Q1) Rohan and Kris borrowed $1,500,000 to purchase a house. The loan requires monthly repayments over 30 years. When they borrowed the money the interest rate was 3.5 per cent per annum, but 2 years later the bank increased the interest rate to 4.5 per cent per annum, in line with market rates. The bank tells Rohan and Kris they can have either Option A or Option B

Option A - increase their monthly repayment (so as to pay off the loan by the originally agreed date) (First Option) or

Option B - extend the term of the loan (and keep making the same monthly repayments) (Second Option).

Required:

Calculate

The new monthly repayment if Rohan and Kris accept Option A;

The extra term (in months) of the loan term if Kevin & Anne accept Option B.

Q2)

2) David Smith Ltd has announced a renounceable rights offering to obtain $40 million of equity financing. The subscription price is set at $8 per share. The shares currently sell for $11 per share and there are 20 million shares outstanding.

Required:

How many shares are to be issued under the rights issue and what number of shares will an existing owner require to buy one new share?

2. What is the value of the right?

3. What is the theoretical ex-rights share price?

4. If you hold shares in David Smith Ltd, will you gain or lose wealth by the rights issue? Support your answer with calculations. Assume that you have cash to exercise the rights.

3) The directors of Good So Far Ltd are interested in launching a new product. The directors believe that they can sell 7,000 units per year at a selling price of $450 per unit and the variable costs per unit will be 40 per cent of revenue. The project should have a 5-year economic life. The directors require a 20 percent return on new products such as this one. Fixed cash expenses for the project will be $1,050,000 per year. The company will need to invest a total of $2,500,000 in manufacturing equipment initially. This equipment may be depreciated at 10 percent straight line on the original cost. In 5 years, the equipment is expected to have a salvage value of $800,000. The corporate tax rate is 30%.

a) What is the initial net cash flow in year 0?

b) What is the yearly net cash flows from year 1 to year 4?

c) What is the net cash flows in year 5?

d) What is the NPV of the project?

e) What is the IRR of the project in %?

f) Should the firm invest in this project (Answer Yes or No)?