Formalities:
• You should submit a document in Excel format.
• Font: Arial 11 pts.
• Text alignment: Justified.
Submission: Sunday February 13th.
Weight: This task is a 30% of your total grade for this subject.
This task assesses the following learning outcomes:
• Understand the basic theories of finance and apply these to practical problems.• Understand the goal of the Firm• Understand the different forms of organizations• Analyze series of future cash flows and recommend choices for investment. Net Present value, annuities, perpetuities, loan amortization schedules.
ASSIGNMENT QUESTIONS:
IMPORTANT: SHOW YOUR DETAILED SOLUTIONS FOR EACH QUESTION.
Problems (60 points)
1. You are thinking about investing your money, and you wonder how much time would you need to quadruple it?
You don´t know how much money you have, but you know that the interest rate is 9% compounded annually.
2. Delivery ASAP Co. has identified an investment project with the following cash flows. If the discount rate is 10 percent, what is the present value of these cash flows?
Year 0= -1200
Year 1=+500
Year 2= +600
Year 3= +750
Year 4=+400
3. An investment offers 6,900 per year for 18 years, with the first payment occurring one yearfrom now. If the required return is 6 percent, what is the value of the investment?
What would be the value if the first payment take place on day 1?
4. Given an interest rate of 6.1 percent per year, what is the value at Period t = 10 of a perpetual stream of 1,500 annual payments that begins at Period t = 21?
5. Your bank offers to lend you €60,000 at a 7% annual interest rate to start your new business. The terms require you to amortize the loan with 3 equal end-of-year payments.
a) Find an amount of annual payment.
b) Show the amortization schedule.
Questions (40 points)
a) What happens to the future value of an annuity if you increase the rate r? What happens to the present value?b) Who owns a Corporation? Describe the process whereby the owners control the firm’s management. What is the main reason that an agency relationship exists in the corporate form of organization? In this context, what kinds of problems can arise?c) Why is the goal of financial management to maximize the current share price of the company’s stock? In other words, why isn’t the goal to maximize the future share price?d) When we talk about the discount rates in a project, what does the discount rate mean? Explain with your own words what is the difference between “hurdle rate” and “opportunity cost of capital”.e) Considering that you have a consol of 1€ with an annual interest rate of 10%, at which price could you sell it today? Would you be able to explain what is the future value of that console?
Rubrics
Descriptor
9-10
The student demonstrates an excellent understanding of the concepts.
8-8.9
The student demonstrates a good understanding of the concepts.
7-7.9
The student demonstrates a fair understanding of the concepts.
6-6.9
The student demonstrates some, but insufficient understanding of the concepts.
3-5.9
The student demonstrates insufficient understanding of the concepts. They may mention some relevant ideas or concepts, although it is clear that the relationship between them is not understood by the student.
1-2.9
The student demonstrates insufficient understanding of the concepts and does not mention any relevant ideas or concepts.
0
The student leaves the question blank or cheats.
