Question
What a happy new year 2017! In 2017 Sam won the lottery ticket prize with the amount of (USD one million), finally the long sweet
What a happy new year 2017!
In 2017 Sam won the lottery ticket prize with the amount of (USD one million), finally the long sweet dream become true. It is possible now for Sam to be free of debts, he can payback (Peace Bank) his loan by which he bought the first pledged house; it was (including interests) USD 40000, 20 years, 5% annual interest rate, only 5 years pass away. He can purchase a new car after sad grief days with his old one. Sam was cashier in a local company, with annual salary was (USD 24000) in 2016; this means that he must pay 10% of his income as a Tax.
Just a few days after euphoria of winning, Sam began wise thinking, in a way to decide what he can do with $1million he just received. Fortunately, he still keep good relation with Anne, his friend, she is working as financial consultant in Bounty City Inc., immediately he called her and arrange meeting with promise of complex calculations. Anne prepared summary list reflects some of financial facts, hoped to help in any investment decision Sam may take. Three hours later, after long in-depth discussion regarding the numbers and percentages mentioned in the list, she asked him to study the provided data well and to call her later to analyze critically any resulted decisions he may take. The list that delivered to Sam was this table:
Description | Value | Dividends | Risk Rating | |
Roger Co. | Stock price | $ 8 | $ 0.16 per share | AAA |
Stones Co. | Stock price | $ 4 | $ 0.08 per share | BB- |
Real-estate. Co. | Stock price | $2 | Initial issuing / Underwriting | |
Lawyer fees / Per hour | $ 100 | |||
Lawyer fees / Per contract | $ 1000 | |||
Inflation rate | Year 2016 | 10 % | ||
Government bond | Default free | 5% | AAA+ | |
World-Pan Corp. | Commercial bond | 15% | CCC+ | |
Bounty City Inc. | Annual Return | 12% | A+ |
Questions:
1-Which company you advise Sam to invest in: Roger Co. or Stones Co.? Justify why? (20 marks)
2-What is the value of real interest rate in each last three investment opportunities? Can we consider any of them as loss? How? (20 marks)
3-Define risk premium? Where Sam has to consider the (Risk Premium) if he wishes to invest in any of mentioned alternatives? (20 marks)
4-Once Sam starts his investment activities, he may experience potential risks, shall he inform his bank (Peace Bank) about? Why? If he did not, what this situation called? (20 marks)
5-What is better for Sam, to payback his house bank loan (remaining $30000)? Or invest this money? Justify why? (20 marks)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started