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Unformatted text preview: Question1 a) The two rates are not directly comparable, because they are both Stated Annual Rates and have different compounding periods. In order to compare the loans, we need to calculate the Effective Annual Rate for the two Loans. We will choose the lowest of the two rates. So, for the first loan we have that 1 + 1 = 1 + 0.06 2 2 <=> 1 = 0.0609 = 6.09% For the second loan we have that 1 + 2 = 1 + 0.05 12 12 <=> 2 = 0.0512 = 5.12% The Loan with the lowest rate is the second loan. The Loan will have 240 payments and a monthly interest rate of 5%/12=0.416%. To calculate the monthly payments we need to solve the following expression for C $5,000,000 = 0.416% 240 <=> = $32,997.79 b) The amount of money you owe on your Loan is the Present Value of the payments still to be made. Ten years from now, there will be still 120 monthly payments of $32,997,79 to be made. So, to liquidate the loan, you need to make a payment of = $32,997.79 0.416% 120 = $3,111,076 Question 2 a) The first dividend that is relevant is the dividend coming next year. Since 2/3 of the Earnings are reinvested in the firm and earn a 9% rate of return, the Earnings are growing at a rate of 9%*2/3=6%. So, the first relevant Earnings is $3.00*1.06=$3.18. Since only one third is paid as dividends, the next dividend to be paid is $1.06. The Earnings and, therefore, the dividends will grow at a rate of 6%. So, the Price of a share of stock is = $1.06 . 16 .06 = $10.6 b) The Present Value of the Growth Opportunities is the Present Value of the investments made by the firm in reinvesting the Earnings. The easiest way to calculate the value is to made by the firm in reinvesting the Earnings....
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This note was uploaded on 03/30/2011 for the course FIN 5514 taught by Professor Jaffe during the Three '11 term at University of New South Wales.
 Three '11
 jaffe
 Compounding

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