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Eric decided that now that home prices are finally falling it’s time to buy his first home. A so-so house in Pomona costs about $500,000. A decent house in Fullerton costs about $700,000. A nice house in Diamond Bar costs about $900,000. To buy a house Eric would need to pay a 20% downpayment from his savings – the amount he already has – and for the remaining amount he will take a mortgage loan. The loan will require fixed payments at the end of each month. He has calculated that with his current job he will be able to spend not more than $3,500 per month on the loan payments.
If the annual mortgage rate on a 20-year loan is 6% (compounded monthly), which one of the three homes would Eric be able to afford? Calculate and explain.
Would the answer change if the mortgage loan was instead for 30 years? Calculate and explain in words all calculations.
ABC Partnership distributed land with basis of $12,100 and FMV of $20,000 to Partner A in liquidation of his partnership interest. Partner A's basis in his partnership interest before the distribution was $13,700 and includes $5,000, his share of par..
Evaluating a project that costs $365,000 and is expected to generate $260,000 and $175,000, respectively, during the next 2 years. If Komfy’s required rate of return is 13%, what is the project’s (a) net present value, (b) internal rate of return (IR..
Suppose a firm pays a dividend on it's stock at the end of every period, the stock beta is 1.5, the firm just paid a dividend in the amount of $3.1, and dividends are expected to grow two percent every period forever. If the expected return on the ma..
A given bond has 5 years to maturity. It has a face value of $1,000. It has a YTM of 6% and the coupons are paid semi annually at a 10% annual rate. What does the bond currently sell for?
A warrant is a long-term option from a company that gives the holder the right to buy a stated number of shares of the firm’s stock at a specified price for a specified length of time. A corporation decides to issue 10-year bonds to fund a necessary ..
You have $100,000 to invest in either Stock D, Stock F, or a risk-free asset. You must invest all of your money. Your goal is to create a portfolio that has an expected return of 10.9 percent.
CAPM: You are given the following information about a company. Its current value in the stock market is $255 Million. What is the company’s beta? What is the company’s expected returns? What is the company expected to be worth a year from now?
PDF Corp. needs to replace an old lathe with a new, more efficient model. The old lathe was purchased for $50,000 nine years ago and has a current book value of $5,000. The new lathe is expected to be sold for $5,000 at the end of the project's ten-y..
World-Tour Co. has just now paid a dividend of $2.83 per share (D0); its dividends are expected to grow at a constant rate of 6% per year forever. If the required rate of return on the stock is 16%, what is the current value of the stock, after payin..
Companies typically report compensating balances that are required under a loan agreement as unrestricted cash classified within current assets. a. For purposes of financial statement analysis, is this a useful classification? Explain. b. Describe ho..
Your bank offers to lend you $230,000 at an 8.5% annual interest rate to start your new business. The terms require you to amortize the loan with 10 equal end-of-year payments. How much of the principal would you be paying back during the 3rd year?
Efficient provision of a public good occurs at the level at which each member of society places the same value on the last unit. If a good is non rival and excludable, it will never be produced by the private sector. A road is non rival because one p..
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