Question
-You are required to answer these questions on PAPER , showing ALL necessary calculations. Excel formulae will NOT be considered acceptable working. -For dollar amounts,
-You are required to answer these questions on PAPER, showing ALL necessary calculations. Excel formulae will NOT be considered acceptable working.
-For dollar amounts, give your answer to the nearest cent. For interest rates, give our answer as a percentage rounded to 4 decimal places.
-The various parts in the question will typically require values from earlier parts. In these cases, use the EXACT values from the earlier parts, not the rounded values.
You are required to answer these questions on PAPER, showing ALL necessary calculations. Excel formulae will NOT be considered acceptable working.
Jerry intends to use the money from his loan (and his personal savings if necessary) to make an investment in his friend Elaines business. In return, Elaine has predicted the following returns on Jerrys investment:
Four half-yearly payments of $10,000, the first being exactly 6 months from today,
Four half-yearly payments of $20,000, the first being exactly 6 months after the final $10,000 payment described above, and
Two half-yearly payments of $25,000, the first being exactly 6 months after the final $20,000 payment described above
To make a more conservative assessment of the investment, Jerry will expect a higher rate of return. Jerry decides that he requires the following return on his investment:
12% p.a. effective for the first 2 years of the investment, and
15% p.a. compounding quarterly for the remaining term of the investment.
Using this information, answer the following questions.
e) For the two rates given above, determine the equivalent effective half-yearly rates. Clearly label your answers. (2 marks)
f) Using your results from part e), draw a cash flow diagram, and then determine the maximum price Jerry would be willing to pay for this investment. (2 marks)
g) Jerry makes an offer to Elaine of the price calculated in part
f). Elaine thinks for a moment, and gives a counter-offer of $115,000. Write down an equation that can be solved to determine Jerrys return on his investment using Elaines new price, expressed as an effective half-yearly rate. You do NOT need to solve this equation
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