Finance Four Questions Assignment

| August 14, 2017

Question 1: You are negotiating a contract with your employer. You have been offered three possible 4 year contracts. Your opportunity cost is 10%. Payments are guaranteed, and they would be made at the end of each year. Terms of each contract are as follows:Year 1 Year 2 Year 3 Year 4Contract A $55,000 $55,000 $55,000 $55,000Contract B $55,000 $56,000 $58,000 $60,000Contract C $80,000 $40,000 $50,000 $50,000Which contract would you accept? Show workings.Question 2: Interest Ratesa) The nominal interest is 12% with interest paid quarterly. What will be the effective annual rate?b) Minnie has taken a 30-year mortgage for $500,000. The mortgage requires monthly payment of $5,143.06 with an interest rate of 12% per annum.i. How much interest is in the first payment?ii. How much repayment of principle is in the first payment?c) Mickey is planning to save $50,000 per quarter for 10 years. Savings will earn interest at an(nominal) interest rate of 12% per annum. Calculate the present value for this annuity if interest is compounded semi-annually.Question 4: Investment Decision Rules (chapter 8)A firm with a 14% WACC is evaluating 2 projects for this year’s budget. After-tax cash flows are asfollows:Year 0 Year 1 Year 2 Year 3 Year 4 Year 5Project A -$8,000 $2,200 $2,200 $2,200 $2,200 $2,200Project B -$20,000 $5,700 $5,800 $6,000 $6,200 $6,500i. Calculate NPV for each project.ii. Calculate IRR for each project.iii. Calculate MIRR for each project.iv. Calculate payback for each project.v. Calculate discounted payback for each project.Question 4: Risk and Return (chapters 11 and 12)a) Consider the following information for two stocks, Stocks Y and Z and the returns on the twostocks are positively correlated.Stocks Expected return Standard deviationY 9% 15%Z 15% 17%i. Assume you held a portfolio consisting of 60% of Stock Y and 40% of Stock Z. Calculate the average return of the portfolio during this period.ii. Calculate the standard deviation of the portfolio if the correlation between Stock Y and Stock Z is 10%.b) An Italian restaurant chain will generate the following rates of return in the following scenarios:State of economy Probability Rates of return if state of economy occursBoom 30% 125%Normal Economy 50% 15%Recession 20% -100%i. Calculate the expected rate of return.ii. Calculate the standard deviation of return for its shareholders.

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