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AK/ADMS3530 3.0
Assignment #1
Winter 2009
Instructions:
(1)
This assignment is to be done individually.
You must sign and submit
the standard cover page supplied as the last page of this
assignment
.
(2)
Before you start, please read the note “
Writing Style Required for
ADMS3530 Assignments
” posted in the “Assignments” folder on the
course web site. Please stick to the writing guidelines suggested in the
note.
(3)
This assignment is due at the
start
of class
, the
week of April 13, 2009
.
(4)
For Internet section students, the assignment must be uploaded to the
Centre for Distance Education:
http://www.atkinson.yorku.ca/cde/assignmentupload
and identified
precisely in accordance with the course outline by
Tuesday, April 14,
2009, midnight.
(5)
This assignment must be handwritten
. Work that is too difficult to read due
to messiness and poor handwriting will receive zero credit.
You must
show your work to receive full credit.
(6)
This assignment carries a total mark of 100 points.
(7)
Late assignments will not be accepted whether for technical or any other
reason.
(8)
Decimal places: please keep at least 4 in your calculations and 2 in your
final answers.
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View Full Document ADMS3530 3.0 Winter 2008
Assignment #1
Question 1 – Time Value of Money
(10 marks)
Consider a loan for $100,000 given by a city government to encourage a firm to start a
recycling project. The loan would be paid back over eight years by a series of quarterly
payments. For the first year, only interest would be charged quarterly. For the next
seven years, the loan would be amortized by 28 quarterly payments. The government
charges the firm interest at a stated annual rate of 6 percent, whereas a private bank
would charge the firm interest at a stated annual rate of 9 percent. Calculate the subsidy
conferred by this loan, measured in dollars at the time the loan is disbursed.
Answer:
First, calculate the interest and annuity payments based on the subsidized annual
interest rate of 6%, or quarterly interest rate of 1.5%, for a $100,000 loan.
Quarterly interest payments over the first year = 1.5%*100000 = 1500.00
Quarterly annuity payments for next seven years = 100000/PVAF(1.5%,28) = 4400.11
Second, discount the quarterly annuity payments at the market interest rate of 9%.
"PV" of annuity payments after first year = PVAF(2.25%,28)*4400.11 = 90676.71
PV of these annuity payments today = 90676.71/1.0225^4 = 82954.98
PV of the interest payments today = PVAF(2.25%,4)*1500 = 5677.11
PV of future payments on loan = 88632.09
Hence the subsidy = loan disbursed  PV of future payments on loan = 100000 
88632.09 = $11,367.91.
Question 2 – Time Value of Money
(20 marks)
Please note: in the following question, parts (a) and (b) are independent,
whereas parts (c), (d), and (e) are related.
(a) Michael deposits $500 at the end of each month for the next five years,
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This note was uploaded on 12/14/2011 for the course FINANCE 3530 taught by Professor Delta during the Spring '11 term at York University.
 Spring '11
 delta
 Corporate Finance

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