MAF605 - The Economics of Purchasing a Condominium - Cash flows, Their Timing & Return Applicable - Accounting Assignment Help

Assignment Task    

 

INSTRUCTIONS: Answer ALL questions.

 

PART A: ANSWER ALL QUESTIONS –

 

QUESTION 1

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 

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 

 

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:

 

 

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.

QUESTION 4 

 

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. 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?

 

PART B: ANSWER ALL QUESTIONS 

 

QUESTION 1 

The following information applies to RTC Logistics Ltd.:

Operating income (EBIT) = $300,000
Shares outstanding = 120,000 shares
Debt = $100,000
EPS = $1.45
Interest expense = $10,000
Stock price = $17.40
Tax rate = 40%

The company is considering recapitalization where it would issue $348,000 worth of new debt and use the proceeds to buy back $348,000 worth of common stock. The buyback will be undertaken at the pre-recapitalization share price of $17.40 per share. The recapitalization is not expected to have an effect on operating income or the tax rate. After the recapitalization, the company’s total interest expense will be $50,000.

Required:

Assume that the recapitalization has no effect on the company’s price earnings (P/E) ratio. What is the expected price of the company’s stock following the recapitalization? Should RTC proceed with the recapitalisation exercise? Explain.

QUESTION 2

Mah Seng Company Berhad had total earnings last year of $5 million but expects total earnings to drop to $4,750,000 this year because of a slowdown in the consumer sector. There are currently 1 million shares of common stock outstanding. The company has $4 million worth of investments to undertake this year. The company finances 40% of its investments with debt and 60% with equity capital. The company paid $3 per share in dividends last year.

• a. If the company follows a pure residual dividend policy, how large a dividend will each shareholder receive this year?
• b. If the company maintains a constant dividend payout ratio each year, how large a dividend will each shareholder receive this year?
• c. If the company follows a constant dollar dividend policy, how large a dividend will each shareholder receive this year?

 

QUESTION 3 

 

• a. Assume you are the financial officer of a major firm. The president of the firm has just stated that she wishes to reduce the firm's investment in current assets since those assets provide little, if any, return to the firm. How would you respond to this statement?
• b. As long as a firm maintains a positive cash balance, why is it essential to review the cash flows?

 

QUESTION 4 

 

The LeeAnn Family Restaurant is open 24 hours a day and serves breakfast, lunch, and dinner.  The owner of the business has determined that fixed costs are $24,000 per month.  Variable costs are estimated at $9.60 per meal.  The average total bill (excluding tax and tip) is $12 per customer.

• a. Compute the break-even point in meals.
• b. Compute the break-even volume in dollars.
• c. Compute the number of meals that must be served if the LeeAnn Family Restaurant wishes to earn a profit of $6,000.
• d. Assume that fixed costs increase to $30,000.  How many additional meals must be served if therestaurant wishes to earn the same profit?

 

 

QUESTION 5 

 

• a. Discuss the uses and advantages of budget.
• b. Explain the concept of control and budgetary control.

 

 

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