HW3_S2023 (1)
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School
Carnegie Mellon University *
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Course
88223
Subject
Finance
Date
Feb 20, 2024
Type
doc
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3
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H
OMEWORK
A
SSIGNMENT
#3
1) Tim is graduating and moving from Pittsburgh, so he agrees to sell his car to his friend
Francis. Tim accumulated a lot of credit card debt as a student, and he intends to use the
money from selling his car to pay down his credit card debt, which has an 8% APR
(interest rate). Francis has a part-time campus job that he has used to pay for his meal
plan, but he can use these earnings to pay for the car and then increase his student loan
amount to pay for his meal plan. His student loan has a 6.5% APR (interest rate). Tim and
Francis are considering whether Francis will pay for the car entirely up front with a single
payment of $3000 now or in two installments of $1500 now and another $1700 one year
from now. What is the NPV of each payment plan for each of them? [20 points] Which
payment plan do you expect they will agree on? [5 points]
2) The Righton Corporation is taking out a loan of $38,000 at 7.8% interest (see table
below). This interest rate is locked in for the life of the loan. They recognize that if/when
they want to take out another loan in the future, the interest rate may change, but they
have no reason to expect it to be higher or lower, and they are confident that the bank
would extend them another loan on similar terms. They are considering three different
possible repayment plans for the current loan.
Under Plan 1, they must pay yearly interest of $2,964 and the entire principal at the end.
Plan 2 is an annuity-type plan where they pay equal payments of $5612.14 every year.
With Plan 3, they pay a balloon payment of principal plus all accumulated interest in year 10. Year
Plan1
Plan2
Plan3
0
38,000
38,000
38,000
1
-2,964
-5612.14
0
2
-2,964
-5612.14
0
3
-2,964
-5612.14
0
4
-2,964
-5612.14
0
5
-2,964
-5612.14
0
6
-2,964
-5612.14
0
7
-2,964
-5612.14
0
8
-2,964
-5612.14
0
9
-2,964
-5612.14
0
10
-40,964
-5612.14
-80,533
payment sum:
-67,640
-56,121.4
-80,533
NPV:
?
?
?
a)
Show how the bank calculates the balloon payment of $80,533. [5 points]
1
b)
What are the NPVs of the payment streams for the three plans? Can you use NPV to recommend one plan over the others? Why should one plan be preferred over another? [10 points]
c)
Suppose that the company agreed on paying the 7.8% rate and signed a contract locking in that rate, and then the very next day the market interest rate dropped to 5.5%. Under which plan would the Righton Corporation be happiest? Under which plan would the bank be happiest? Why? How large would the gain or loss in NPV be for each plan? [20 points]
3) The government is proposing a new program to encourage college students to go into government jobs (teaching and service). The program will help cover the cost of college if you work in the government. With the new program, you would only need to pay back college loans for 10 years, regardless of what you owed. Unfortunately, government salaries are generally lower than those in private industry and pay does not grow as fast.
Base salary government job: $70,000/yr starting after graduation
Base salary private industry job: $90,000/yr starting after graduation
Inflation: 6% annually
Government salary growth: 2% over inflation annually
Private salary growth: 3% over inflation annually
Living expenses: $35,000/yr starting after graduation (inflate after that)
Loan interest rate: 4% annually
Annual loan payments: 25% of (salary minus cost of living)
Years before loan forgiveness, government job: 10
Years before loan forgiveness, private job: 15
Cost of college $59,000 per year for each of four years (no inflation)
Discount rate: 9%
Assume that you are a freshman entering college and that once you start in government or
industry, you stay there for 35 years. Should you consider the new government program? [40 points]
2
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Related Questions
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B 12.
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Problem 1
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PlEASE GIVE FULL SOLUTION
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QUESTION 1
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If she were to consider the processing fee to represent interest paid in her formula, what would she discover to be the annual interest rate she was charged on her short term loan?
QUESTION 2
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Read the case and analyze. Identify which part of the case refers to the
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Can she currently afford the school loan?
multiple choice
Yes
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Please answer only correct with explanation.
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I will really upvote. Thanks
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1. What should you share with Velma about an ARM loan given her situation? Are you obligated to help her apply for the loan she wants?
