Question 1 (20 Marks) [CLO 3] a. You wish to establish a trust fund from which your niece can withdraw $2,000 every six months for 15 years, at the end of which time she will receive the remaining money in the trust, which you would like to be $10,000. The trust will be invested at 8% per annum compounded semiannually. How large should the trust be? (5 Marks) b. Prepare a loan amortization schedule involving a $10 million Truck loan at 10% to be repaid in 2 years. (5 marks) c. Your friend, a professional football player, has been approached by three different clubs, seeking to recruit him. Each club is offering him a three year contract, and the terms are set out below. He is uncertain which offer to accept, and has asked for your advice. Club A's Contract Club B's Contract Club C's Contract Year 1 $2 million $2 million $7 million Year 2 4 million 3 million 2 million Year 3 7 million 8 million 3 million Given a discount rate is 14% Which contract offers the greatest value? (8 Marks) d. Suppose you were offered the opportunity to receive $2500 beginning in one year and continuing forever. If you could earn 12% on your investments, how much should you pay for this perpetuity? (2 Marks) Question 2 (20 Marks) [CLO 3] a. Hart Enterprises recently paid a dividend, Do, of $1. 5. The company expects to have supernormal growth of 15% for 2 years before the dividend is expected to grow at a constant rate of 8%. The firm's cost of equity is 12%. What is the firm's intrinsic value today (8 Marks) b. The Heymann Company's bonds have 2 years remaining to maturity. Interest is paid annually; the bonds have a $1,000 par value; and the coupon interest rate is 9%. What is the yield to maturity at a current market price of $912 (6 Marks) c. Find the expected value of a 15 year bond with a $1,000 par value, issued on January 1, 2001, and a Coupon rate of 10% per year paid semi-annually. Assume that at the present time (January 1, 2013) 12 years later, the required rate of return on the bond is 12% per year. (8 Marks) Question 3 (20 Marks) [CLO 5] a. You have recently been hired to improve the performance of Multiplex Corporation, which has been experiencing a severe cash shortage. As one part of your analysis, you want to determine the firm's cash conversion cycle. Using the following information and a 365-day year, what is your estimate of the firm's current cash conversion cycle? Current inventory = $120,000. Annual sales = $600,000. Accounts receivable = $157,808. Accounts payable = $25,000
