Question
Your grandmother urged you to begin a habit of saving money early in your life. He suggested that you put GH1,825 per year. Your grandmother
Your grandmother urged you to begin a habit of saving money early in your life. He suggested that you put GH1,825 per year. Your grandmother further suggested that you invest the money at the end of the year in an online brokerage mutual fund account that has an annual expected return of 8%. You are 18 years old. If you start following your grandmothers advice today, and continue saving in this way of your life, how much do you expect to have in the brokerage account when you are 65 years old? (5 marks)
) c. What is the present value of a perpetuity that pays GH120.00 per year beginning one year from now if the appropriate interest rate is 6%. (3 marks)
d. You will retire in 18 years. You currently have GH250,000 saved, and you think you will need GH1,000,000 at retirement. What annual interest rate must you earn to reach your goal, assuming you do not save any additional funds? (4 marks)
e. Differentiate between discounting and compounding. (5 marks)
f. Explain the following: capital market and money market. (5 marks) g. What is finance? (5 marks)
h. Explain four (4) factors that are considered in choosing between long-term and short-term borrowing. (8 marks)
QUESTION 2
Desert Birds is considering investing in a new project, the details of which are as follows: GH GH Project cost 40,000 Estimated net profit: Years 1 9,600 2 14,400 3 24,000 4 20,000 5 4,000 2 | A P E L Additional information; The projects life span is 5 years. Depreciation is based on the straight line method The estimated residual value of the project at the end of its useful life is GH8,000. The cost of capital is 10%.
i. Using the NPV technique, assess the viability of the project. (14 marks)
ii. Managers can be encouraged to act in shareholders best interests through incentives that reward them for good performance but punish them for poor performance. Required; explain four (4) specific mechanisms used to motivate managers to act in shareholders best interests. (8 marks)
iii. Explain four (4) demerits of the accounting rate of return technique of capital budgeting. (8 marks)
Question One
The future earnings, dividends, and common stock price of CHAPS Consult Ltd are expected to grow 7% per year. CHAPS common stock currently sells for GH25.00 per share; its last dividend was GH2.50. Also, CHAPS beta is 1.6, the risk-free rate is 9%, and the average return on the market is 13%. CHAPS outstanding bonds have a 10% coupon and a 12% yield to maturity. CHAPS believes it could issue new bonds at par that would provide a similar yield to maturity. Furthermore, CHAPS can issue perpetual preferred stock at a price of GH50.00 a share. The stock would pay a constant annual dividend of GH4.20 a share. Its tax rate is 35%. a.
Using the DCF approach, what is its cost of common equity?
b. What will be the firms cost of common equity using the CAPM approach?
c. What is CHAPS Consult Ltd.s after-tax cost of debt? d. Determine the companys cost of preferred stock? e. List and explain 5 (five) advantages of the NPV technique
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