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Problem 5
Joe College graduated from a university that is located three hours from the city in which he now works. A loyal alumnus and an avid football fan, Joe always buys season tickets to the football games although his Alma Mater has posted loosing records in each of the last three years. Joe sends a check for $218 to the University by July 1 of every year to cover the cost of two tickets for each of the 7 home games plus $50 for a parking permit. Joe has difficulty finding friends to accompany him to the games. However, he is adamant that he must go to the games because he has paid for the tickets. Friends insist that the cost of the tickets is a sunk cost and that the decision should be based on future costs that would be different between alternatives – going to the game and not going to the game. Friends have calculated the fuel for the 6 hour round trip costs $15 and two meals while away from home for the game can easily cost $30 or more. Write a memo to Joe outlining the…
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2 Cost of travel from home to her accounting job.
3 Cost of travel from her accounting job to her waitressing job.
4 Purchase of suits as required by her accounting firm.
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Javiar Jones - Is 39 years old. He graduated from Medical School 7 years ago and is finally done with his residency in dermatology. He is now working with a group and has an annual income of $225,000. He hopes his income increases over the years. He currently has no investments, nor retirement accounts. He has federal student loans that total $350,000. He figures that he would likely retire when he is 67 years old, but will try and have a more flexible schedule in the working years leading up to his retirement. What investment allocation/portfolio would you recommend to Javair?
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Problem 1
Michelle borrows $7, 200 from her father to buy a used car. She repays him after9 months, at an annual simple interest rate of 6.2%. Find the total amount she repays.
PlEASE GIVE FULL SOLUTION
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QUESTION 1
Marina had an accident with her car and the repair bill came to $900. She didn't have any emergency fund money and no extra money in her monthly budget, so she ended up borrowing from a pay-day loan company. As long as she can pay the loan back at the end of the 30 day period she won't be charged any interest, technically. However, she did have to pay an $19 processing fee per $100 that she borrowed.
If she were to consider the processing fee to represent interest paid in her formula, what would she discover to be the annual interest rate she was charged on her short term loan?
QUESTION 2
The end of the month has arrived and Marina was only able to save up a portion of the money she owed so far. This means she will have to delay paying off on the remaining amount. Besides the delayed payment fee that she is charged, she will now have to pay interest on the remaining amount until it is paid off. The APR (annual percentage rate) is 46.5%, but the interest is…
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6- if Jocelyns annual earnings are $72600, what is her rounded monthly pay, rounded to the nearest dollar.
8- Danya is in grade 12 and works weekends and after school as a cashier at a dollar store, earning 17.00/h. She works an average of 27 hours per week. Her average bi-weekly pay, rounded to the nearest dollar is?
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Madeline Rollins is trying to decide whether she can afford a loan she needs in order to go to chiropractic school. Right now, Madeline is living at home and works in a shoe store, earning a gross income of $1,220 per month. Her employer deducts a total of $300 for taxes from her monthly pay. Madeline also pays $180 on several credit card debts each month. The loan she needs for chiropractic school will cost an additional $270 per month.
Calculate her debt payments-to-income ratio with and without the college loan. (Remember the 20 percent rule.) (Enter your answers as a percent rounded to 2 decimal places.)
Can she currently afford the school loan?
multiple choice
Yes
No
arrow_forward
(11)Bill took out a 6 year loan to buy a car. If the loan carried an annual interest rate of 3.1% and he made monthly payments of $317, how much interest did he pay?
Please answer only correct with explanation.
Someone give me incorrect answer.
I will really upvote. Thanks
arrow_forward
Case, Part 1: Velma, a 59-year-old minority woman who works as a teacher, contacts you about getting a loan to purchase a condominium. As you’re chatting, she indicates that she’s hoping to retire from teaching in three years. You take her financial and personal information and see that you should be able to get her the amount she needs to purchase the home, and now you need to discuss terms. You share some loan options with her and she insists that she’s only interested in an adjustable rate mortgage, because she wants the lower monthly payments to start and is convinced the interest rates will stay low or go down even further.
1. What should you share with Velma about an ARM loan given her situation? Are you obligated to help her apply for the loan she wants?
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Problem 5
Joe College graduated from a university that is located three hours from the city in which he now works. A loyal alumnus and an avid football fan, Joe always buys season tickets to the football games although his Alma Mater has posted loosing records in each of the last three years. Joe sends a check for $218 to the University by July 1 of every year to cover the cost of two tickets for each of the 7 home games plus $50 for a parking permit. Joe has difficulty finding friends to accompany him to the games. However, he is adamant that he must go to the games because he has paid for the tickets. Friends insist that the cost of the tickets is a sunk cost and that the decision should be based on future costs that would be different between alternatives – going to the game and not going to the game. Friends have calculated the fuel for the 6 hour round trip costs $15 and two meals while away from home for the game can easily cost $30 or more. Write a memo to Joe outlining the…
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