Subject: Corporate Finance

Individual Assignment

INDIVIDUAL ASSIGNMENT
Subject: Human Resource Management
IeMBA IEI03
Students name

: VO THI PHUONG THUY

ID

: VN1001630

Date of completion : 15/11/2014

1. Vernox wishes to borrow $10000 for three years. A group of individuals agrees
to lend him this amount if he contracts to pay them $16000 at the end of the three years.
What is the implicit compound annual interest rate implied by this contract (to the nearest
whole percent)? (10 marks)
Time line:
0

PV=10.000_ _ _ _ _ _ _ _ _ _FV= 16.000

The Future value of initial $10000 for three years:
FV3= PV (1+i)3
The implicit compound annual interest rate implied by this contract:
(1+i)3= FV3/ PV =16.000/10.000=1.6
1+i=1.61/3
i= 1.61/3-1= 1,169-1=0,169=16,9%
2. Joe has inherited $25000 and wishes to purchase an annuity that will provide him
with a steady income over the next 12 years. He has heard that the local savings and loan
association is currently paying 6 percent compound interest on annual basis. If he were to
deposit his funds, what year-end equal-dollar amount (to the nearest dollar) would he be
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Subject: Corporate Finance

Individual Assignment

able to withdraw annually such that he would have a zero balance after his last
withdrawal 12 years from now? (10 marks)
0

8 9 10 11 12 Year

i=6%
PVA n =25.000

FV=0

The present value of ordinary annuity that Joe has inherited:

1
(1+i)n

1 PVA n= PMT x
i

(1 + i)n 1
PVA n= PMT x

=
i(1 + i)n

The year-end equal-dollar amount that he be able to withdraw annually:

PMT= PVA n x i(1 + i)n = 25.000x 6% (1+6%)12
(1 + i)n 1

(1+6%)12-1

= $2982
3. Gonzalez Company has outstanding a 10% bond issue with a face value of $1000
per bond and three years to maturity. Interest is payable annually. The bonds are privately
held by Suresafe Insurance Company. Suresafe wishes to sell the bonds, and is
negotiating with another party. It estimates that, in current market conditions, the bond
should provide a (nominal annual) return of 14 percent. (20 marks).

a. What price per bond should Suresafe be able to realize on the sale?

M=100
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Subject: Corporate Finance

Individual Assignment

INT = 10% x 1000 = 100

n=3
0

100

100

100
1000

PV1
PV2
PV3
The price per bond should Suresafe be able to realize on the sale:

VB

=
=

INT

(1 + rd)n - 1

rd (1 + rd)n
100 x (1+14%) 3 -1
14% (1+14%) 3

+
+

M
(1 + rd)n
1000
(1+14%) 3

= $ 907, 1
b. What would be the price per bond if interest payment were made semiannually?
M=1000
INT = (10% x 1000)/2 = 50
n=3x2=6
r d=14%/2=7%

4
3

Subject: Corporate Finance

Individual Assignment

50

50

50

50

50

50
1000

PV1
PV2
PV3
PV4
PV5
PV6

VB

INT

(1 + rd)n - 1

rd (1 + rd)n

50 x (1+7%) 6 -1

M
(1 + rd)n

+ 1000

14% (1+14%) 6

(1+7%) 6

= $ 904,6
4. Red Brewery has $1000-par value bonds outstanding with the following
characteristics: currently selling at par; 5 years until final maturity; and a 9 percent
coupon rate (with interest paid semiannually). Interestingly, Blue Brewery has a very
similar bond issue outstanding. In fact, every bond feature is the same as Red bonds,
except that Blue bonds mature in exactly 15 years. Now assume that the markets
nominal annual required rate of return for both bond issues suddenly fell from 9 percent
to 8 percent. (20 marks)
a. Which brewerys bonds would show the greatest price change? Why?
INT Red= INT Blue = M x i % = 1000* (9% / 2) = 1000 x 0.45 = 45
n= 5*2= 10
VB Red

INT

(1 + rd)n - 1

+
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Subject: Corporate Finance

Individual Assignment

rd (1 + rd)n
45 x (1+0.45) 10 -1

(1 + rd)n
+
1000

4.5% (1+4.5%) 10

(1+4.5%) 10

= $ 1000
VB Blue

INT

(1 + rd)n - 1

rd (1 + rd)n
45 x (1+4.5 %) 30 -1

0.45 (1+4.5%) 30

M
(1 + rd)n
+
1000
(1+4.5%) 30

= 733+267
= $ 1000
Coupon rate = r d, so both bonds sell at its par value ($1000)
When the markets nominal annual required rate of return for both bond issues
suddenly fell from 9 percent to 8 percent r

= 8%/2 = 4%. It means Coupon rate

(4.5%) > r d (4%), so both bonds sell at a premium. Because every bond feature of Red
brewerys bond is the same as Blue bond, except that Blue bonds mature in exactly 15
years, and Red bonds mature in 5 years (with interest paid semiannually) n Red = 10 <
n Blue = 30. Thus, Blue brewerys bonds would show the greatest price change.

