Finance

2831 Words Apr 24th, 2011 12 Pages
BAFI 500 PRACTICE EXAM

NAME:_______PRACTICE EXAM_____________________________________

Student #:_________________________________________

1. You would be given 4 or 5 questions similar to the ones found in this practice exam. You are, however, responsible for all material covered in the course whether or not that material is covered in this exam. 2. You will have 3 hours to write this exam. 3. Answer all questions in the spaces provided. Please write legibly. 4. Use of calculator is permitted, but please show how answers were obtained. A numerical answer without an explanation will be given a grade of zero.

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1. Robinson Crusoe (RC) lives only two periods (today and tomorrow). He prefers to consume the same amount of money
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Explain why or why not.
ANSWER

First, convert the APR to the EAR

⎛ 0.12 ⎞ ⎜1 + ⎟ = 1.12683 , i.e. 12.683% per year 12 ⎠ ⎝ ⎛ 0.12 ⎞ or equivalently, ⎜1 + ⎟ = 1.01 , 1% per month. 12 ⎠ ⎝

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The next step consists of comparing PV: • PV of your Vacation ⎡ ⎤ 1 ⎢1 − 4⎥ (1.12683) ⎦ × 1,600 = 4,790.72. PVVacation= ⎣ 0.12683

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Chef Tony’s deal
PVChef Tony 1 ⎤ ⎡ ⎢1 − (1.01)48 ⎥ 600 600 ⎥ × 133.67 = + +⎢ 2 (1.12683) (1.12683)4 ⎢ 0.01 ⎥ ⎢ ⎥ ⎣ ⎦ = 472.54 + 372.16 + 5,075.98 = 5,920.68

Chef Tony’s analysis ignores the time value of money. b. If you were now told that your bank is willing to finance the purchase of the time share for 10% APR, how much better or worse off are you if you using ACE’s financing instead of your bank’s if you were going to purchase the time share for $5,000?
ANSWER

In this case,

⎛ 0.10 ⎞ ⎟ = 1.10471 , i.e. 10.471% per year, or equivalently, ⎜1 + 12 ⎠ ⎝

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⎛ 0.10 ⎞ ⎟ = 1.008333 , 0.83% per month. ⎜1 + 12 ⎠ ⎝ We need to borrow, $5,000 at a 10.471% per year over 48 months. The monthly payment is obtained as follows: ⎡ ⎤ 1 ⎢1 − 48 ⎥ (1.008333) ⎦ , 5,000 = Payment × ⎣ 0.008333 hence 5,000 Payment = = 126.813 ⎡⎡ ⎤⎤ 1 ⎢ ⎢1 − 48 ⎥ ⎥ ⎢ ⎣ (1.008333) ⎦ ⎥ ⎥ ⎢ 0.008333 ⎥ ⎢ ⎥ ⎢ ⎦ ⎣ Tony wants $133.67, you are better off by $133.67-$126.81 = $6.85708, per month. The present value of the flow of payments is given by : ⎡ ⎤ 1 ⎢1 − 48 ⎥ (1.008333) ⎦ = $270.362. 6.85708 × ⎣ 0.008333

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