Question

6 You are looking to invest in Italian sculpture and have identified a valuable piece that is currently selling for $29 000. Your expectations that the sculpture should be held for 1 year before selling. Based on your analysis you consider that the sale prices and likelihood that these prices will be realised in 1 year are as follows; 10% chance that the sale price will be $36 000, 30% chance that the sale price will be $32 500, 30% chance that the sale price will be $30 500, 30% chance that the sale price will be $28 000.

Required:

The return that you expect from the investment will be:

8.62%

11.34%

6.55%

7.96%

7 Tolden Trading has borrowed from MacBank to invest in a project. The loan requires a repayment of $17,384 at the end of every month for three years. The lender quoted Tolden Trading a rate of 8.40 per cent with monthly compounding.

Required:

Assuming the MacBank figures are correct;

(1) What is the approximate amount of the loan taken out by Tolden Trading?

(2) What is the approximate overall effective annual rate on the loan if Tolden Trading also was required to pay an initial fee to the mortgage broker who introduced the business to the financier. The fee was payable on establishment of the loan and was an amount equal to 6% of the sum of the first 2 loan repayments.

(1) $551 501, (2) 9.01%

(1) $625 824, (2) 8.66%

(1) $551 501, (2) 8.66%

(1) $44 479, (2) 8.79%

(1) $625 824, (2) 8.95%

(1) $195 607, (2) 9.12%

8 Galgan Trading is a fast-growing telecommunications agency. Currently, their sales are at $700,000. They expect their sales to grow at an annual compound rate of 35% in the next two years, followed by an annual compound rate of 25% in years 3 through 7. Finally, their growth rate would slow down to a compound growth rate of 10% in years 8-10.

Required:

What will be the approximate sales amount for Galgan Trading as of year 10?

$5,181,956

$2,843,323

$3,893,280

$1,698,023

Answer 1

6 You are looking to invest in Italian sculpture and have identified a valuable piece that is currently selling for $29 000. Your expectations that the sculpture should be held for 1 year before selling. Based on your analysis you consider that the sale prices and likelihood that these prices will be realised in 1 year are as follows; 10% chance that the sale price will be $36 000, 30% chance that the sale price will be $32 500, 30% chance that the sale price will be $30 500, 30% chance that the sale price will be $28 000. Return on investment = 6.55% Option C

7 Tolden Trading has borrowed from MacBank to invest in a project. The loan requires a repayment of $17,384 at the end of every month for three years. The lender quoted Tolden Trading a rate of 8.40 per cent with monthly compounding.

(1) $551 501, (2) 9.01% (answer)

(1) What is the approximate amount of the loan taken out by Tolden Trading? $551501.48

(2) What is the approximate overall effective annual rate on the loan if Tolden Trading also was required to pay an initial fee to the mortgage broker who introduced the business to the financier. The fee was payable on establishment of the loan and was an amount equal to 6% of the sum of the first 2 loan repayments.

Fee Paid = Loan Repayment * 2 * 6%

Fee Paid = 17384 * 2 * 6%

Fee Paid = $2086.08

Net Loan Amount = Loan Amount Received - Fee Paid = 551501.48 - 2086.08 = $549415.40

Computation of Monthly Interest Rate: 0.72%

Effective Annual interest Rate = (1 + Monthly Interest Rate)^12 - 1

Effective Annual interest Rate = (1 + 0.72%)^12 - 1

Effective Annual interest Rate = 1.0901 - 1

Effective Annual interest Rate = 9.01%

8 Galgan Trading is a fast-growing telecommunications agency. Currently, their sales are at $700,000. They expect their sales to grow at an annual compound rate of 35% in the next two years, followed by an annual compound rate of 25% in years 3 through 7. Finally, their growth rate would slow down to a compound growth rate of 10% in years 8-10.

What will be the approximate sales amount for Galgan Trading as of year 10?

Sales Amount after 10 years = Current sales * (1 + 2 year growth rate)^2 * (1 + 5 year growth rate)^5 * (1 + 3 year growth rate)^3

Sales Amount after 10 years = 700000 * (1.35)^2 * (1.25)^5 * (1.10)^3

Sales Amount after 10 years = 700000 * 1.8225 * 3.0518 * 1.331

Sales Amount after 10 years = 5181956 Option A