- QUESTION ONE FINANCIAL MATHEMATICS (06 marks) complete on excel spreadsheet A young newly married couple wish to purchase a unit house in a remote area priced at $190,000. They want to borrow...

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QUESTION ONE







FINANCIAL MATHEMATICS (06 marks) complete on excel spreadsheet





A young newly married couple wish to purchase a unit house in a remote area priced at $190,000. They want to borrow the entire amount and repay this amount in full plus interest over the next 20 years. You can offer them a mortgage for the full amount at an interest rate of 17% (sounds like extortion to me) and calls for equal annual instalment payments at the end of each of the 20 years.



Required:
(a) Calculate the amount of the annual payment? (b) Create and complete the amortization








QUESTION TWO COMPREHENSIVE QUESTION (CAPM, WACC, CF ANALYSIS)



(15 Marks)




SYPETCO Ltd
is a leading company in Australia and you the below details relating to the capital structure of the company.






Information concerning raising new capital
































































































Bonds



$1,000



Face value





13%



Coupon Rate (Annual Payments)





20



Term (Years)





$25



Discount offered (required) to sell new bonds





$10



Flotation Cost per bond



Preference Shares



11%



Required rate to sell new preference shares





$100



Face Value





$3



Flotation cost per share



Ordinary Shares



$83.33



Current Market Price





$4.00



Discount on share price to sell new shares





$5.40



Flotation Cost per bond





$5.00



2021 - Proposed Dividend



Dividend History



$4.63



2020





$4.29



2019





$3.97



2018





$3.68



2017













$3.40



2016





Current Capital Structure











Extract from Balance


Sheet $1,000,000 Long-Term Debt
















































$800,000



Preference Shares





$2,000,000



Ordinary Shares



Current Market Values



$2,000,000



Long-Term Debt





$750,000



Preference Shares





$4,000,000



Ordinary Shares



Tax Rate



33 %





Risk Free Rate



5%












a)

Calculate the cost associated with each new source of finance. The firm has no retained earnings available.



b)

Calculate the WACC given the existing weights



The financial controller does not believe the existing capital structure weights are appropriate to minimise the firm’s cost of capital in the medium term and believes they should be as follows






















Long-term debt





40%



Preference Shares





15%



Ordinary Shares





45%





c)

What impact do these new weights have on the WACC?




The firm is now (in 2021) considering the following investment opportunity for the period 2022-2029.


Data is as follows










































Initial Outlay



$1,600,000






Upgrade



$700,000



Required at the end of Year 4



Incremental Sales



350,000



Increased sales units per annum - (Year 5-8)



Working Capital



$45,000



Increase required



Estimated Life



8



Years



Salvage Value



$60,000






Depreciation Rate



0.125



For tax purposes



The machine is fully depreciated by the end of its useful life




































Other Cash







Expenses Other Cash



$60,000.00



Per annum (Years 1-4)



Expenses



$76,000.00



Per annum (Years 5-8)



Production Costs



$0.15



Per


Unit



Sales price



$0.75



Per Unit (Years 1-4)



Sales price



$1.02



Per Unit (Years 5-8)




Sales estimates for next 8 years starting from 2022










































Year



Sales (Units)



2022



679651



2023



694903



2024



710155



2025



725406



2026



740658



2027



755909



2028



771161



2029



786413





d)

Calculate the Net Present Value, Internal Rate of Return and Payback Period




The financial controller is considering the use of the Capital Asset Pricing Model as a surrogate discount factor. The risk-free rate is 5 percent. The information in the table below has been used by company management in calculating the stock beta value which is 1.151 and the expected return on the stock which is 12.5%.
















Year



Stock Market



Share





Index



Price
































































2011



2000



$15.00



2012



2400



$25.00



2013



2900



$33.00



2014



3500



$40.00



2015



4200



$45.00



2016



5000



$55.00



2017



5900



$62.00



2018



6000



$68.00



2019



6100



$74.00



2020



6200



$80.00



2021



6300



$83.33





e)

Calculate the CAPM



f)

Explain why this figure may differ from that calculated above (i.e. Cost of equity – Ordinary Shares)


Answered 1 days AfterSep 16, 2021

Answer To: - QUESTION ONE FINANCIAL MATHEMATICS (06 marks) complete on excel spreadsheet A young newly...

Sumit answered on Sep 17 2021
132 Votes
Question 1
    Given:
    Purchase Price    $ 190,000
    Time     20    Years
    Interest Rate    17%    P.A.
    (a). Amount of Annual Payment    $ 33,761.17
    (b). Amortization Table
    
Period    Opening Amount    Installment Amount    Interest Amount    Principle Amount    Closing Amount
    1    $ 190,000    $ 33,761.17    $ 32,300    $ 1,461.17    $ 188,538.83
    2    $ 188,538.83    $ 33,761.17    $ 32,052    $ 1,709.57    $ 186,829.26
    3    $ 186,829.26    $ 33,761.17    $ 31,761    $ 2,000.19    $ 184,829.07
    4    $ 184,829.07    $ 33,761.17    $ 31,421    $ 2,340.23    $ 182,488.85
    5    $ 182,488.85    $ 33,761.17    $ 31,023    $ 2,738.06    $ 179,750.78
    6    $ 179,750.78    $ 33,761.17    $ 30,558    $ 3,203.54    $ 176,547.25
    7    $ 176,547.25    $ 33,761.17    $ 30,013    $ 3,748.14    $ 172,799.11
    8    $ 172,799.11    $ 33,761.17    $ 29,376    $ 4,385.32    $ 168,413.79
    9    $ 168,413.79    $ 33,761.17    $ 28,630    $ 5,130.82    $ 163,282.97
    10    $ 163,282.97    $ 33,761.17    $ 27,758    $ 6,003.06    $ 157,279.90
    11    $ 157,279.90    $ 33,761.17    $ 26,738    $ 7,023.59    $ 150,256.32
    12    $ 150,256.32    $ 33,761.17    $ 25,544    $ 8,217.59    $ 142,038.72
    13    $ 142,038.72    $ 33,761.17    $ 24,147    $ 9,614.59    $ 132,424.14
    14    $ 132,424.14    $ 33,761.17    $ 22,512    $ 11,249.07    $ 121,175.07
    15    $ 121,175.07    $ 33,761.17    $ 20,600    $ 13,161.41    $ 108,013.66
    16    $ 108,013.66    $ 33,761.17    $ 18,362    $ 15,398.85    $ 92,614.82
    17    $ 92,614.82    $ 33,761.17    $ 15,745    $ 18,016.65    $ 74,598.17
    18    $ 74,598.17    $ 33,761.17    $ 12,682    $ 21,079.48    $ 53,518.69
    19    $ 53,518.69    $ 33,761.17    $ 9,098    $ 24,662.99    $ 28,855.70
    20    $ 28,855.70    $ ...
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