# Finance ratios

Description Question 1: (10 marks) Assume that you work for a multinational company. You manager has informed you that different stakeholders would like to know how the firm is performing relative to the competitors. i) Identify three potential users of financial ratios, and explain each user’s focus (i.e., the aspect of the company’s operations and the operating performance ratios that will be of interest to them). ii) Briefly discuss 2 difficulties an analyst is likely to encounter when comparing the ratios of similar corporations from different countries. Question 2: Application of Time Value of Money (40 marks) a) You have won a lottery worth \$1,000,000. The amount will be paid to you in equal installments over 20 years. If the interest rate is 10% compounded annually, how much will you be paid at the end of every year? (5 marks) b) You are planning to buy a car worth \$20,000. Which of the two deals described below would you choose, both with a 48-month term? i) the dealer offers to take 10% off the price, and lend you the balance at an APR of 9%, monthly compounding. (2.5 marks) ii) the dealer offers to lend you \$20,000 (with no discount) at an APR of 3%, monthly compounding. (2.5 marks) c) You have just joined the investment banking firm of Mckenzie & Co. They have offered you two different salary arrangements. You can have \$75,000 per year for the next two years, or you can have \$55,000 per year for the next two years, along with a \$30,000 signing bonus today. If the interest rate is 12% compounded monthly, which is a better offer? NB: first convert the Quoted rate (12%) to EAR and use the EAR as the discount rate. (10 marks) d) In 30 years, you plan to set up a fellowship fund for Carleton University that would pay out \$100,000 a year in perpetuity with an annually compounded discount rate of 5%. In order to set up the fund in 30 years, how much do you need to save each year (starting this year) assuming you can get a return of 10% per annum on your savings semi-annually compounded for the next 30 years? (5 marks) e). You have been hired to run a pension fund for Mackay Inc, a small manufacturing firm. The firm currently has \$5 million in the fund and expects to have cash inflows of \$2 million a year for the first 5 years followed by cash outflows of \$3 million a year for the next 5 years. Assume that interest rates are at 8%. i. How much money will be left in the fund at the end of the tenth year? (10 marks) ii. If you were required to pay a perpetuity after the tenth year (starting in year 11 and going through infinity) out of the balance left in the pension fund, how much could you afford to pay? (5 marks) (5+10+5+15=35 marks) Question 3: Application of Time Value of Money (Mortgages) (30 marks) Suppose your parents wish to buy a house whose current market value is \$150,000. They have approached a loan officer at the Bank of Montreal who offers them 25-year mortgage financing for 75% of the purchase price at a rate of 6.75%. Payments are to be made on a monthly basis even though the bank is required by law to compound the interest semi-annually. (a) What are the effective annual and monthly rates of interest on the loan? (5 marks) (b) Assuming the loan payments are due at the end of each month: (i) determine the size of the monthly loan payments (7 marks) (ii) prepare the amortization schedule for the first 3 months (9 marks) (iii) determine the principal outstanding at the end of the 5th year. (9 marks) (NB: You could amortize the loan to find the balance at the end of year five using excel. This would be fairly tedious to do by hand. Alternatively, using the information already determined in this problem, you can simply focus on the remaining payments). Total (5+7+9+9 = 30 marks) Question 4: Bond Valuation (20 marks) Lend Lease Ltd is planning to issue 7-year bonds with semi-annual coupon payments. The market interest rate for such bonds is 8%. Coupon payments will be made at a rate of 9.17%. The management of Lend Lease Ltd has determined the company needs to raise \$875,000 to fund the purchase of a new office and wants to use the proceeds of the bond issue for that purpose. i) Calculate the price of these 9.17% coupon bonds. (10 marks) ii) State and explain whether these bonds are premium or discount bonds. (2 marks) iii) Determine how many of these 9.17% coupon bonds the company would need to issue. (2 marks) iv) Calculate the price of these bonds, if they paid no coupons to investors. Assume semiannual compounding for these zero-coupon bonds. (4 marks) v) Determine how many of these zero-coupon bonds the company would need to issue. (2 marks) (Total = 20 marks) 4 questions Application of Time Value of Money : Application of Time Value of Money (Mortgages) ( Bond Valuation

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