Bank Money and Deposits Payments & Saving Account - Profitability Index & Interest Rate - Accounting Assignment Help

Assignment Task    
 

Question 1.

Bryce has graduated and needs money for a new car. A bank will lend Bryce the money if Bryce pays back within four years and Bryce pays a rate of interest that a bank would otherwise get by saving money at an account. Bryce thinks that she will be able to pay 5000 in one year and then 8000 each year for the next three years.

a) If a bank would otherwise earn 6% per year on savings, how much can Bryce borrow from a bank?

b) If the bank lends the money and then deposits Bryce’s payments at the savings account, how much will the bank have four years from now?

c) Evaluate whether the bank will be willing to lend the money in exchange for promised payments?

Question 2.

Lian is a winner of a $30 million prize. Lian can take a prize money either as 30 payments of $1 million per year starting today, or $15 million paid today.

a) If the interest rate is 8%, which option should Lian take?

b) Evaluate the reason for a chosen option.

Question 3.

Discuss why picking the project with the highest NPV might not be optimal when a manager is evaluating projects with different resource requirements. Would profitability index advise the managerial decision?

Question 4.

Investment is comprised of two stocks, all of which have a required return of 15% and a most recent dividend of $2.50 per share. Stocks are expected to maintain constant growth rate in dividends for the foreseeable future of 8 percent and -5 percent per year, respectively.

a) What is the dividend yield for each of these stocks? What is the expected capital gain yield?

b) Discuss the relationship among the various returns that you find for each of these stocks.

Question 5.

A Bank has a beta of 0.67, whereas a beta of a Company is 1.72. The risk-free interest rate is 3% and the market risk premium is 7%.

a) What is the expected return of an equally weighted portfolio of a Bank and a Company, according to CAPM?

b) Discuss the two approaches to calculation of the expected return of this equally weighted portfolio.

Question 6.

Shares of Corporation have a beta of 0.90. The market risk premium is 7%, and the risk-free rate is 8%. Corporation paid a dividend of $1.80 per share, and the dividend is expected to grow at 7% forever. The share currently sells for $25. Corporation has a debt-equity ratio of 50%. Its cost of debt is 8%, before taxation, taxation rate is 30%.

What is the weighted average cost of capital of Corporation?

Question 7.

The efficient market hypothesis asserts that well-organised capital markets are efficient. If the markets are efficient, what is an implication of this efficiency for market participants?

a) What the -$1 NPV for project A means?

b) Why does the project D have the highest +NPV but the lowest IRR for projects with +NPV?

c) Project C has the highest IRR. Under what circumstances is project B preferable?

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