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Business 5039 Assignment 1

Due in class on Tuesday February 7, 2012

Assignments can be submitted by groups or individuals, please hand in one hard copy per group and list all the names of your group members clearly. You do not have to work with your case discussion group members.

Problem 1

After Christmas shopping Teddy had a $2000 balance on his Visa Card. Teddy’s new year’s resolution is to make no new credit card purchases until he pays off the bill. Teddy decides to make monthly payments over the next 6 months to get the balance to zero (payments are made at the end of each month). According to Teddy’s latest monthly statement, his bank charges 18% annually with monthly compounding.

a) (1) How big are Teddy’s monthly payments?

b) (2) What is the EAR on Teddy’s credit card?

Problem 2

What quarterly payment is necessary to accumulate $1.5 million over 15 years if the effective annual interest rate (EAR) is 12.55 percent? Assume payments are made at the end of each quarter.

Problem 3

3 years ago, Teddy and Mary bought a house in Thunder Bay for $285,000. They put down $110,000 as down payment and the rest of the purchase price is borrowed from RBC. The mortgage had a 25-year amortization period and a stated interest rate of 5.5% (APR). What is their monthly payment?

Problem 4

A 12-year bond with a 9% coupon rate, $1,000 face value and semi-annual coupon payments was issued by Fancy Car Ltd five years ago. You bought this bond two years ago when the semi-annually compounded market interest rate was 7% (APR). How much did you pay for the bond?

Problem 5

Malfoy Corporation paid a $3.00 dividend per share this year. Its total earnings per share were $6.00. Malfoy’s book equity is $60 million. There are 1 million shares outstanding and the discount rate for Malfoy stock is 12%.

(a) What is the sustainable growth rate (g) of Malfoy?

(b) What is the price of a share of Malfoy stock if you assume that the numbers above...