Financial Management
Tutorial 1 Questions 2011
1) At what rate of simple interest will $600 amount to $654 in nine months?
2) A promissory note dated 1 April 2006 for $1 500, borrowed at 16% per annum, which is due on 1 October 2006 is sold on 1July 2006. What is the maturity value of the note? What is the present value on the date of sale?
3) The simple discount rate of a bank is 16% per annum. If a client signs a note to pay $6 000 in nine months time, how much will the client receive? What is the equivalent simple interest rate?
4) Calculate the sum accumulated if a fixed deposit of $10 000 is invested on 15 March 2003 until 1 July 2005 and interest is credited annually on 1 July at 15.5% per annum.
5) You are quoted a rate of 20% per annum compounded semi-annually. What is the equivalent continuous interest rate?
6) You have two investment options:
a. 19.75% per annum compounded semi-annually.
b. 19% per annum compounded monthly.
Use continuous rates to decide which the better investment option is.
7) Determine the effective rates of interest if the nominal rate is 18% and interest is calculated:
a. Half-yearly.
b. Monthly.
8) A small businessman borrowed some money from the bank under the following conditions:
· $500 000 to be paid after 3 months from the date of the loan.
· $800 000 to be paid one 1 year from the date of the loan.
· $900 000 to be paid 1 year 6 months from the date of the loan.
The businessman has found things to be tough this year and fails to make any payments.
· 6 months from now he makes a payment of $300 000.
· 9 months later he pays $250 000.
The bank accepts this arrangement provided that the balance is to be paid on the last date as agreed. If simple interest is charged at 22% per year, how much is to be paid by the businessman? Illustrate in a time line.
9) A lender quotes an interest rate on loans at 22% per annum with continuous compounding, but interest is actually paid quarterly. Find the amount of interest on a loan of $250 000 after 1 year.
10) Compare the amounts accumulated on a principal of $10 000 if invested from 10 March 2003 to 1 July 2005 at 16.5% per annum compounded semi-annually, and credited on 1 July and 1 July, if:
a. Simple interest is used for the odd period and compound interest for the rest of the term..
11) Paul owes Winston $1 000 due in 3 years and $8 000 due in 5 years . He wishes to reschedule his debt so as to pay two sums on different dates, one say X, in one year and the other, which is twice as much (i.e. 2X), five years later. Winston agrees provided that the interest rate is 18% per annum compounded quarterly. What are Paul’s payments? Illustrate in a time line.
12) Determine the future value of an annuity after five payments of $600 each, paid annually at an interest rate of 10% per annum.
13) Mrs. Dudley decides to save for her daughter’s higher education and, every year from the child’s first birthday onwards, puts away $1 200. If she receives 11% interest annually, what will the amount be after her daughter’s 18th birthday?
14) Determine the amount and the present value of an ordinary annuity with payments of $200 per month for five years at 18% per annum compounded monthly. What is the total interest paid?
15) Suppose the annuity just described above is not an ordinary annuity but an annuity due. What would the amount and present value be then, and what would be the interest paid?
Additional questions
a) Given The following cashflows for a capital project by Sarajeka ltd, calculate its payback period and discounted pay back period. The required rate of return is 8% p. a.
(3, 6)
Year / 0 / 1 / 2 / 3 / 4 / 5Cash flow / -50 000 / 15 000 / 15 000 / 20 000 / 10 000 / 5 000
i. What is your understanding of the NPV and IRR as investment evaluation tools. (3, 3)
ii. The two rules tend to sometimes conflict in ranking projects, explain why and this is solved using financial theory arguments. (7 )
2. Marilyn is 22 years old (at t= 0) and is planning for her retirementat age of 63( t= 41). She plans to save $5 000 per year for the next 15 years (t=1 to t=15). She wants to hev retirement income of $200 000 per year for 20 years, with the first retirement payment starting at t= 41. How much must Marilyn save each year from t=16 to t= 40 inorder to achieve her retirement goal. Assume she plans to invest in a diversified stock – and – bond mutual fund that will earn 9% p.a on average [15]
Giant spars a leading retail chain in Zimbabwe, has just issued a bond on the market. The bond has a nominal value of $500 000, yield to maturity of 18.98%, coupon rate of 17%(where coupons are paid out semi annually). The bond matures on 1 september 2095.what is the all- in Price (dirty price), the accrued interest and the clean priceof the bond on the following settlement dates:
a). 15 0ctober 2011
b). 22 august 2011
Comment on your answers [18 marks]
The following relate to project A by Mbizaldo electronics
year / Cash flow0 / (42 000)
1 / 18 000
2 / 16 000
3 / 15 000
4 / 15 000
5 / 14 000
Given the risk free rate is 10%, the market rist premium is 12% and beta of mbizaldo is 0.8
a). calculate the internal rate of return for the above project
b). should Mbizaldo electronics accept that project
c). would your decision change if you adopt the MIRR
Mr. R. MBIZI (Mcom Finance, MBA, Bcom Econs, IOBZ Dip) Page 4