21:49 A . 06. Assignment one July 2019 - Read-only 47% Sign in to edit and save changes to this file. UNIVERSITY OF NAIROBI, SCHOOL OF BUSINESS DEPARTMENT OF FINANCE AND ACCOUNTING MSC PROGRAMME COURSE DFI 512: CORPORATE FINANCIAL STRATEGY ASSIGNMENT NO 1 1. Discuss how executive compensation can be used to reduce agency problems between shareholders and management of a company. 2. Prepare (using a spreadsheet package) an entire duration amortization schedule as follows: Initial amount: Shs 5,000,000/- rate of interest: 14% per annum, period: 10 years payable monthly in arrears An additional amount of Shs 450,000/= is repaid with the 30 installment, and the monthly installment recomputed to fully pay the loan balance in the initially agreed period. The rate of interest is adjusted to 16% per annum with effect from the end of the fourth year. The monthly repayment is recomputed to fully pay the loan balance in the initially agreed period. The borrower enhances his monthly repayments by Shs 12,000/= per month from the end of month 74 The borrower is advanced an additional Shs 700,000/= at the end of month 80 and the monthly repayment is recomputed to fully pay the loan balance in 9 months less than had initially been agreed 3. The Beta Corporation obtains a bank loan that is disbursed as follows: Shs 320 million, Shs 240 million, Shs 160 million and Shs 80 million at the beginning of years one, two, three, and four respectively. The loan is repaid in five equal annual installments of Shs 270 million at the end of years four to eight, and a final amount at the beginning of year 12. Given a rate of inflation of 3.0% per annum during the period, and if Beta's real cost of the loan is 15% per annum, what should the final repayment be? 4. A loan of Shs 3000,000/- disbursed today is repaid in four installments commencing at the end of year one. The second repayment is at the end of year two and is half as much again as the first installment and is 25% less than the third installment (due at the end of year four). The final installment is due at the end of year five and is 15% more than the first installment The rate of interest is 13% per annum in years one and two; 15% per annum in years three and four, and 12% per annum in years, five and six. Compute the amount of each installment. 5. Afirm is advanced a Shs 5 million-loan by a bank to be repaid in equal monthly installments over five years at a rate of interest of 18% per annum. After the 24th installment, the rate of interest is adjusted to 20% per annum and the monthly installment size recomputed such that the loan is fully repaid in the remaining duration of the initially agreed term. After the 36installment, the rate of interest is lowered by 3% per annum but the monthly installment size is not adjusted, until from the end of the 49 month when it is increased by Shs 29,330 Required: (0) Compute the initially agreed installment and the one after the interest rate adjustment to 20% per annum. () At the end of which month would the loan be fully repaid? (i) What is the total interest that the firm pays on the loan during its term? 6. Consider the following project dala: A Shs 5 million feasibility study will be conducted at 10. If the study indicates potential, the firm will spend Shs 30 million at t= 1 to build a prototype. The best estimate is that there is an 80% chance that the study will indicate potential and 20% chance that it will not. If reception of the prototype is good the firm will spend Sh. 800 million to build a production plant at t-2. The best estimate is that there is a 70% chance that the prototypes' reception will be poor. If the plant is built, there's a 60% chance of at-3 cash inflow of Shs 700 million and a 40% chance of Shs 400 million cash inflow. If the inflow at t-3 is Shs 700 million, there are 30% and 70% chances of Shs 320 million and Shs 180 million inflows respectively at t4. If the inflow at t3 is Shs 400 million, there are 80% and 20% chances of Shs 390 million and Shs 310 million inflows respectively at 4. The plant has a salvage value of Shs 110 million at t-5. If the appropriate cost of capital is 13.5% what is the project's expected NPV? 21:49 A . 06. Assignment one July 2019 - Read-only 47% Sign in to edit and save changes to this file. UNIVERSITY OF NAIROBI, SCHOOL OF BUSINESS DEPARTMENT OF FINANCE AND ACCOUNTING MSC PROGRAMME COURSE DFI 512: CORPORATE FINANCIAL STRATEGY ASSIGNMENT NO 1 1. Discuss how executive compensation can be used to reduce agency problems between shareholders and management of a company. 2. Prepare (using a spreadsheet package) an entire duration amortization schedule as follows: Initial amount: Shs 5,000,000/- rate of interest: 14% per annum, period: 10 years payable monthly in arrears An additional amount of Shs 450,000/= is repaid with the 30 installment, and the monthly installment recomputed to fully pay the loan balance in the initially agreed period. The rate of interest is adjusted to 16% per annum with effect from the end of the fourth year. The monthly repayment is recomputed to fully pay the loan balance in the initially agreed period. The borrower enhances his monthly repayments by Shs 12,000/= per month from the end of month 74 The borrower is advanced an additional Shs 700,000/= at the end of month 80 and the monthly repayment is recomputed to fully pay the loan balance in 9 months less than had initially been agreed 3. The Beta Corporation obtains a bank loan that is disbursed as follows: Shs 320 million, Shs 240 million, Shs 160 million and Shs 80 million at the beginning of years one, two, three, and four respectively. The loan is repaid in five equal annual installments of Shs 270 million at the end of years four to eight, and a final amount at the beginning of year 12. Given a rate of inflation of 3.0% per annum during the period, and if Beta's real cost of the loan is 15% per annum, what should the final repayment be? 4. A loan of Shs 3000,000/- disbursed today is repaid in four installments commencing at the end of year one. The second repayment is at the end of year two and is half as much again as the first installment and is 25% less than the third installment (due at the end of year four). The final installment is due at the end of year five and is 15% more than the first installment The rate of interest is 13% per annum in years one and two; 15% per annum in years three and four, and 12% per annum in years, five and six. Compute the amount of each installment. 5. Afirm is advanced a Shs 5 million-loan by a bank to be repaid in equal monthly installments over five years at a rate of interest of 18% per annum. After the 24th installment, the rate of interest is adjusted to 20% per annum and the monthly installment size recomputed such that the loan is fully repaid in the remaining duration of the initially agreed term. After the 36installment, the rate of interest is lowered by 3% per annum but the monthly installment size is not adjusted, until from the end of the 49 month when it is increased by Shs 29,330 Required: (0) Compute the initially agreed installment and the one after the interest rate adjustment to 20% per annum. () At the end of which month would the loan be fully repaid? (i) What is the total interest that the firm pays on the loan during its term? 6. Consider the following project dala: A Shs 5 million feasibility study will be conducted at 10. If the study indicates potential, the firm will spend Shs 30 million at t= 1 to build a prototype. The best estimate is that there is an 80% chance that the study will indicate potential and 20% chance that it will not. If reception of the prototype is good the firm will spend Sh. 800 million to build a production plant at t-2. The best estimate is that there is a 70% chance that the prototypes' reception will be poor. If the plant is built, there's a 60% chance of at-3 cash inflow of Shs 700 million and a 40% chance of Shs 400 million cash inflow. If the inflow at t-3 is Shs 700 million, there are 30% and 70% chances of Shs 320 million and Shs 180 million inflows respectively at t4. If the inflow at t3 is Shs 400 million, there are 80% and 20% chances of Shs 390 million and Shs 310 million inflows respectively at 4. The plant has a salvage value of Shs 110 million at t-5. If the appropriate cost of capital is 13.5% what is the project's expected NPV