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    FM I Assignment-2

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    margera158

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    FM I Assignment-2

    Uploaded by

    margera158
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    3 views3 pages

    FM I Assignment-2

    Uploaded by

    margera158

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    © All Rights Reserved
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    Download as pdf or txt
    of 3

    ODA BULTUM UNIVERSITY

    COLLEGE OF BUSINESS AND ECONOMICS


    DEPARTMENT OF ACCOUNTING AND FINANCE

    Financial Management I - Group Assignment (20%)


    Submission Date:- ----------------

    Part I: Workout
    1. Assume the total cost of a college education will be $345,000 when your child enters college
    in 18 years. You presently have $73,000 to invest. What annual rate of interest must you earn on
    your investment to cover the cost of your child’s college education.

    2. You now have Birr 2,000,000 in the bank earning interest of 5 percent per month. You need
    Birr 3,000,000 to make a down payment on a house. You can save an additional Birr 10,000 per
    month. How long will it take me to accumulate the Birr 3,000,000?

    3. You have Birr 1,500 to invest today at 7% interest compounded annually. Find how much you
    will have accumulated in the account at the end of (1) 3 years, (2) 6 years, and (3) 9 years.

    4. You’re trying to save to buy a new $245,000 Ferrari. You have $50,000 today that can be
    invested at your bank. The bank pays 4.3 percent annual interest on its accounts. How long will it
    be before you have enough to buy the car?

    5. You need to have $50,000 at the end of 10 years. To accumulate this sum, you have decided to
    save a certain amount at the end of each of the next 10 years and deposit it in the bank. The bank
    pays 8 percent interest compounded annually for long-term deposits.
    How much will you have to save each year (to the nearest dollar)?

    6. Alex J. is considering investing in a security that has the following distribution of possible
    one year return.

    Probability of occurrence 0.10 0.20 0.30 0.30 0.10


    Possible return -10 0 .00 10 0.20 0.30
    (a) What is the expected return and standard deviation associated with the investment?
    (b) Is there much "downside` risk? How can you tell

    1
    7. Consider the following information:
    Sta of Economy

    Rate of Return If State B Stoc


    (a) Your portfolio is invested 30 percent each in A and C, and 40 percent in B. What is the
    expected return of the portfolio?
    (b) What is the variance of this portfolio? The standard deviation?

    8. This problem will give you some practice calculating measures of prospective portfolio
    performance. There are two assets and three states of the economy:

    State of the economy Probability of the state Rate of return if the state occurs
    of economy Stock A Stock B
    Recession 0.20 -0.15 0.20
    Normal 0.50 0.20 0.30
    Boom 0.30 0.60 0.40

    What are the expected returns and standard deviations for these two stocks?

    9. Mikias Cricket Farm issued a 30-year, 6 percent semiannual bond three years ago. The bond
    currently sells for 93 percent of its face value. The company’s tax rate is 22 percent.
    (a) What is the pretax cost of debt?
    (b) What is the after tax cost of debt?
    (c) Which is more relevant, the pretax or the after tax cost of debt? Why?

    10. Targaryen Corporation has a target capital structure of 70 percent common stock, 5 percent
    preferred stock, and 25 percent debt. Its cost of equity is 10 percent, the cost of preferred stock is
    5 percent, and the pretax cost of debt is 6 percent. The relevant tax rate is 23 percent.
    a). What is the company’s WACC?
    b). The company president has approached you about the company’s capital structure.
    He wants to know why the company doesn’t use more preferred stock financing because it costs
    less than debt. What would you tell the president?

    2
    11. Abdi Camping Gear, Inc., is considering two mutually exclusive projects. Each requires an
    initial investment of $100,000. Abdi Geda, president of the company, has set a maximum payback
    period of 4 years. The after-tax cash inflows associated with each project are shown in the
    following table:

    Required: Determine the payback period of each project. Which project should be accepted?

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