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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($372 + $135 + 500) / ($2.21 - ($0.83 + .40)) = 1,028 [+/- 31]
The fixed cost is assumed that Larry has discovered the other fixed cost incurred. The total investment is $800,000. The worst case scenario assumes that Larry got a total line of credit from the bank in the amount of $400,000 and invested $400,000 from other source. The Notes payable – short term and the long-term debt is (11.8 + 3.7) = 15.5 % from Table F in the handout. The Loan interest and payment per year is ($400,000 * 0.155)= $62,000. The Income data from Table F indicates that there is a 0.4% of all other expenses net out of the total sales which equals to $109,908 (5,700,666 gallons * $4.82 *0.4%) .
Poor Dog, Inc. borrowed $135,000 from the bank today. They must repay this money over the next six years by making monthly payments of $2,215.10. What is the interest rate on the loan? Express your answer with annual compounding.
3. Mr. Varello is paid semimonthly. His annual salary is $64,333. What is his semimonthly
What annual interest rate is needed to produce $200,000 after five years if only $100,000 is invested?
10. An investment of $1,000 today will grow to $1,100 in one year. What is the continuously compounded rate of return?
FVN = FV1= PV × (1 +I)N = $500 x (1 + 0.08) = $500 x 1.08 = $540
2. If you had a payment that was due you in 5 years for $50,000 and you could earn a 5% rate of return, how much
At an interest rate of 15% per year (3.75% for three months, the amount to borrow equals
Second City Options (SCO) is a small firm that specializes in option trading. Employing 35 people, SCO is located on LaSalle Street in the Chicago financial district. It is a member firm of the Chicago Board Options Exchange (CBOE), where it trades options on stocks and stock indices. It is also a member firm of the Chicago Mercantile Exchange Group (CME Group), where it trades options on futures and the underlying futures contracts.
24,675 = (18% x 1175 x 1.5 x base wage rate) + (82% x 1175 x base wage rate)
the formula as shown in the image starts to look like multiplying the year by the addition of the
QD = -5200 – 42 (500) + 20,600) + 5.2 (5,500) + .20 (10,000) + 0.25 (5,000) = 17,650
(5 points) Qin deposits his first paycheck in the bank. The annual interest rate is 12%, but