Midterm Examination # 2 (Total 30%)

No credit without supporting calculations. Detailed solution must be provided.

20161390 Alibek Sagantay

1)Assume you have a margin account with a 50% initial margin. You purchase 100 shares of sto
ckat $80 per share. The price increases to $100 per share. What is the net value of your investme
nt (margin) now?

1. Basic margin = 100 * 80 * 0.5 = 4000

Increase = 100 * (100-80) = 2000
New margin = 4000 + 2000 = 6000

2)Using the stock valuation formula calculate the value of a share of stock if it is expected to pay
$15 in dividends, in addition the dividends are expected to grow at a rate of 8 percent forever,

3)Suppose that the current value of all of a mutual fundʹs holdings is determined to be $750
million. The fundʹs liabilities are $125 million and it grew at 20% from last year. It currently has
45 million shares outstanding. What is the fundʹs NAV?

NAV = ($750 mln – $125 mln) / 45 mln = $13.89

4) Suppose that you have estimated that, to provide for your retirement income, you will need
$2,250,000 on deposit in your retirement account when you retire. You believe that you will earn
an average of 11% on your retirement investments until you retire in 35 years. What must your
annual deposits be to accumulate this total?
FV = 2250000; r = 11%; n = 35. PMT - ? PMT = 6586.85

5)At the end of each year for 25 years you deposit $365 in an account that earns 12% interest. If
instead you had begun saving earlier, and had deposited $365 in the account each year for 50
years, how much more money would you have on deposit?

r = 12%; n = 25; PMT = -365. FV - ? FV = 48666.86

r = 12%; n = 50; PMT = -365. FV - ? FV = 876006.66

6)Mary Keane just started working and plans to deposit $ 3,000 annually into her IRA earning
12% compounded annually. How much would she have in 20 years, 30 years, and 40 years? (3
points)
20 years: r = 12%; n = 20; PMT = -3000. FV - ? FV = 216157.33
30 years: r = 12%; n = 20; PMT = -3000. FV - ? FV = 723998.05
40 years: r = 12%; n = 20; PMT = -3000. FV - ? FV = 2301274.26

7)Using an average daily balance, calculate monthly interest charge if sum of all daily balances
is $ 16,500, billing period of 30 days and monthly interest rate is 10 %. (3 points)

8) Cedrickʹs credit card was stolen, and he did not realize that it was stolen until he received his
most recent billing statement. He contacted the credit card company immediately after he read
his statement. Fraudulent charges were as follows: $250 for a Blue-ray player, $600 for a new set
of tires, $200 cash withdrawal, and $40 in interest charges on the above items. He did not carry
credit card insurance. How much is Cedrickʹs potential maximum liability?

Potential maximum liability = $50

9) If you own a home with a market value of $175,000 and you have an outstanding balance on
your mortgage of $60,000, your home equity is
Equity = $175000 - $60000 = $115000

10) Ronald is borrowing $20,000 using the discount method. His bank is offering him an annual
percentage rate of 8.5% and he is taking out the loan for 24 months. How large of a check will
Ronald receive from this loan when he leaves the bank? How much will he repay?
Check = $20000 – ($20000 * 8.5% * 2) = $16600
Amount repaid = $20000

11) Fred ran short on cash and borrowed $300 through a Payday Loan company. The company
charged him a fee of $60 to borrow the $300 for 14 days. Using the simple interest method
calculate what interest rate was Fred charged for the aforementioned loan.
Rate = ( 60 / 300 * (14/365)) * 100 = 521.43%

12) Payday lenders

A) make money by providing one-time assistance during a time of financial need.
B) make money by keeping borrowers in debt.
C) encourage repeat borrowing.
D) all of the above.
D
13) Veronica was offered a loan using the discount method of calculation by her bank. She will
borrow $10,000 for one year at an APR of 11%. How large will the check be that Veronica?
receives? How much must she repay?
Check = $10000 – ($10000 * 11% * 1) = $8900
Amount repaid = $10000

14) You have just obtained a personal loan for a new home movie system under the simple
interest
method. You have borrowed $12,000 for 9 months at an annual rate of 10%. Your marginal tax
rate is 28%. What are the total interest charges you would pay if the loan is paid off on time?
Interest = $12000 * 10% * 9/12 = $900
15) You disagree with Ed ʺShiftyʺ Smith, a car salesperson, on the price of an open-end lease.
He
says the depreciation charge is only $6,000. What is the actual depreciation charge for a car now
worth $23,000 that is expected to drop in value to $15,000 in two years?
Actual depreciation = $23000 - $15000 = $8000
16) Billy has chosen to purchase a new vehicle. The vehicle costs $15,000. His APR is 10% and
he will be financing the vehicle for 36 months. How much will Billy pay each month for his new
vehicle?
r = 10%/12; PV = 15000; n = 36. PMT - ? PMT = 484.01
17) Jackie is considering obtaining a mortgage of $333,000. A lower APR is available, but she
must pay 1.75 points to buy the rate down. How much must Jackie pay in dollars?
Payment = $333000 * 0.0175 = $5827.5

18) Juanita has determined that the PITI on the house she would like to purchase will be $1,260
per month. What is the minimum gross salary she will need to qualify for a mortgage from a
Reputable lender?
19) Tran currently makes $4,500 per month in gross income. He has a student loan payment of
$250 per month and a car loan of $450 per month. His credit card payments average $300 per
month. What is the largest PITI he could qualify for with a reputable lender?

