent. What are the net payments of Carter and Brence if..
Company A's basic earning power (BEP) exceeds its cost of debt financing (rd). If it increases its debt ratio, then which of the following statements is CORRECT? a. Company A will increase its return on assets (ROA). b. Company A will increase its hi..
Determine the formula value and premium over the formula value if the respective prices of common stock and warrants are $30 per share and $1 per warrant and $32 per share and $2 per warrant.
It has been determined that, in aggregate, financial institutions with depository accounts currently hold excess reserves equal to $3 billion—that is, they hold $3 billion more than is necessary to meet the reserve requirements associated with existi..
Consider a project with an initial outlay of $1,000 and yearly cash flows as follows: -200, -100, 300, 300, 300, 100, 100, 200, 700, 400, and 100. Calculate the classical payback period assuming 10% cost of funds.
You purchased one of AAA Corp.’s 9%, 15-year convertible bonds at its $1,000 par value a year ago when the company’s common stock was selling for $25. Similar bonds without a conversion feature returned 10% at the time. You exercise the conversion fe..
The weighted marginal cost of funds is used in pricing decisions. Explain how it should be used if the loan being priced exhibits average risk. How should the weighted marginal cost of funds be used if the loan carries above average risk?
The president of Lowell Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer’s price is $60,000 and it falls into the MACRS 3-year class (33% in year 1, 45% in year 2, 15% in year 3, and 7% in year 4). The firm’s ma..
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