no references needed
Touro College Touro College Business Department Corporate Finance EBF-220-ON Fall 2020 Dr. Menahem Rosenberg, CFA Week 3 – Time Value of Money, Chapter 4 In this assignment and throughout the semester, you will need a calculator. A financial calculator is OK, a graphing, programmable calculator any phone calculators or any other instrument capable of communication and/or storage (beyond numbers storage) is prohibited during exams. You can also use other calculators, as long as they have a yx key. The formula sheet will also be available during exams. I have also posted a time value of money booklet. This booklet has many examples that will help you with the exercises. Material is quantitative. It starts simple, and builds on the basic blocks. Unless you know the basic stuff, don’t jump ahead. Read: Chapter 4 To do: Complete the ‘Assignment Week 3’ on ‘Connect’. The assignment has to be completed by the due date, but you have unlimited time until then. Also, you have three tries. Answer the all the questions in ‘Exercise 3’ posted on blackboard. Your answer should be uploaded to blackboard. This must also be completed by the due date. For this exercise you can find hints at the bottom of this paper. I recommend solving question 7 in Excel. You may also solve other question using Excel. However, you should submit the Excel file. The file it must contain the formulas used. I should be able to click on a cell and view the formula underneath. That is, just cells with numbers will not satisfy the assignment requirement. What you should know: • Present Value and Future value of lump sums. • Compounding, interest is usually quoted annually, but can be computed daily, monthly or any other sub-period. • Continuous compounding. • Multiple cash flows. • Perpetuity: Cash flows that continue forever. • Annuity: A constant cash flow (or growing constantly), for a fixed number of periods and fixed intervals. Distinguish between Ordinary Annuity and Annuity Due. • Life cycle problems; Mortgages, retirement saving and withdrawals. Finance 320-- Touro College Business Department Corporate Finance EBF-220-ON Fall 2020 Dr. Menahem Rosenberg Exercise 3- 1. A business borrows $3 million dollar; the loan is made of three equal $1 million parts. The first part is to be paid off in 60 days, the second part in one year and the last part in one year plus 60 days. Payment of each of the parts includes the interest accumulated in that part only. Assume all parts interest are 8% and daily compounding is used. 2. Given a 10% annual interest rate. Which would you prefer to receive as a wedding present? a. A security paying $500 every year, forever. b.A security paying $10,000 once, four years from today. How will your answer change if the annual rate is 5% instead? For both calculate the security present value. 3. If Sam Darnold is offered a five-year contract; Total value of the contract being reported at $25 million, paid in five equal payments, first payment is cash at the contract sign in day, today, and the remaining payment are made every year after that. Assuming 6% interest rate, what is the present value of contract? 4. You will receive an annuity of $30,000 every six months for 12 years. a. Calculate the present value of the assuming a 5.0% discount rate. b. Calculate the present value of the assuming a 5.0% discount rate, but the first payment is in exactly, two years (followed with another 23 payments). 5. A business borrows $20 million to be paid back in equal annual payments over four years. Interest rate is 11%. Calculate the first two years of interest charges. No Excel. 6. Excel. Excel. The company you work for borrows $20 million for four years. The loan will be paid back in equal quarterly payment. For tax purposes your manger asks you to prepare the five years interest charges on that loan. Assume annual interest rate of 12%. 7. An investor saves for retirement $400 per month in next 40 years. The money is invested in a stock/ bond portfolio and is expected to earn an average 8% per year. When he retires, he believes he will live 30 years and he will invest his retirement fund in a conservative bond fund that will earn 3% per year. a. Calculate the investor’s planned equal monthly withdrawals in his retirement years. 8. Evaluate the monthly payment on a 20 years mortgage of $1,000,000 and 7.20% annual rate. How much does the borrower owe after five years? Try without Excel! Touro College Touro College Business Department Corporate Finance EBF-220-ON Fall 2020 Dr. Menahem Rosenberg, CFA Exercise 3: Follow the definition and formulas. You can also review the example in the Time value of Money booklet posted. Hints: 1. Treat it as three separate loan with different maturities. This is essentially a compounding question; try to view it as a daily interest rate and the number of days for the loan to be paid off. 2. Compare the present value of the two choices. 3. Annuity due. 4. First, calculate ordinary annuity present value, consider this as amount $X. This $X is a value in a future period, calculate its present value; the trick is to figure out if it is 3 or 4 years of discount. 5. First calculate the annuity payments. For each period use the following steps: Add interest to the outstanding loan, subtract the payment; the result is the next period outstanding loan, repeat. 6. First calculate the annuity payments. You may use Excel function =PV(…) and PMT(…), see excel help for more details. 7. Consider this as two problems, first, the saving years accumulating a retirement fund (FV annuity). Second, withdrawal from the given retirement fund (payment of a PV annuity). 8b. The outstanding loan equals the present value of the remaining years of payments. For examples see TVM booklet.