20)Thomas took a new job in Iowa. He is buying his first home. He has qualified for an APR of
4.6%. He plans on making payments for the next 20 years. He anticipates that he can afford a
payment of $550.00. How much of a mortgage will Thomas qualify for?
21)You have recently inherited a sum of money. You are purchasing an old Victorian home
which was built in 1856. The type of insurance needed on the house would be________

22) Alfred lost his 3-year-old camera. It cost him $200 three years ago and had a life expectancy
of 6 years. Alfred has actual cash value insurance on this camera, which means his insurance
company will issue him a check for ________ for his loss. A new camera costs $150.

23)Latisha invested $1,000 in XYZ stock. Two years later she sold the stock for $1,200. During
the time she owned the stock, she received a total of $80 in dividends. What was her total return
on this investment?

24) Tran purchased a house for a rental property for $100,000 five years ago. During the time he
owned this rental, his net rental income was a total of $4,000. He just sold the property for
$120,000. What was his average annual return on this investment?

25) Juan purchased shares in ABC company for $5,000 three years ago. During these three years
he received $600 in dividends. He just sold the stock for $4,300. What was his total return on
this investment?

26) Assume you have a margin account with a 50% initial margin. You purchase 100 shares of
stock at $80 per share. The price increases to $100 per share. What is the net value of your
investment(margin) now?

27) The firm will pay an annual dividend this year of $2 per share. The current market price of
the stock is $40.00 per share. The book value of this stock is $24.00 per share. The earnings per
share for this firm is $5.75. What is the current dividend yield of this stock?

28)A stock currently selling for $105 with estimated earnings per share of $5.25 would have a
P/E ratio of ___________

29) The P/E ratio of a stock is 20, and its earnings per share is $5.25. What is the current selling
price of the stock?

30) Your friend has recommended that you purchase stock in company XYZ. It is expected to
pay $4 dividend, and has historically grown at 5%. If the required rate of return is 12%, what is
the estimated value of a share of XYZ stock?

Case
 Asset and Assem

Asset and Assem have been married for almost one year now and are thinking about buying a
house. Asset is an executive for a large, multi-national corporation with offices around the
world. Assem is working in a local bank. She told that she is willing to move where ever Asset
gets transferred to. Together they make 1 500 000 tenge in gross monthly income and pay 10%
in taxes and withholdings every month. Between them they have 200 000 tenge in student loan
payments, 100 000 tenge in car loans, and their credit cards payments average 160 000 tenge per
month. They travel to Antalya every summer. They currently have nothing in savings but Asset’
father said that he will give them a 40% down payment for the new home.

1) Based on their incomes, how large of a PITI can they comfortably afford to pay?

2) They saw in the newspaper that they can get a fixed rate mortgage for 10% or a two year
ARM with an initial rate for 8.50%. Which mortgage would be best for them?

3) They have found a very nice Akbulak Residence apartment available for 59 000 000 tenge.
Assuming a 20% down payment and a 30 year fixed rate mortgage at 9%, what will their PITI
be? Annual property taxes are 100 000 tenge and homeowner’s insurance premium is 88 000
tenge per year.

4) Will the they be approved for the Akbulak Residence mortgage?

Solution:
2. Basic margin = 100 * 80 * 0.5 = 4000
Increase = 100 * (100-80) = 2000
New margin = 4000 + 2000 = 6000
3.
4. NAV = ($750 mln – $125 mln) / 45 mln = $13.89
5. FV = 2250000; r = 11%; n = 35. PMT - ? PMT = 6586.85
6. r = 12%; n = 25; PMT = -365. FV - ? FV = 48666.86
r = 12%; n = 50; PMT = -365. FV - ? FV = 876006.66
7. 20 years: r = 12%; n = 20; PMT = -3000. FV - ? FV = 216157.33
30 years: r = 12%; n = 20; PMT = -3000. FV - ? FV = 723998.05
40 years: r = 12%; n = 20; PMT = -3000. FV - ? FV = 2301274.26

8.
9. Potential maximum liability = $50
10. Equity = $175000 - $60000 = $115000
11. Check = $20000 – ($20000 * 8.5% * 2) = $16600
Amount repaid = $20000

12. Rate = ( 60 / 300 * (14/365)) * 100 = 521.43%

13. D
14. Check = $10000 – ($10000 * 11% * 1) = $8900
Amount repaid = $10000
15. Interest = $12000 * 10% * 9/12 = $900
16. Actual depreciation = $23000 - $15000 = $8000
17. r = 10%/12; PV = 15000; n = 36. PMT - ? PMT = 484.01
18. Payment = $333000 * 0.0175 = $5827.5
19. Salary = $1260 / 28% = $4500
20. Salary = $4500 * 36% = $1620
Largest PITI = $1620 – $450 – $250 – $300 = $620
21. r = 4.6%/12; n = 240; PMT = -550. PV - ? PV = $86198.79
22. HO 8
23. Check = $150 – ($150 * 50%) = $75
24. Return = ($1200 - $1000 + $80) / $1000 = 28%
25. Aver. Annual Return = (($120000 - $100000 + $4000)/ $100000)/5 = 4.8%
26. Return = ($4300 - $5000 + $600) / $5000 = 2%
27. Basic margin = 100 * 80 * 0.5 = 4000
Increase = 100 * (100-80) = 2000
New margin = 4000 + 2000 = 6000
28. Div. yield = $2/$40 = 5%
29. P/E ratio = 105 / 5.25 = 20
30. Price = 5.25 * 20 = 105
31. Price = 4 / (0.12 – 0.05) = 57.14

Case
1. 1500000 * 0.28 = 420000
2. ARM will be better since the initial rate is lower