FINANCE 634 EXAM 1

Fall 1998

Part 2


1. Consider the following loan conditions:


Amount borrowed: $400,000

Time 25 years

Interest Rate 9.75% stated annual rate

Payment Frequency Monthly

Balloon Payment $0

Answer the following questions:

a. Suppose you pay off the loan immediately following the 200th payment. What is the total dollar amount of interest you will have paid over the life of the loan?

[8] Total Interest $ _________________

b. Suppose the largest payment you can afford is $3,400 per month, so you want to arrange a 5-year balloon loan with a $3,400 monthly payment. What will the amount of the balloon payment be?

[5] Balloon payment $ _______________________

 

c. Returning to the original loan conditions (ignore b), suppose you make an extra payment of $200 with each required monthly payment. How much money, in actual dollars, would you save using this payment scenario versus the one described in Part A (make only the required payment and carry the loan for the full 25 years)?

[5] Total Savings: $_______________________

 

d. What is the effective annual rate of the loan scenario described in part c?

[3] Effective Annual Rate __________ %


e. Suppose the lending institution runs a special promotional deal such that every 12th payment is reduced by $500. What is the effective annual rate on this promotional loan? Be precise and show your work.

[3] Answer: ____________________________

 

2. Consider the following annual cash payments:

TIME CASH FLOW
1 0
2 0
3 0
4 0
5 0
6 1500
7 1500
8 1500
9 1500
10 ?
11 ?
12 ?
13 ?
14 3000
15 3000
16 3000
17 2000


The missing cash flows (?s) are all equal amounts. Using a 9.5% discount rate, the TOTAL present value of all of the cash flows is $10,000. Find the missing cash flows.

[6] Answer:______________

 

3. You deposit $3500 now and $1000 at the end of each month for 10 years (120 $1000 deposits) in an account that has a stated annual rate of 8.75% with interest compounded quarterly. How much will be in the account immediately following the final deposit? (Assume that every month has 30 days and every quarter has 3 months and 90 days.)

[5] Answer: $ _____________

 

4. You deposit $3500 now and make equal monthly deposits for 10 years (120 monthly deposits) in an account that has a stated annual rate of 8.75% with interest compounded continuously. How much will be in the account immediately following the final deposit? (Assume that every month has 30 days and every quarter has 3 months and 90 days.)

[5] Answer: $ _____________

 

5.  Alfred E. Newman has just been promoted to the position of CFO for Tayke, DeMonie & Runn (TDR), a manufacturing company that specializes in relatively useless items that are mass-marketed in infomercials. The company has two divisions, electronic products (the X-Ray glasses are a big seller in Washington) and cosmetics (the teflon shower soap is also a hot item inside the Beltway). He has asked you to assess the divisions' relative historical performance (with respect to each other) using the information given below. A page listing potentially useful ratios is attached at the end of this test. Point out any important trends or differences that you see in these two divisions. Justify your conclusions by referring to the results of your analysis. Use the space below for your analysis and the following page for your BRIEF conclusions. [10 Points]
Electronics Cosmetics
1996 1997 1996 1997
Sales 2,500 2,600 1,623 1,687
Cost of Goods 1,075 1,300 967 980
Gross Profit 1,425 1,300 656 707
Operating Expenses 178 185 97 100
Depreciation 100 100 80 70
EBIT 1,147 1,015 479 537
Interest 325 322 174 168
Taxes 341 357 142 66
Net Income 481 336 163 303


Extra Credit: Points as Marked

NO PARTIAL CREDIT

1.  You deposit $3500 now and make equal monthly deposits for 4 years (48 monthly deposits) in an account that has a 9.5% stated annual rate with interest compounded daily. If the account has a total of $62,000 in it immediately following the final deposit, what was the dollar amount of your monthly payment? (Assume that every month has 30 days and every quarter has 3 months and 90 days.)

[3] Answer: $ _____________

 

2. You deposit $3500 now and make equal monthly deposits of $1000 for 4 years (48 monthly deposits) in an account that has interest compounded continuously. If the account has a total of $60,000 in it immediately following the final deposit, what was the stated (nominal) annual interest rate on the account?

[3] Answer: _____________ %

 

3.  Consider the following loan: Stated Annual Rate 10.25%

Payment Frequency Monthly

Balloon Payment $25,000

Loan Term 10 years

For the 100th payment on this loan, the dollar amount of interest from the payment is $651.50. What was the original amount of the loan?

[4] Answer: ______________________

 

Answers:

1. $556,305.55; $388,460.87; $143,556.88; 10.20%; 10.05%

2. $2,970.45

3. $198,443.97

4. $199,543.23

5. Sales are up in both companies but all major indicators are down in Electronics and up in Cosmetics. The change in Electronics came from a very large increase in Cost of Goods. Part of Cosmetic's positive change was due to a reduction in depreciation and taxes, which could be temporary and not indicative of a real improvement in performance. Even so, these factors alone could not have accounted for enough of this unit's improvement to matter.

EC1. $978.00

EC2. 7.10%

EC3. $225,502