Financial Problem Solving of Companies Questions I need you to answer all these questions. If possible please show some working but it doesn’t have to be s

Financial Problem Solving of Companies Questions I need you to answer all these questions. If possible please show some working but it doesn’t have to be so detailed. Question 1
You have just bought a car. The $50,000 car loan from the finance company involves monthly
payments made at the end of the month, over 60 months. However, at the end of the loan, there
is a lump sum payment, called a balloon payment of $30,000.
Assume the interest rate applicable is 6% p.a. monthly rest throughout the loan tenure.
(a)
Discuss, using time value concepts of PV or FV of single sums, or multiple sums, etc.,
how you can compute the first monthly repayment. Show the computations to solve for
the monthly repayment amount.
(10 marks)
(b)
Explain and compute the interest amount of the first monthly repayment.
(4 marks)
(c)
Explain and calculate the interest amount of the 13th monthly repayment.
(5 marks)
(d)
Discuss why the finance company offers the balloon scheme instead of the standard
loan scheme without a balloon payment.
(6 marks)
Note: You are to provide explanations of the computations you made. Just providing the answer
from the financial calculator is not sufficient.
Question 2
Mr. Lim has $10,000 to invest for a period of 5 years. He has a choice of either the bonds or
stocks of the Oxley Company.
(A)
Bond: Oxley’s bond: Face value $1,000, 10% coupon paid annually and 8 years’ life
remaining. The bond can be purchased at $1,100 today.
(B)
Common Stock: Oxley’s common stock just paid a dividend $0.80. Its dividend will
grow at 4% per year perpetually. The stock can be purchased at $8 today.
(a)
Calculate the rate of return per annum over the 5-year period for the investment in bonds
if the required return for the bonds is 7% and coupons can be invested to give a 7%
return.
(10 marks)
(b)
Compute the rate of return per annum for the investment in stocks over the 5-year
period. The required return for the stock is 12%, while dividends received can be
invested to give a return of 7%.
(10 marks)
Question 3
You have $1 million to invest, and you must invest all your money. The following are assets
you can invest:
Expected Return
Beta
Risk-free asset
Stock X
Stock Y
6%
30%
20%
Not given
1.8
1.3
(a)
Suppose you want to create a portfolio that has an expected return of 12% by investing
in the risk-free asset and Stock X. Calculate how much money you will invest in Stock
X.
(6 marks)
(b)
Suppose you want to create a portfolio with a systematic risk that is 70% of the risk of
the overall market, by investing in the risk-free asset and Stock X. Calculate how much
money you will invest in Stock X.
(6 marks)
(c)
Suppose you are told that the beta of Stock X is correct, but there is uncertainty whether
the beta of Stock Y is correct. Using the CAPM framework, determine whether the beta
of Stock Y is correct.
(6 marks)
(d)
You have learned in this course that if you invest only in X and Y, this 2-asset portfolio
will have a higher return than the portfolio return when a risk-free asset (such as
Treasury bills) is also included. This being the case, appraise why anyone would want
to hold Treasury bills in their portfolio.
(7 marks)
Question 4
As a result of improvements in product engineering, United Automation is able to sell one of
its two milling machines. Both machines perform the same function but differ in age. The
newer machine could be sold today for $50,000. Its operating costs are $20,000 a year, but in
5 years the machine will require a $20,000 overhaul. Thereafter operating costs will be $30,000
until the machine is finally sold in year 10 for $5,000.
The older machine could be sold today for $25,000. If it is kept, it will need an immediate
$20,000 overhaul. Thereafter operating costs will be $30,000 a year until the machine is finally
sold in
year
5 for $5,000.
Both machines have been fully depreciated for tax purposes before this replacement decision.
The company pays tax at 35 percent. Cash flows have been forecasted in real terms. The real
cost of capital is 12 percent.
(Note: the overhaul cost is a capital expenditure and straight line depreciation to zero is used)
Analyse which machine United Automation should sell by answering the following.
(a)
Compute the cash flows and NPV of the newer machine if it is kept, without considering
the cash flows associated with the older machine.
(9 marks)
(b)
Compute the cash flows and NPV of the older machine if it is kept, without considering
the cash flows associated with the newer machine.
(9 marks)
(c)
Discuss, using the results of parts (a) and (b), which machine should be sold.
(7 marks)
(d)
Discuss why the payback period cannot be used for the decision regarding which
machine to keep.
(5 marks)

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