...PROBLEMS (p. 180) 1. A few years ago, Simon Powell purchased a home for $150,000. Today, the home is worth $250,000. His remaining mortgage balance is $100,000. Assuming that Simon can borrow up to 75 percent of the market value, what is the maximum amount he can borrow? (LO 5.2) Present market value of Simon’s home = $250,000. Simon can borrow up to 75 percent of the market value, or $187,500. Simon still owes $100,000 mortgage on his home. Therefore, he can borrow an additional $87,500. 2. Louise McIntyre’s monthly gross income is $3,000. Her employer withholds $700 in federal, state, and local income taxes and $250 in Social Security taxes per month. Louise contributes $100 per month for her IRA. Her monthly credit payments for VISA and MasterCard are $65 and $60, respectively. Her monthly payment on an automobile loan is $375. What is Louise’s debt payments-to-income ratio? Is Louise living within her means? (LO 5.3) Louise’s Gross Income | = | $3,000 | Less: Income taxes | = | -700 | Less: Social Security Tax | = | -250 | Less: IRA contribution | = | -100 | Net take-home pay | = | $1,950 | Her monthly payments on VISA, MasterCard, and a car loan add up to $500 per month. Louise’s debt payments to income ratio is 500 to 1,950, or 25.6 percent. This ratio exceeds the recommended 20 percent figure. Therefore, Louise is overextended. Her maximum monthly loan and credit card payments should not be over $390. 3. Robert Sampson owns a $175,000 townhouse...
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...Appraisal 6 2.4 Credit Documentation 6 2.5 Collateral 7 2.6 Interest Rate 7 2.7 Size of Loan 8 2.8 Purpose of Loan 8 2.9 Loan Period 8 2.10 Disbursement 9 2.11 Repayment of Bank Loans 9 2.12 Monitoring and Follow up 9 2.13 Factoring of Debtors through Credit Bureaus 10 2.14 Portfolio Management 10 3. RESEARCH METHODOLOGY 11 3.1 Research Method 11 3.2 Method of Data Collection 11 3.3 Determination of Population Size of the Study 12 3.4 Sample Size 12 3.5 Method Data Analyses 12 4. TIMELINE 12 5. BUDGET BREAKDOWN 13 6. REFERENCES 13 1. INTRODUCTION 1.1 Back Ground of the Study Bank lending is guided by credit policies which are guidelines and procedures put in place to ensure smooth lending operations. Bank lending if not properly assessed, involves the risk that he borrower will not be able or willing to honor their obligations (Feder & Just 1980). In order to lend, banks accept deposits from the public against which they provide loans and other form of advances. Since they bear a cost for carrying these deposits, banks undertake lending activities in order to generate revenue. The major sources of revenue comprise margins, interests, fees and commissions (Odongo, 2004). Beyond the urge to extend credit and generate revenue, banks have to recover the principal' amount in order to ensure safety of depositors’ fund and avoid capital erosion. Bank lending therefore has to consider interest income, cost of funds, statutory...
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...pension to you for the subsequent 30 years (i.e. starting in the year 2040) that is constant in real terms. Assume a long-term nominal interest rate of 6% per year. With your current standard of living (which you would want to retain once you retire), you expect that you would need Rs. 240,000 per year in real terms as pension. Assume that the average long-term inflation rate is expected to be 4.8% per year. Calculate how much you would thus need to save every year in real terms (to contribute to the pension fund) in order to meet your needs? 2. Raj Corporation has the opportunity to invest $ 1 million now (t=0) and expects after tax return of $600000 in t=1 and $700000 in t=2. The project will last for 2 years only. The appropriate cost of capital is 12% with all equity financing. The borrowing rate is 8% and Raj Corporation will borrow $300000 for the project. The debt must be repaid in two equal instalments. Assume that debt tax-shields have a net value of $0.30 per dollar of interest paid. Calculate the project’s APV. 3. The following table shows the price of a sample of US treasury strips in March 2009. Each strips make a single payment of $1000 at maturity. Maturity | Price (%) | March 2010 | 99.423 | March 2011 | 97.546 | March 2012 | 94.510 | March 2013 | 90.524 | a) Calculate the annually compounded spot interest rate for each year. b) What will be the price of the bond in year March 2011, which have maturity in March 2013 which make...
