Final_Review_Questions_Fall_2010_

# Final_Review_Questions_Fall_2010_ - Final review questions...

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Final review questions Comm 308 (Fall 20 ± 0) Sections A and ²² Disclaimer: This document is provided to you as a preparatory aid. It may not be complete. You are responsible for all topics covered in the lectures and assignments, as well as all end of chapter suggested questions and any practice questions posted in your course folder (pre, and post mid-term). 1. Time Value The interest rate on a \$190,000 mortgage loan equals 8.5% APR compounded semi- annually. Monthly payments are calculated using 15-year amortization and the original mortgage term equals five years. a. What is the monthly payment over the term of the mortgage? b. What will the outstanding principal balance be at the end of the mortgage term of five years? c. What will the monthly payments be if, at the end of five years, the loan is renewed at 7.5% APR compounded semi-annually (the remaining amortization period is ten years)? 2. More on TVM Your lease calls for payments of \$500 at the end of each month for the next 12 months. Now your landlord offers you a new 1-year lease that calls for zero rent for 3 months, then rental payments of \$700 at the end of each month for the next 9 months. You keep your money in a bank account that pays an APR of 5% compounded quarterly. By what amount would your net worth change if you accept the new lease? 3. Equity a. Constance Inc. generates \$10 per share in earnings. It has 1,000,000 shares outstanding. Constance is in a steady state and pays out all of its earnings as dividends. This situation is expected to last into the foreseeable future. How much would you pay for a share of Constance Inc. if the required rate of return is 10%? b. Suppose Constance has a new project come available. If Constance invests, it will need to pay \$5M next year (year 1). The project will provide \$6.105M the following year (year2). What is the price of a share of Constance? (Assume that the proper rate of return for the new project is 10%.) What if Constance’s new project cost \$5M in year 1 and paid off \$5.445M in year 2?

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## This note was uploaded on 05/17/2011 for the course COMM 308 taught by Professor Ravimateti during the Spring '10 term at Concordia Canada.

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Final_Review_Questions_Fall_2010_ - Final review questions...

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