Problema 2

Kanani Savings and Loan General Time Value of Money Concepts John D. Johnson

Kanani is a small southern California based savings and loan dealing primarily with home mortgages, CD's and passbook savings accounts. Due to the recent publicity surrounding the Savings and Loan Crisis Kanani has lost over $l00;000 which has created a cash flow problem for the institution. J. Nicholas Slottje, the senior vice president of operations, proposed a liquidation of the institutions only commercial loan to alleviate the firms' current cash flow crises and reduce the probability of an FSLIC audit.

Kimberiv Hayes, a newlv promoted vice president of Kanani Savings, was asked by Mr. Slottje, the senior vice president, to prepare a valuation report on the potential market value of the loan in question. The loan was originally made on January 28, 1987 to Lomax, Barnes, Zobroski, Kincannon.and Westerfield, a local law firm. The contract has 15 outstanding payments. The first 5 of the installments are semiannual payments of $12,000.00 ⁽¹⁾. The next 5 installments of $8,000.00 will be made quarterly beginning 4 months after the last of the $12,000.00 payments. Four $30,000.00 annual installments will follow I year later. The final installment, due 1 year later, will be a balloon payment of $150,000.00. In discussing the matter with the companies economist it was decided that the appropriate discount rate should be between 9%-12%. Since the value of the contract was very sensitive to the discount rate Ms. Hayes decided that rather than choose the rate herself she would evaluate the cash flows using discount rates in 0.25% intervals within the economists forecasted range and let the board of directors decide. In other words her report contained a contract value assuming a 9% discount rate, a contract value assuming 9.25% discount rate, etc.

QUESTIONS

1. Lay out all of the payments on a time line an use the formula below to discount each of the cash flows to the present. cash flow PV = ------------------ (1 + rate)^nper

Since the first installments are semiannual followed bv quarterly and annual payments with a balloon it may be best to break the time line into three sections to better understand the problem.

2. Use the PV(rate, nper, pmt, fv, type) function to analyze each of tile sections of the time line and finally the present value of the whole stream .

3. Is it possible to solve the problem using only the PV(rate, nper, pmt, fv, type) function in a single cell of the worksheet? What precautions should one take when attempting this?

4. Build a table of possible values for the loan using the discount rates that Ms. Hayae decided upon in the case and prepare a presentation suitable for the board of directors.

⁽¹⁾ Assume that the first installment is payable in six months from the date of the report.