FIN 5203 – FINANCIAL MANAGEMENT ASSIGNMENT 1
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FIN 5203 – FINANCIAL MANAGEMENT
ASSIGNMENT 1
Due Date: October 5, 4 PM (CT)
Rules:
• Please submit your assignment on Canvas before the deadline mentioned above.
• If you use any assumptions in your solutions, state it clearly wherever it applies.
• Please write the NAMES of EACH group member clearly!
• Please SHOW YOUR WORK in order to earn full credit!
• You can answer these questions by using MS Excel or handwriting (it is up to you).
• If you have any questions about the assignment, please contact me during the office hours (via
Zoom) or via e-mail any other time before the due date.
Good luck to you all!
1. (16 Points) You have just finished your undergraduate degree and you have two career options:
Option 1: Accepting a job offer with the starting salary of $75,000 per year (paid at the end of the year) and an annual raise of 2% pa (guaranteed). You will work in this company for 40 years.
Option 2: Choosing a graduate program which will cost you $28,000 per year for the next two years (paid at the beginning of each year). Following the graduate school, you can get a job that offers the initial salary of $85,000 (paid at the end of the Year 3) with an annual raise of 3% pa (guaranteed). You will work in this company for 38 years.
a. (6 Points) If you use the discount rate of 10% pa, which option is more lucrative for you?
b. (5 Points) At what discount rate will you be indifferent between these two career options? (Hint: You need to use the incremental cash flows to answer this question)
c. (5 Points) If option 2 (i.e., work after grad school) comes with a signing bonus (paid at the beginning of Year 3), at what signing bonus will you be indifferent?
2. (20 Points) You want to buy a condominium in downtown Clayton for $500,000 and you plan to make 25% down payment. Your bank agreed to provide you a 20-year mortgage for the rest of the cost of this property. The interest rate they offered you is 4.20% pa.
a. (4 Points) How much will your mortgage payments be every month?
b. (10 Points) You made your mortgage payments for the first five years. At the end of the fifth year, you asked your bank whether you could make a one-time payment of $30,000 or not (You effectively have a new mortgage with a 15-year tenor at the end of year 5) and they accepted your one-time payment. How much will your new mortgage payments be under these circumstances? (Note: You are still going to make mortgage payments for the next 15 years and the interest rate did not change)
c. (6 Points) If you want your monthly payments to go down to $1,800 per month in the next 15 years, how much should your one-time payment be?
3. (20 Points) Metropolis has been planning to develop a new warning system to make Superman aware of significant dangers. The installation of the system costs more than what their budget allows so the mayor decides to issue a 25-year bond to finance the project. Each bond has a face value of $1,000 and it promises a coupon rate of 5%, which will be paid semi-annually.
a. (4 Points) Calculate the price of this bond if the Yield to Maturity (YTM) is 6.0% pa.
b. (10 Points) Let’s assume you bought this bond on the date of issue. Right after receiving the fourth coupon payment (i.e., two years later), you decided to sell the bond. Exactly on that date, the YTM decreased to 5.2%. Under these circumstances, what is your holding period return?
c. (6 Points) What is the percentage change in the price on the day of selling this bond (due to YTM change)? (Please submit your answer in three decimals such as 15.233%)
4. (22 Points) Norman Osborn, the founder and CEO of Oscorp, has been informed that his firm managed to create $10.50 earnings per share (EPS) for this year (and just paid the dividend). Oscorp has a policy of distributing 50% of its earnings as dividends to its shareholders. The historical (annual) RORE on Oscorp’s projects is 17% while the required rate of return on Oscorp stocks is 13.20% in the market.
a. (6 Points) Please calculate the stock price of Oscorp with dividend discount model (DDM).
b. (6 Points) Please calculate the value added from retaining and investing in projects per stock (i.e., NPVGO).
c. (10 Points) Norman Osborn has been informed by the Oscorp’s RORE is expected to change in the future based on the current projects. The current RORE (i.e., 17%) is expected to continue for four years. Starting from year 5, the RORE is expected to reduce to 14% and stay at this level forever. Under these circumstances, what is the fair value of Oscorp’s stock?
5. (22 Points) You are an entrepreneur, who is looking for a long-term loan to finance some of your growth projects. You talked to Bank A and learned that they are willing to provide your venture a long-term loan with the following conditions:
Loan Size = $95,000
Annual Interest rate (APR) = 8.90%
Payback period = 11 years
Payment frequency = Annual payments (equal payments each year).
a. (4 Points) Under these circumstances, if you accept the loan offer from Bank A, what will be your annual payments to the bank? (Please show your work!)
b. (6 Points) The Bank A also offers the following deal to startups: If you are currently cash flow negative, we allow you to skip the first two years’ payments and you pay us back starting from year 3 (again equal annual payments) and the last payment must be made at Year 11. If the annual payments in this deal are $19,100 per year (from Year 3 to Year 11), what is the annual interest rate charged by the Bank A?
c. (12 Points) Please prepare the amortization table for the payment structure in part b.
2022-12-16