Question No. 1(a):

Answer:

APR | EAR | |

Bank 1 | 1.35% | 0.013% |

Bank 2 | 1.37% | 0.0137% |

Bank 3 | 1.30% | 0.0814% |

Question No. 1(b):

Answer:

I would like to deposit in the bank 2 because of the higher Annual Percentage Rate of interest as most of the investors think that the Annual Percentage Rate (APR) and Effective Annual Rate (EAR and also known as Annual Percentage Yield APR) are used simultaneously, but there is a difference between the two above. APY differs from that of APR in a way that APR only takes simple or normal interest and on the other hand, APY integrates and includes the additional concepts of the compound interest along with the simple interest.

Question No. 2:

Answer:

If the investor wants to have uneven cash flows as mentioned in the question for around 20 years, then the value investor should invest should be equal to $12,575. Total cash flows over 20 years would be equal to $26,000, then the present value of the investment would be equal to $12,575 using 8% discount rate compounded quarterly. Refer to sheet 8.

Question No. 3:

Answer:

The investor has to borrow the amount equal to $56,853 for that purpose.

Years |
0 |
1 |
2 |
3 |

Cash Flows |
30000 |
-15000 |
30000 |
-15000 |

Present Value @ 4% compounded quarterly |
30000 |
|||

($56,582.84) |

Question No. 4(a)

Answer:

If an investor wants to buy a share of a diamond mining company in South Africa who has just paid its dividend of $6 and it is expected to be reduced by 6% per year, then he would be paying $31.33 at the rate of 18% via using Dividend Growth Model.

Question No. 4(b):

Answer:

If an investor wants to buy a share of a diamond mining company in South Africa who has just paid its dividend of $6 and that is expected to be reduced by 6% per year, then he would be paying $23.5 at the rate of 24% via using Dividend Growth Model.

Current Price |
= Dividend just paid * Growth Rate / Cost of Equity |
||

D= | $ 6.00 | ||

Growth Rate= | -6% | ||

Ke= | 18% and 24% | ||

$ 31.33 | |||

$ 23.50 |

Question No. 5(a):

Answer:

In case if a company needs long term financing it should approach the investor for the loan and ask him to invest a sum of money and with that money the company will be able to pay the amount of money stated in the question, so the investor will invest $11,150 @ 4% APR, compounded semi-annually. Refer to sheet 5.

Question No. 5(b):

Answer:

In case if a company needs long term financing it should approach the investor for the loan and ask him to invest a sum of money and with that money the company will be able to pay the amount of money stated in the question, so the investor will invest $7,433.33 today @ 6% APR, compounded semi-annually. Refer to sheet 5.

Question No. 6:

Answer:

If Sharov stock is contemplating the purchase with the projected cash flows at the rate of 11% per annum, so the investor needs to invest $5,729.48 today in order to have the expected cash flows....................

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