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...has asked each of its commercial loan customers for an estimate of its borrowing requirements for the first half of 2010 (Gapenski and Pink, 2009). Dr. Cook asked Doug to come up with an estimate of the clinic’s line-of-credit requirements to submit at the meeting. A line of credit is a short-term loan agreement by which a bank agrees to lend a business some specified maximum amount. The business can borrow against the credit line at any time it is in force, which typically is no longer than one year. When a line expires, it will have to be renegotiated if it is still needed. The amount borrowed on the line, or some lesser amount, can be repaid at any time, but any amount outstanding must be repaid at expiration (Gapenski and Pink, 2009). Interest is charged daily on the amount drawn down, and often a commitment fee is required up front to secure the line. In general, lines of credit are used by businesses to meet temporary cash needs, as opposed to being used for permanent long-term financing. Doug had to gather more information if he was going to create a cash budget spreadsheet, as Dr. Cook asked him to do once she was...
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...To estimate SBUX cost of equity I used 60 months of return, 104 weeks of return, and 250 days data of return from my spreadsheets. First, I calculated SBUX monthly beta and it equals 1.2, the weekly beta equals .8, and the daily beta was 1.00. I estimated the error in the beta estimates and appear to be .4. I got this number by subtracting the monthly beta 1.2 from the weekly beta .8. I visited four different websites such as Yahoo Finance, Reuters, Nasdaq, and the Value Line beta shown in Damodaran’s company data (spreadsheet) and each one gives a different beta. Yahoo Finance gives beta of .78, Reuters has a beta of 1.21, Nasdag gives a beta of 1.11, and Value Line beta is 1.1. My preferred value for the market risk premium from the data is the Geometric Average 1.71%. The source of the risk premium is historical and I chose it because the data is most current. People are drinking much more coffee from the past and the risk premium is low which is more secure for the company. I also used historical data for my calculation and I believe that it produces the most accurate results. Based on Yahoo Finance and SBUX 10K I found that the Debt $549.6 M, Income tax expense $674.4 M, EBT $2059.1 M and D/E equals 10.62%. My Bottom-up beta is 1.12. I came up with number by multiplying Avg Beta- unlevered with (1+(1- Tax rate) * D/E mkt). My Tax rate 32.75%. I used this Ke=r+ βMRP to get my Cost of Equity. = 5.11+1.12 (1.71) My average beta was 1.00 I calculated 1.2+.8+1= 3 = 3/3...
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...for the furniture, but it would definitely deplete their savings, so they want to look at all their options. The dining room set costs $3,000 and Furniture R’Us offers a financing plan that would allow them to either (1) put 10% down and finance the balance at 4% annual interest over 24 months or (2) receive an immediate $200 cash rebate, thereby paying only $2,800 cash to buy the furniture. Bob and Carol currently earn 5.2% annual interest on their savings. a. Calculate the cash down payment for the loan. b. Calculate the monthly payment on the available loan. (Hint: Treat the current loan as an annuity and solve for the monthly payment.) c. Calculate the initial cash outlay under the cash purchase option. d. Assuming that they can earn a simple interest rate of 5.2% on savings, what will Bob and Carol give up (opportunity cost) over the 2 years if they pay cash? e. What is the cost of the cash alternative at the end of 2 years? f. Should Bob and Carol choose the financing or the cash alternative? P16–9 Cost of bank loan Data Back-Up Systems has obtained a $10,000, 90-day bank loan at an annual interest rate of 15%, payable at maturity. (Note: Assume a 365-day year.) a. How much interest (in dollars) will the firm pay on the 90-day loan? b. Find the 90-day rate on the...
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...s oНОВИНИ ЗАРУБІЖНОЇ НАУКИ 415 Mian Sajid Nazir1, Aqsa Butt2, Muhammad Musarrat Nawaz3 INTEREST RATE DETERMINANTS OF BANKS IN PAKISTAN This study attempts to investigate determinant factors of interest rate differential on deposits and loan accounts of Pakistani banks. For this purpose 4 year data on 30 banks is included in this research paper. The empirical results based on the correlational analysis of the relationship between weighted average rate of interest and 10 independent variables which are credit risk, amount of deposit, administrative cost, profit margins, bank's liquidity, amount of loan, market share, inflation rate, macroeconomic conditions and bank specific factors. These variables will help to highlight customer reaction towards variation in interest rates which help banks to review their policies regarding interest rates, margins and risk premium. The results shows that credit risk, administrative costs, profit margins and deposit amounts are important factors for the interest rate determination and these are positively related with interest rate. Bank's liquidity and deposit amount have negative relationship with interest rate. Meanwhile, inflation and market share have no significant relationship with interest rate fluctuations. Keywords: interest rate; banking sector; Pakistan; risk; deposits. Міан Саїд Назір, Акса Батт, Мухаммад Музаррат Наваз ЧИННИКИ, ЩО ВИЗНАЧАЮТЬ ВІДСОТКОВІ СТАВКИ У БАНКАХ ПАКИСТАНУ У статті зроблено спробу визначити чинники...
