TMAN 625 Midterm Exam

Name

Question 1 2 3 4 5 6 7 8 9 Total

Points 10 10 15 10 15 10 10 10 10 100

Question 1

Score

You are a buyer for a battery company and are investigating the purchase of lithium from an African company for $100 per barrel and $14 per barrel to process and package it before shipping. This particular source requires an 15 month lead time with material and packaging costs paid up front (at time order is placed). Transportation is $4 per barrel and paid when received. If the risk free annual interest rate is 12%, what is the value per barrel after received in the U.S.? If it is received 3 months late, how much is invested per barrel when it is received? Assume monthly compounding.

Question 2 Score 0 You run a construction firm. You have just won a contract to build a government office building. Building it will require an investment of $ 10 million today and $ 5 million in one year. The government will pay you$ 20 million in one year upon the building's completion. Suppose the cash flows and their times of paymant are certain; and the risk free interest rate is 10%.

a. What is the PW of this opportunity (investment). b. How can your firm turn this PW into cash today.

Question 3 Score 0 Your money is tied up and you need to borrow $ 10,000. The following two alternatives are available at different banks:

1) Pay $ 3,311.61 at the end of each year for 5 years, starting at the end of the first year (5 payments total at 9% nominal per ye OR

2) Pay $ 253,93 at the end of each month for 5 years, starting at the end of the first month (60 payments total at 9% nominal per

A) WHICH WILL RESULT IN THE SMALLER PW OF PAYMENTS TO YOU IF YOUR TVOM IS 9% NOMINAL PER YEAR COM OR B) WHICH WILL RESULT IN THE SMALLER PW OF PAYMENTS TO YOU IF YOUR TVOM IS 25% NOMINAL PER YEAR CO

ents total at 9% nominal per year compounded monthly, which equates to 9,38 % effective.

yments total at 9% nominal per year compounded monthly).

9% NOMINAL PER YEAR COMPOUNDED MONTHLY?

25% NOMINAL PER YEAR COMPOUNDED MONTHLY?

Question 4 Score 0 Reputable Payday Loans (RPL) quoted Joe three loan arrangements for a $1,000 loan. The first is to pay back the loan in equal weekly payments .5% interest per week. A second is to pay it back in equal semi-monthly payments (on the 15th and 30th) at 1% semimonthly interest. A third option is to pay it back in equal monthly payments at 2% monthly interest. Compounding of interest is weekly, semi-monthly and monthly respectively for each arrangement. What is the effective annual rate for each alternative? What is the annual percentage rate for each arrangement?

Question 5 Score 0 You are considering investing in a gold mine in South Africa. Gold in South Africa is buried very deep, so the mine will require an intial investment os $ 250 million. Once this investment is made, the mine is expected to produce revenues of $ 30 million per year for the next 20 years. It will cost $ 10 million per year to operate the mine. After 20 years, the gold will be depleted. The mine must then be stabilized on an ongoing basis, which will cost $ 5 million per year in perpetuity. Calculate the PW of this investment, if the yearly interest rate is 5%.

For calculating perpetuity see recommended readings of Week 2.

Question 6

Score

You are saving to make a down payment on a house. You have $ 10,050 saved already. You can afford to save an additional $ 5000 per year at the end of each year. If

End of yer 0 1 2

Investment $5,000.00 $5,000.00 $5,000.00 $5,000.00 $5,000.00 $5,000.00 $5,000.00

Interest

Balance

$10,050.00 $728.63 $1,143.95 $1,589.39 $2,067.12 $2,579.48 $3,129.00 $3,718.35

$15,778.63 $21,922.58 $28,511.96 $35,579.08 $43,158.56 $51,287.56 $60,005.91

3 4 5 6 7

the end of each year. If you earn 7.25% per year on your savings, how long will it take you to save $ 60,000?

Rate PMT PV

7%

$5,000.00 $10,050.00

Question 7

Score

Joe is 55 and plans to retire and move to Aruba where he could live comfortably on a beach with retirement funds of $750,000. He recently inherited $400,000 that he safely invested at 6% annual interest compounded monthly. At what age can he retire and start his Aruba retirement assuming he makes no additional investments in his retirement fund? How much would he have to invest monthly to retire at age 60?

Pmt Rate PV FV

1 6%

$400,000.00 $750,000.00

A. =

Question 8

Score 0 Suppose a seven-year $ 1000 bond with 8% cupon rate and semiannual cupons are trading with yield to maturity of 6.75%.

a) Is this bond currently trading at discount, at par, or at premium? Explain. b) If the yield to maturity of the bond rises to 7%(APR with semiannual compounding) what price will the bond trade for?

ld to maturity of 6.75%.

ill the bond trade for?

Question 9 Score 0 Acme App (AA) has developed a highly successful application for cell phones. They now want to "move out of the garage" and become a viable business. They have heard about different legal organizations like proprietorships, partnerships, LLCs, or corporations. How should they decide which one to choose?
You may find Complementary Reading at Conference 1 useful in answering this question.

Record your answer below.