DEPARTMENT OF COMMERCE

BS.Com & BS-A&F 5th (2021-25)

Financial Management

Assignment # 01: Numerical Questions

Raja Haroon Naseer

Lecturer
Department of Commerce
University of Kotli, AJ&K
Mobile: 0346-5058427
Email: haroonraja2000@gmail.com
Solve the following questions.

1. Calculate the discount factors for the following interest rates and time periods:
a. 10 years at 5%
b. 3 years at 12%
c. 7 years at 8.5%
2. You can save at a rate of 9.5% and will need £5000 to pay for your wedding in 3-year time.
How much would you have to save today to cover this?
3. What is the main difference between simple interest rates and compound interest rates?
Suppose you put £250 at the beginning of every month in a savings account that credits
interest at the annual rate of 6% but compounds it monthly. Find the amount in this account
after 25 years.
4. What is the implied interest rate on a 5-year loan where you have to pay back double the
amount you borrow?
5. Willy has just bought a house. She estimates that the roof will have to be renewed at a cost
of £25,000 after 20 years. To cover these costs, she intends to save an equal amount of
money at the end of each year, earning 6% annual interest rate. How much is such a yearly
annuity?
6. You want to buy a £120,000 house, and you apply for a mortgage loan. The bank will give
you a 5-year loan at 8.75% annual interest rate, payable in monthly installments. How much
is your monthly payment? Prepare loan amortization schedule for five years based on yearly
installment.
7. What is the difference between the coupon rate on a bond and the required rate of return on
a bond?
8. Calculate the prices of the following three bonds — all have a face value of £100:
a. A 2-yr bond with a coupon rate of 50/ and a required rate of return of 9%
b. A 6-yr bond with a coupon rate of 4.50/ and a required rate of return of 6%
c. A 12-yr bond with a coupon rate of 9% and a required rate of return of 7%

9. Company A has just issued a 4-year bond with a coupon rate of 6%. Company B has just
issued a similar bond. Company A was able to sell the bonds at £103.55 whilst Company
B had to sell the bonds at £93.38. The yield on similar government bonds current is 4.5%.
a. Calculate the yield to maturity on the two bonds.
b. Calculate the duration of the two bonds.
 c. Which Bond carries the greater risk?
10. What are the main differences between a preference share and an ordinary share?
11. Jones Design wishes to estimate the value of its outstanding preferred stock. The preferred
issue has an $80 par value and pays an annual dividend of $6.40 per share. Similar risk
preferred stocks are currently earning a 9.3% annual rate of return.
a. What is the market value of the outstanding preferred stock?
b. If an investor purchases the preferred stock at the value calculated in part a, how
much does she gain or lose per share if she sells the stock when the required return
on similar risk preferred stocks has risen to 10.5%? Explain.
12. Common stock value—All growth models You are evaluating the potential purchase of
a small business currently generating $42,500 of after-tax cash flow. On the basis of a
review of similar-risk investment opportunities, you must earn an 18% rate of return on the
proposed purchase. Because you are relatively uncertain about future cash flows, you
decide to estimate the firm’s value using several possible assumptions about the growth
rate of cash flows.
a. What is the firm’s value if cash flows are expected to grow at an annual rate of 0%
from now to infinity?
b. What is the firm’s value if cash flows are expected to grow at a constant annual rate
of 7% from now to infinity?
c. What is the firm’s value if cash flows are expected to grow at an annual rate of 12%
for the first 2 years, followed by a constant annual rate of 7% from year 3 to infinity?

Note: Last date for submission of assignment is on Mid-Term Paper.