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...should prove a good hedge against inflation. Ideally, expenses, income and corporate earnings should behave at least as good as inflation and so should stock prices, usually these price changes can be transferred to the consumer. Second of all, stocks usually incorporate a “growth factor” which usually goes in agreement with economic trends. Economies grow, and what investors expect is that companies will grow too. Using the present value formula, inflation has two components. A higher inflation should perpetuate a rise in expected future dividends as well as a rise in discount rates (r ) which account for higher inflation and a reduced purchasing power parity, therefore neutralizing the effect by making returns to be again lower. As interest rates decrease, people borrow money, spend more and...
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...Titman (2001) MM I Definition – Financing and risk management choices will not affect firm value if the following conditions hold: (1) Total cash flow to a firm’s financial claimants are unaffected by these choices; (2) Efficient markets Frictionless and complete markets are clearly sufficient for capital structure irrelevant. MM II Corporation need not be concerned about the market conditions and needs of investors when designing their financial structures Definition – the cost of capital of levered equity is equal to the cost of capital of unlevered equity plus a premium that is proportional to the market value of debt-equity ratio The process of tailoring or repacking securities is costless and competitive MM III With perfect capital markets, financial transactions neither add nor destroy value, but instead represent a repacking of risk The academic commodity has concluded that thinking about the market condition is unlikely to help understand observed capital structures. Market imperfections are second order effect and that financial intermediaries can more efficiently address security design issues. The implicit assumption is that if investors do demand specially tailored securities, financial intermediaries are better positioned to capture the rents associated with creating them Practitioners tend to talk about whether “market conditions” favor debt vs. equity financing High Yield Debt Market The explanation of the phenomenon because of a coordination failure...
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...are the determinants of a company’s cost of capital? A corporate cost of capital can be specifically defined as the opportunity cost of all capital invested in the enterprise. Opportunity cost refers to what is given up as a consequence of a decision to use a scarce resource, capital invested refers to the total amount of cash invested into a business, and this includes both debt and equity components used in the investment in the enterprise. A three step process is used to calculate a company’s weighted average cost of capital. First is to determine the cost of capital components, which is namely debt and equity. A. Debt capital. The cost of debt capital is equivalent to actual or imputed interest rate on the company's debt, adjusted for the tax-deductibility of interest expenses. Specifically: The after-tax cost of debt-capital = The Yield-to-Maturity on long-term debt x (1 minus the marginal tax rate in %) B. Equity capital. Equity shareholders, unlike debt holders, do not demand an explicit return on their capital. However, equity shareholders do face an implicit opportunity cost for investing in a specific company, because they could invest in an alternative company with a similar risk profile. Thus, we infer the opportunity cost of equity capital. We can do this by using the "Capital Asset Pricing Model" (CAPM). This model says that equity shareholders demand a minimum rate of return equal to the return from a risk-free investment plus a return for bearing extra...
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... The principle = $112,242.47, the interest rate = 5.75%, loan period = 20 years. You should be able to compute the new monthly payment based on these numbers. Then the new monthly payment - the current monthly payment gives the additional amount of money. You may ignore the escrow payment $211.13 and the total payment $917.25 for this project. 2. Explain whether or not it would be reasonable to do this is if you currently meet your monthly expenses with less than $100 left over. Use the answer from part 1 to explain. You earn the points as long as your arguments make sense. 3. It might be possible to pay the current balance off in 20 years if you refinanced the loan at a lower interest rate. The interest rate that you qualify for will depend, in part, on your credit rating. Identify the highest interest rate you could refinance at in order to do this and determine the interest rate that would require a monthly total payment that is less than your current total payment. Also, refinancing costs you $2000 up-front in closing costs. The principle = $112,242.47, loan period = 20 years. You are looking for the highest interest rate (it is lower than 5.75% of course) which makes your monthly payment lower than the current monthly payment $706.12 The $2000 will be used in part 4. 4. Explain whether it is more or less reasonable to consider refinancing your loan. In order to answer this, you need to look at different interest rates. Refinancing costs you $2000...
