Finance - 2831 Words

BAFI 500 PRACTICE EXAM NAME:_______PRACTICE EXAM_____________________________________ Student #:_________________________________________ 1. You would be given 4 or 5 questions similar to the ones found in this practice exam. You are, however, responsible for all material covered in the course whether or not that material is covered in this exam. 2. You will have 3 hours to write this exam. 3. Answer all questions in the spaces provided. Please write legibly. 4. Use of calculator is permitted, but please show how answers were obtained. A numerical answer without an explanation will be given a grade of zero. 1 1. Robinson Crusoe (RC) lives only two periods (today and tomorrow). He prefers to consume the same amount of money†¦show more content†¦Explain why or why not. ANSWER First, convert the APR to the EAR ⎛ 0.12 ⎞ âŽÅ"1 + ⎟ = 1.12683 , i.e. 12.683% per year 12 ⎠  ⎠ ⎛ 0.12 ⎞ or equivalently, âŽÅ"1 + ⎟ = 1.01 , 1% per month. 12 ⎠  ⎠ 12 The next step consists of comparing PV: †¢ PV of your Vacation ⎠¡ ⎠¤ 1 ⎠¢1 − 4⎠¥ (1.12683) ⎠¦ Ãâ€" 1,600 = 4,790.72. PVVacation= ⎠£ 0.12683 4 †¢ Chef Tony’s deal PVChef Tony 1 ⎠¤ ⎠¡ ⎠¢1 − (1.01)48 ⎠¥ 600 600 ⎠¥ Ãâ€" 133.67 = + +⎠¢ 2 (1.12683) (1.12683)4 ⎠¢ 0.01 ⎠¥ ⎠¢ ⎠¥ ⎠£ ⎠¦ = 472.54 + 372.16 + 5,075.98 = 5,920.68 Chef Tony’s analysis ignores the time value of money. b. If you were now told that your bank is willing to finance the purchase of the time share for 10% APR, how much better or worse off are you if you using ACE’s financing instead of your bank’s if you were going to purchase the time share for $5,000? ANSWER In this case, ⎛ 0.10 ⎞ ⎟ = 1.10471 , i.e. 10.471% per year, or equivalently, âŽÅ"1 + 12 ⎠  ⎠ 12 ⎛ 0.10 ⎞ ⎟ = 1.008333 , 0.83% per month. âŽÅ"1 + 12 ⎠  ⎠ We need to borrow, $5,000 at a 10.471% per year over 48 months. The monthly payment is obtained as follows: ⎠¡ ⎠¤ 1 ⎠¢1 − 48 ⎠¥ (1.008333) ⎠¦ , 5,000 = Payment Ãâ€" ⎠£ 0.008333 hence 5,000 Payment = = 126.813 ⎠¡Ã¢Å½ ¡ ⎠¤Ã¢Å½ ¤ 1 ⎠¢ ⎠¢1 − 48 ⎠¥ ⎠¥ ⎠¢ ⎠£ (1.008333) ⎠¦ ⎠¥ ⎠¥ ⎠¢ 0.008333 ⎠¥ ⎠¢ ⎠¥ ⎠¢ ⎠¦ ⎠£ Tony wants $133.67, you are better off by $133.67-$126.81 = $6.85708, per month. The present value of the flow of payments is given by : ⎠¡ ⎠¤ 1 ⎠¢1 − 48 ⎠¥ (1.008333) ⎠¦ = $270.362. 6.85708 Ãâ€" ⎠£ 0.008333 5Show MoreRelatedFinance1352 Words   |  6 Pagesfinancial manager differ from the traditional financial manager? Does the modern financial managers role differ for the large diversified firm and the small to medium size firm? 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