Exam Melb. Sem. 1 2007 Solutions

Exam Melb. Sem. 1 2007 Solutions - BAFI Business Finance...

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Unformatted text preview: BAFI Business Finance Exam Solutions Semester 1 2007 Section B Q. 1 Explain in simple terms what you would need to know and how you would go about determining the interest and principal components of a loan repayment. To determine the interest and principal components of a loan repayment you would need to know the following: Present value (PV) – the amount outstanding on the loan, r – the discount or interest rate applicable to the loan, n – the number of payments to be made on the loan, PMT – the periodic payment (annuity) to be made on the loan. Using the PV of an annuity formula: you would find the amount of the loan outstanding at a point in time, i.e. the loans PV. From this you would multiply the amount outstanding by the interest rate per period (r) to find the interest component of the PMT. You would then subtract the interest component from the PMT and this would give you the portion of the payment going towards repayment of the principal. 1 Q. 2 Five years ago Chris entered into a loan agreement to borrow $200,000 and repay the loan over 20 years through equal monthly instalments. If the interest rate was fixed at 8% p.a. for the entire term of the loan, what is the amount of each monthly instalment: PV o = $200,000, n = 20 years x 12 payments per year = 240, r = 8% p.a./12 compounding periods per year = 0.00667, PMT = ?. Use PV of an annuity formula: +- =- 00667 . ) 00667 . 1 ( 1 000 , 200 $ 240 PMT 2 Q. 3 Club Auto Parts’ last dividend, D , was $0.50, and the company expects to experience no growth (in dividends) for the next two years. However, Club will grow at an annual rate of 5% in the third and fourth years, and beginning with the fifth year it should attain a 10% annual growth rate which it will sustain thereafter. Club has a required rate of return of 12% p.a. Calculate the value of the stock today. Years 1 & 2 g = 0% p.a., Years 3 & 4 g = 5% p.a., Year 5 onwards g = 10% p.a. Beginning with D , the last dividend paid, we must calculate dividends up to the first year in which the growth rate in dividends becomes constant in perpetuity, which in this case is Year 5: D = $0.50, D 1 = $0.50 (1+0.00) = $0.50, D 2 = $0.50 (1+0.00 ) = $0.50, D 3 = $0.50 (1+0.05) = $0.525, D 4 = $0.525 (1+0.05) = $0.5513, D 5 = $0.5513 (1+0.10) = $0.6064....
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Exam Melb. Sem. 1 2007 Solutions - BAFI Business Finance...

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