Finance, Information Systems, & Management Science FINANCE 2360 ASSIGNMENT

Finance, Information Systems, & Management Science

FINANCE 2360 ASSIGNMENT #1

Total Marks: 73

Problem 1 (5 marks)

You own shares representing 25% of Sinclair Company.  You paid $500,000 for these shares 5 years ago.  The corporation has 3 other shareholders each with a 25% equity position in the company.  The corporation has grown over the past 4 years and your shares are now worth $1,000,000.  The corporation recently issued bonds in the amount of $4,000,000 to fund an acquisition.  The acquisition was a disaster and the company is now unable to meet its interest commitments and is on the verge of bankruptcy.  There are no other debts.  As a 25% shareholder, what is the maximum potential loss you could have if the company declares bankruptcy?  Explain. How would your answer change if the company was a general partnership instead?

Problem 2 (4 marks)

In 2019, the average annual salary in Canada was $52,600.  In 1967 it was $15,776.  What is the annual percentage increase in salary for this 52-year period?

Problem 3 (3 marks)

At a rate of 6% compounded annually, approximately how long would it take for your money to grow to twelve times its original value?

Problem 4 (6 marks)

Angela and Bill are saving for a down payment on a house.  They have $25,000 to invest.  Bill wants to invest the funds in an investment expected to earn 5% compounded annually over the next 5 years.  Angela wants to invest in a riskier investment which is expected to earn 8 % compounded annually over the next 5 years.

How much more would they have to invest today in the less risky investment to achieve the same value as they would earn by holding the riskier investment in 5 years’ time?

Problem 5 (12 marks)

Consider an annuity consisting of three cash flows of $8,000 each.  If the interest rate is 6%, what is the present value (today) of the annuity if the first cash flow occurs: (3 marks each)

1. Today
2. One year from today
3. Two years from today
4. Five years from today

Problem 6 (8 marks)

Yan is saving to go on a trip to Australia five years from today. She has determined that she will need to have $13,000 saved to take the trip.

1. How much will she need to invest today in to have $13,000 in five years? Assume she can earn the following interest rates over the next five years: (4 marks)

First year: 3%, Second year 3.5%, Third year: 4%, Fourth year: 5% and Fifth year: 5%

1. Instead of investing the money today, she has decided to wait two years to invest the money. How much will she need to invest, two years from today, in to have $13,000 five years from today? (4 marks)

First year: 3%, Second year 3.5%, Third year: 4%, Fourth year: 5% and Fifth year: 5%

Problem 7 (6 marks) 

A life insurance company is selling an investment policy that will pay you and your heirs $17,500 per year forever, with the first payment starting today.  If you require a return on this kind of investment of 6 percent and they sell this policy for $295,000

1. Is this a good investment for you? Show your work.
2. At what rate would you breakeven on this investment, if the first payment is at the end of this year?

Problem 8 (13 marks)

After 4 years of hard work, 23-year old Jake graduated with his bachelor’s degree in finance and started job hunting. After several interviews, he has secured two job offers:

Offer from RBC:

In the offer from RBC, the starting annual salary is $65,000 and RBC promises that Jake can expect 2.5% annual salary growth.

Offer from TD Bank:

In the offer from TD Bank, the starting annual salary is $70,000 and TD promises that Jake can expect 1.5% annual salary growth. In addition, TD will award a one-time loyalty bonus of $30,000 on the 25^th year anniversary if any employee works at TD for over 25 years, and another $50,000 bonus on the 35^th year anniversary.

Assuming that Jake will stay with one employer until he retires at age of 65, which job offer should Jake take given a 4 % annual interest rate (APR)?

Problem 9 (16 marks)

Your daughter just turned 4 years old.  You anticipate she will start University when she turns 18.  You would like to have funds in a registered education savings plan (RESP) to fund her education at that time.  You anticipate she will spend 6 years in university, and it will cost $20,000 per year. She will need the $20,000 at the start of each school year. When she graduates (debt free) you would also like her to have $40,000 for a down payment on a condo or to travel.  If the account promises to pay a fixed interest rate (APR) of 6% per year with monthly compounding, how much money do you have to deposit each quarter to ensure you will have enough when she starts university?

Assume you will make the same deposit at the end of each quarter until she starts university.