Mr Lim is meeting his financial planner for his regular financial review. Mr Lim is considering the purchase of a resale flat. Based on his annual income of $48,000, the bank is willing to lend an amount that can be serviced by monthly payments equivalent to 35% of his monthly income. The interest rate on the bank loan is 4.8% per year with monthly compounding for a 20-year fixed rate loan. The real estate agent had advised Mr Lim to set aside $10,000 for initial down payment and transaction costs. Transaction costs are estimated at 1% of the loan. At the same time, Mr Lim plans to make a series of deposits in an individual retirement account. He had hoped to deposit $10,000 today, $20,000 in two years and $30,000 in five years. The interest rate offered is 3% per annum. He is worried that his retirement plan may be affected if he uses his existing cash of $10,000 to fund the down payment and transaction costs of the resale flat. Mr Lim's financial planner would like to recommend that Mr Lim invest in a portfolio of small-cap equities to generate higher returns. The portfolio has a beta of 1.8.



(a) Compute the bank loan that Mr Lim is able to obtain for his mortgage. (6 marks)

(b) Calculate the maximum amount that Mr Lim is able to offer for the resale flat. (4 marks)

(c) Mr Lim decides not to purchase the resale flat and goes ahead to contribute to the individual retirement account as planned. If he withdraws $5,000 in three years and $15,000 in seven years, assuming no withdrawal penalties, compute how much he will have after eight years. (5 marks)

(d) Mr Lim asks his financial planner to recommend the appropriate monthly contribution if he chooses a regular savings plan to attain his goal of $80,000 in ten years and be disciplined not to make any withdrawals during the interim period. Assume the interest rate is 3% per annum with monthly compounding. (5 marks)

(e) Mr Lim ponders his financial planner's portfolio recommendation. He shares that he is more concerned about capital protection instead of generating returns that beat the market. Appraise and suggest how his financial planner can address Mr Lim's concerns. (5 marks)