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Q 1, 3, 6, and 7 are each worth 15 points while the remaining four questions are worth 10 points each.
Partial credit will be allocated, so show all of your work. 1. Jennifer Gage is trying to decide between a traditional fixed-rate 30 year versus 15year mortgage to fund the purchase of an investment property. The current interest rates for a 30 year mortgage are 4.25% APR based on monthly compounding while the 15 year mortgage is available at 4.0% APR based on monthly compounding. Jennifer is planning to borrow $500,000 and the first monthly payment is due in exactly one month’s time. In order to help Jennifer make her decision, using the information provided above, estimate the following:
a) Jennifer’s monthly mortgage payment for the 15 year and 30 year mortgage.
ANSWER: Using financial calculator, Jennifer 15 year mortgage is $3,698.44 while 30 year mortgage is $2,459.70
b) The total interest she would have to pay over the life of the loan for the 15 year versus 30 year mortgage.
ANSWER: Using financial calculator, Total interest for 15 years is $165,719.13 while total interest for 30 years is $385,491.80
c) Calculate the balance on her loan at the end of 15 years with the 30 year mortgage.
ANSWER: Using financial calculator, Balance on loan is $326,966.64
d) If Jennifer would like to keep her monthly mortgage payment the same as in the 30 year mortgage but borrow using the 15 year mortgage, what is the maximum amount she can borrow?
Using financial calculator, Maximum she can borrow is $332,532.13 2. You are considering purchasing a zero percent coupon bond that is about to be issued by XYZ Inc. It has a face value of $1000 and five years to maturity. The nominal yield on this bond is 7.5% compounded semi-annually. What is the price of this bond?
ANSWER: USING FINANCIAL CALCULATOR, PRICE OF BOND IS $692.02 3. Grandflow Inc. has just made a dividend payment of $1.5 per share and is expected to pay a dividend of $2 per share next year. Further, the dividend is expected to grow for the following 2 years at the rate of 10% per year. Beyond year 3, the dividend is expected to grow at a constant rate of 3% forever. Dividends are paid out at the end of each year. If Grandflow’s cost of equity is 15%, what is the current value of a share of Grandflow stock?
ANSWER: USING FINANCIAL CALCULATOR, CURRENT VALUE OF A SHARE IS $18.65 4. Roy's Welding Supplies common stock sells for $38 a share and pays an annual dividend that increases by 3 percent annually. The required rate of return on this stock is 8.0 percent. What is the amount of the last dividend paid?
ANSWER: USING FINANCIAL CALCULATOR, AMOUNT OF DIVIDEND LAST PAID IS $1.84 5. You are in possession of a growing annuity that makes its first payment of $15 sixteen years from now. Beyond year 16, the payment of $15 will grow at 4% per year until year 30 when the payment stops. If the annual interest rate is 8%, what is the value of this annuity today?
USING FINANCIAL CALCULATOR, VALUE OF ANNUITY TODAY IS $153.91 6. A fast growing biotechnology company has just received a 15 year patent for a new drug. The company expects that next year the profits will be 100 million and are expected to grow at the rate of 7% per year over the next 15 years. The company plans to discontinue producing the drug at the end of 15 years when the patent expires. What is the present value of the cash flows…