Finance Practice Paper

Topics: Balance sheet, Interest, Compound interest Pages: 5 (1245 words) Published: May 13, 2011
Please answer all questions

Q1.a. Kashif Naeem needs $50,450 at the end of six years, and his only investment outlet is a 10 percent long-term certificate of deposit (compounded annually). With the certificate of deposit, he makes an initial investment at the beginning of the first year. (Q2) i. What single payment could be made at the beginning of the first year to help Kashif achieve this objective? (4) ii. What amount could Kashif pay at the end of each year annually for six years to achieve this same objective? (4)

Q1.b. A property will provide $15,000 a year forever. If its value is $175,000 what must be the discount rate? (2) (Q14)

Q2. a. On January 1, 2005, Noman bought 500 shares of stock for Rs.19 per share. On December 31, 2008, he sold the stock for Rs.31.50 per share. What is his annual rate of return? Interpolate to find the exact answer. (4) (Q4. Mr. Strong)

2. b. If investors are to earn a 6 percent real interest rate, what nominal interest rate must they earn if the inflation rate is 8 percent? (2) (Q10)

2. c. Calculate the EAR for the following cases: (2)
i. APR 24%: Compounding period 1 month
ii. APR 12%: Compounding period 3 months

2. d. Calculate the APR for the following cases: (2)
i. EAR 10%: Compounding period 1 month
ii. EAR 8.24%: Compounding period 3 months

Q3. Mr. Asad Naseer has decided to start saving for his retirement. Beginning on his twenty-first birthday, Mr. Naseer plans to invest Rs.2,000 each birthday into a savings investment earning a 7 percent compound annual rate of interest. He will continue this savings program for a total of 10 years and then stop making payments. But his savings will continue to compound at 7 percent for 35 more years, until Mr Naseer retires at age 65. Ms. Hira Mughal also plans to invest Rs.2,000 a year, on each birthday, at 7 percent, and will do so for a total of 35 years. However, he will not begin his contributions until her thirty-first birthday. How much will Mr. Naseer and Ms. Mughal’s savings program be worth at the retirement age of 65? Who is better off financially at retirement, and by how much? (15)

Q4. Noman Hatim borrows $60,000 at 10 percent interest toward the purchase of a home. His mortgage is for 10 years. (Q1 of Ex II) a. How much will his annual payments be? (3)

b. How much interest will he pay over the life of the loan? (3) c. How much should he be willing to pay to get out of a 10 percent mortgage and into an 8 percent mortgage with 10 years remaining on the mortgage? Assume that current interest rates are 8 percent. Disregard taxes. (4)

Q5. On December 31, 1994 Aperna Architectural services purchased equipment at a cost of $25,250 paying $5,000 cash and a 2-year installment note payable for $20,250. This note calls for eight quarterly payments which include interest computed at the annual rate of 20% per year. Payments are due on Mar31, June 30, September 30 and December 31. The first payment is due Mar 31, 2005 and the note will be fully amortized on December 31, 2006. You are required to calculate the amount of the quarterly payment and prepare an amortization table showing the allocation of each of the eight quarterly payments between interest expense and reductions in the principal amount of the note. (15)

Q6. The IU Corporation makes standard size 4 inch fasteners which it sells for $180 per hundred. Mr. Lakhani is the majority owner and manages the inventory and finances of the company. He estimates sales for the following months to be:

January$120,600 (67,000 fasteners)
February$115,200 (64,000 fasteners)
March$131,400 (73,000 fasteners)
April$147,600 (82,000 fasteners)
May$133,200 (74,000 fasteners)
June$142,200 (79,000 fasteners)

Last year IU Corporation’s sales were $108,000 in November and $113,400 (63,000 fasteners) in December.

Mr. Lakhani is preparing for a meeting with his banker to...
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