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...2.1 Key factors in case study 2.1.1 Saving factors in the case As we know, Alexander is a forty-eight year-old CEO of Graphic Design Ltd. He draws a salary of £420,000 per annum. He and his wife Janet have a 14-year-old boy, 10-year-old girl and 3-year-old girl, named Adam, Sheila and Carina respectively. Janet is already 44 and works as her husband`s personal assistant with salary of £55,000 per annum. So the annual household income of his family is £475,000 totally. Adam and Sheila studied in a local private school. The couple will have to pay £3,000 per child per annum in school fee, what was more when Carina arrived her school age, and at that time she will probably be sent into the same school. 2.1.2 Mortgage factors in the case The Flynn’s live in a bungalow which is conservatively evaluated £1.25m in firm economic condition. They have £450,000 mortgage to pay in 14 years. They decided to build an extension which cost £300,000. They have taken out the over 20 year’s mortgage on an endowment basis. A substantial shortfall leads to policy operational problems. 2.1.3 Protection factors in the case As a Company Director and Chief Executive of a software company, Alexander is already 48 and close to his middle-age. Great work pressure may easily cause health problems. Janet is 44 and works as Alexander's personal assist. So this couple needs to protect health to deal with the pressure and workload. Their three children also need to protect health to prevent accident...
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...Abstract Guillermo’s Furniture Manufacturing Company is in Sonora, Mexico in a gorgeous vacation spot. Guillermo’s is the largest furniture store in the area and made furniture for years, until the late 1990s that a new competitors joined the furniture business that has put a dent into Guillermo’s business. Competitors have new technology when to allow them to come in with lower prices and lure customers but Guillermo has to decide on the best options for the company either upgrade or move forward working as he did making quality products for customer’s expectation. In order for Guillermo to improve his company, Guillermo has to seek other alternatives and make financial decisions to increase sales to make profits. The contents of the paper will examining Sensitivity Analysis, Weighted Average Cost of Capital (WACC), multiple valuation techniques in reducing risks, calculate NPV for future cash flows and work out pro forma cash flow budget for the next five years for the organization and analyze the companies projected earnings (UOP, 2009). Analysis of Different Alternatives Guillermo has three available alternatives to evaluate the furniture store. First alternative is to keep itself in the current position. The current managers use capital budgeting techniques to find the best project among the group of projects. Current budget for Guillermo is $42,577 net income before taxes could observe capital markets for just a short time to convince consumer the...
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...is an option. The Differences between Leasing and Purchasing Both leasing and purchasing has its pros and it cons. The trick is to figure out which would be better for a company’s current financial status. Leasing allows a lessee to avoid large down payments, keep updated materials, lower lease payments due to shared tax advantages, and the property that is being leased does not show as an asset or liability. These are all positive factors if your company is a smaller company and does not have the cash to purchase the material or only needs the material for a limited time. Next are a few pros of purchasing through a capital lease. Leasing payments on an operational lease might be higher than those payments on a capital lease due to interest rates and since the company does not own the property, it must not be abused or used to harshly because it will be returned to the lessor. A capital lease gives you tax breaks such as deprecation, while operational leasing does not. As stated above, operational leases (rental agreements) and capital leases (purchasing leases) both have their pros and cons. Again, it is really the current financial status of the company that would determine which method would be best. Financial Status of a Company One of the main questions to review before deciding to purchase or lease property is what can the company afford? To determine what a company can afford, a person must review the current financials of the company. If the company...
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...Seminar report on Risk-return tradeoff Submitted by Pradip Routh Reg. no - 0906247013 Introduction :People have many motives for investing. For most investors, however, their interest in investment is largely pecuniary- to earn a return on their money. However, selecting stocks exclusively on the basis of maximization of return is not enough. To sat that investors like return and dislike risks is, however, simplistic. To facilitate our job for analyzing securities and portfolio within a return-risk context are, we must begin with a clear understanding of what risk and return are, what creates them, and how they should be measured. The ultimate decisions to be made in investment are (1 ) what securities should be held and (2) how much money should be allocated to each. These decisions are normally made in two steps. First estimates are prepared of the return and risk associated with available securities over a forward holding period. This step is known as security analysis. Second risk-return estimates must be compared in order to decide how to allocate available funds among these securities on a continuing basis. Security analysis is built around the idea that investors are concerned with two principle properties inherent in securities; the return that can be expected from holding a security, and the risk that the return that is achieved will be less than the return that was expected. The primary purpose herein is to focus upon return and risk and how...
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