Subject: Corporate Finance

Individual Assignment

b. At the markets new, lower required rate of return for these bonds, determine the
per bond price for each brewerys bonds. Which bonds price increased the most, and by
how much?
Bond price for Red brewerys bonds at lower required rate of return with interest
paid semiannually (8%/2=4%):
VB Red

INT

(1 + rd)n - 1

rd (1 + rd)n
45 x (1+0.4) 10 -1

+
+

(1 + rd)n
1000

4% (1+4%) 10

(1+4%) 10

= $ 1041
Bond price for Blue brewerys bonds at lower required rate of return with interest
paid semiannually (8%/2 = 4%):

VB Blue

INT

(1 + rd)n - 1

rd (1 + rd)n
45 x (1+4 %) 30 -1

+
+

4% (1+4%) 30

(1 + rd)n
1000
(1+4%) 30

= $ 1086
From this analysis above, it is clearly that Blue brewerys bonds would show the
greatest price change and its bonds price increased the most ($1086-$1000=$86).
5. Summer Stone is analyzing and investment. The expected one-year return on the
investment is 20%. The probability distribution of possible returns is approximately
normal with a standard deviation of 15%. (20 marks)
a. What are the chances the investment will result in a negative return?
b. What is the probability that the return will be greater than 10%? 50%?

Subject: Corporate Finance

Individual Assignment

6. Barnaby Company has current assets of $800000 and current liabilities of

$500000. What effect would the following transactions have on the firms current ratio
(and state the resulting figures)? (20 marks)
Balance sheet
Assets
current assets of $800000
Liabilities and equity
current liabilities of $500000
Current ratio
Assets
Liabilities and equity

Current assets
Current liabilities

=
=

800000

= 1.6

500000

a. Two new trucks are purchased for a total of $100000 in cash.

Balance sheet will change:
Assets
current assets

$800000

Fixed assets

$100000

Total assets

$900000

Liabilities and equity

current liabilities

$500000

Accts. payable

$ 100000

Total Liabilities and equity

$ 600000
900000

New Current ratio =

= 1.5.
600000

After Barnaby Company purchased two new trucks, total assets increased because
of the increase of fixed assets and total Liabilities and equity also increased due to the
increase of accts. Payable. The new firms current ratio decreased.
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Subject: Corporate Finance

Individual Assignment

b. The company borrows $100000 short term to carry an increase in receivables of

the same amount.
Balance sheet will change:
Assets
current assets

$800000

AR

$100000

Total assets

$900000

Liabilities and equity

current liabilities

$500000

Accts. payable

$ 100000

Total Liabilities and equity

$ 600000
900000

New Current ratio =

= 1.5.
600000

After Barnaby Company borrows $100000 short term to carry an increase in

receivables of the same amount, total assets increased because of the increase in AR and
total Liabilities and equity increased due to the increase of accts. payable and the new
firms current ratio decreased.
c. Additional common stock of $200000 is sold and the proceeds invested in the
expansion of several terminals.
Balance sheet will change:
Assets
current assets

$800000

Fixed assets

$200'000

Total assets

$1000000

Liabilities and equity

Current liabilities

$500000

Common stock

($ 200'000)
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Subject: Corporate Finance

Individual Assignment

Total Liabilities and equity

$ 300000
1000000

New Current ratio =

= 0.33.
300000

After Barnaby Company sold common stock of $200000 and the proceeds invested
in the expansion of several terminals, total assets increased because of the increase of S-T
invest in the expansion of several terminals. Total Liabilities and equity decreased due to
the decrease of Common stock. The firms current ratio decreased.
d. The company increases its account payable to pay a cash dividend of $40000 out
of cash.
Balance sheet will change:
Assets
current assets

$800000

Cash

($40'000)

Total assets

$760000

Liabilities and equity

Current liabilities

$500000

Accts payable

$ 40'000

Total Liabilities and equity

$ 540000
760000

New Current ratio =

= 1.4.
540000

After Barnaby Company increases its account payable to pay a cash dividend of
$40000 out of cash, total assets decreased because of the increase of cash. Total
Liabilities and equity increased due to the increase of increases its account payable. The
firms current ratio decreased.