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ADJUSTABLE RATE MORTGAGES
Ann found an apartment that costs $500,000. She has saved $100,000 for a down payment and will get a mortgage for $400,000. It will be a fully amortizing, 30 year, 1/1 adjustable rate mortgage with monthly payments. The initial rate is 2%. The rate will reset to 175 basis points above the LIBOR. There are no rate caps. The initial LIBOR is 1%. The following 4 questions will use this information.
a) What is Ann’s payment for the first 12 months?
b) Suppose the LIBOR remains the same in the second year as it was in the first. What is Ann’s payment in the 2nd year? (Hint: you will first need to compute Ann’s balance after the first year.)
c) What is Ann’s APR? (i.e. What is Ann’s IRR on this loan assuming the index remains the same for the life of the loan? Please give the annual IRR, so multiply the monthly IRR by 12.)
d) Suppose the LIBOR at the first reset is 7%. What is Ann’s monthly mortgage payment in the 2nd year?
Gunderman Corporation has two divisions: the Alpha Division and the Charlie Division. The Alpha Division has sales of $235,000, variable expenses of $309,800, and traceable fixed expenses of $121,500. The total amount of common fixed expenses not tra..
Theo needs $40,000 as a down payment for a house 6 years from now. He earns 2.5 percent on his savings. Theo can either deposit one lump sum today for this purpose or he can wait a year and deposit a lump sum. How much additional money must he deposi..
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A resort hotel has total annual sales revenue of $1,000,000, variable costs of $350,000, and fixed costs of $570,000. The fixed costs include $80,000 a year for land rental lease. Calculate the hotel’s breakeven point. If the owners had an equity in..
Barton Simpson, the chief financial officer of Broadband, Inc., could hardly believe the change in interest rates that had taken place over the last few months. The interest rate on A2 rated bonds was now 6 percent. Compare the price in part A to the..
AJ takes out a small business loan of $15500 at a nominal rate of interest of 8.7% convertible quarterly.
Consider the following cost alternatives with 10 year useful lives. The company has a MARR = 15%. Using suitable Excel functions, perform an incremental IRR analysis to determine the best alternative. Clearly lay out each step of the analysis and its..
What is the total of? Pelamed's 2010 net income plus interest? payments? What is the amount of? Pelamed's interest tax shield in? 2010?
Briefly explain (3–5 paragraphs) how equity transactions affect the components of stockholders’ equity. For instance, what impact do these transactions have on financial ratios, such as EPS (earnings per share)?
What criteria should be considered to determine whether to lease or buy a required fixed asset? Analyze and discuss the upsides and downsides of each option.
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