Assignment -
The main objective of this assignment is to emphasis the importance of consideration time value of money in financial management decisions. It will cover time value of money, investment valuation and firms' long term investment decisions. Your answers in this assignment should be mainly focused on those topics.
Task 1. Write a comprehensive essay on application of time value concepts in various financial management decisions. Your essay should be covered
a. Fundamentals of time value concepts
b. Discounting and compounding process and their uses (what is the rational for using discounting process rather than compounding process in decision making?)
c. Discount rate and main components of the discount rate (why do we use different discount rates for evaluating different decisions?).
d. Use of time value in valuation of financial instruments such as bonds, equity and preference shares.
e. Capital budgeting and time value.
f. The other issues
(Words Limit 1500)
Task 2. Answer questions in the case study given below (Extracted from "Cases in Financial Management (2nd Edition), Sulock, Joseph and Dunkelberg, John, John Wiley & Sons, Inc", Some contents of the case have been altered to suit the local condition).
CASE - FINANCIAL PLANNING - TIME VALUE OF MONEY
QUESTIONS - Ignore taxes in all your answers.
1. On what financial goals dose Studebaker seem to be focusing? Is it the correct goal? Explain.
2. Morton notes that the $550,000 invested in the single-premium life insurance policy would grow to $1,763,925 in 20 years for a return of 6 percent a year. Explain how this return was calculated.
3. In order to reposition the equity in his home, Studebaker would have to take out a 30-year, $705,000 mortgage at 9 percent. Explain how the yearly mortgage payments on this loan were obtained. If the loan is for only 20 years, what would be the annual repayment?
4. For the 9 percent mortgage in Exhibit 4, find the loan balance at the end of years 19 and 20.
5. Exhibit 3 indicates that $1,763,925 will be accumulated after 20 years in the life insurance policy. Is this really true? (Hint: If Studebaker were to make this investment, what would his debt position look like in year 20?)
6. (a) If the excess $300,000 were invested in a long-term asset yielding 8 percent a year, how much would be accumulated after 20 years?
(b) Suppose Studebaker placed $26,145.31 a year into a long-term investment paying 8 percent a year. How much would be accumulated after 20 years (amounts invested at the end of each year)?
7. Repeat problem 5 but assume a 7 percent return can be earned.
8. Comer's criticisms implied that the single-premium life insurance policy is an unattractive investment for Studebaker. What do your previous answers suggest?
9. (a) Suppose Studebaker's goal is to accumulate $3,500,000 in 20 years. Assume the $300,000 is invested at 8 percent. How much will he have to save in equal amounts at the end of each of the next 20 years if he can earn 8 percent per year on any investments?
(b) Repeat part (a) but assume he will not be able to save any money in years 13 to 20. This is, he will save an equal amount at the end of years 1 to 12 and nothing thereafter.
10. The yearly payment on the new 30-year, $705,000 mortgage is $68,622. This assumes one payment is made at the end of each of the next 30 years. Suppose that payments must be made at the end of each month. Would 12 of these monthly payments be equal to one of the yearly payments? Explain.
11. Exhibit 3 suggests that the annual cost of the life insurance policy is $26,145.31. With the adjustments mentioned in the case, Comer calculated the cost to be $47,145.31in year 1 and $170,502.31 by year 20 assuming a 7 percent annual return. Explain how these were determined.
12. Comment on the strategies suggested by Morton.
13. Critically evaluate the proposed investment plan using your answers and the information given in the case.
Attachment:- Assignment File.rar