Evaluating the Economics of Purchasing a Condominium for College

Question 1 (10 Marks)

QUESTION 1 (10 MARKS)

Imagine that you are trying to evaluate the economics of purchasing a condominium to live in during college rather than renting an apartment. If you buy the?condo, during each of the next 4 years you will have to pay property taxes and maintenance expenditures of about $6,000 per?year, but you will avoid paying rent of $10,000 per year. When you graduate 4 years from?now, you expect to sell the condo for $125,000 after taxes. If you buy the?condo, you will use money you have saved that is currently invested and earning a 4?% annual?after-tax rate of return. Assume for simplicity that all cash flows? (rent, maintenance, ? etc.) would occur at the end of each year.

a. Draw a timeline showing the cash?flows, their?timing, and the required return applicable to valuing the condo.

b. What is the maximum price you would be willing to pay to acquire the?condo? Explain.

QUESTION 2 (40 MARKS)

You are starting a new project. This project would last 4 years. The following is the input information that you have collected:

a. What is the NPV of this project? (In your calculations use zero decimal spaces/round to the whole numbers).

b. Explain briefly if you think that the project is viable.

c. Discuss the potential sources of long-term finance available to a large company.

QUESTION 3 (40 MARKS)

You have been asked by your CEO to evaluate, analyse and calculate commonly used ratios relating to a company’s profitability, liquidity, solvency and management efficiency.

Requirement:

a. Complete the balance sheet and sales data (fill in the blanks), using the following financial data:

Debt/net worth                                                        60%

              Acid test ratio                                                            1.2

              Asset turnover                                                           1.5 times

              Day sales outstanding in accounts receivable     40 days

              Gross profit margin                                                   30%

              Inventory turnover                                                    6 times  

                                                                           Balance sheet

Cash                               ________                       Accounts payable     ________

Accounts receivable   ________                        Common stock         RM15,000                         

Inventories                   ________                        Retained earnings    RM22,000

Plant & equipment     ________  

Total assets                  ________                        Total liabilities          ________

                                                                                   & capital

Sales                              ________  

Cost of goods sold      ________  

a. Explain how do analysts use ratios to analyse a firm’s leverage?  Which ratios convey more important information to a credit analyst those revolving around the levels of indebtedness or those measuring the ability to service debt?  What is the relationship between a firm’s level of indebtedness and risk?  What must happen in order for an increase in leverage to be successful? Discuss and illustrate all your answer.

Zhen Yi Computers has an outstanding issue of bond with a par value of $1,000, paying 12 percent coupon rate semi-annually. The bond was issued 25 years ago and has 5 years to maturity.

Required:

a. What is the value of the bond assuming 14 percent rate of interest?

b. What is the current yield?

c. O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years.  Their nominal annual, not semi-annual yield to maturity is 9.25%, they pay interest semi-annually, and they sell at a price of $1,075.  What is the bond's nominal coupon interest rate?