ASSIGNMENT COVER SHEET
ASSIGNMENT COVER SHEET Electronic or manual submission Form: SSC-115-07-06 UNIT NAME OF STUDENT (PRINT CLEARLY) CODE: ECF5220 TITLE: PRINCIPLES OF FINANCE LE THANH NGUYEN THI THU FAMILY NAME STUDENT ID. NO. NGAN 10208786 HIEN 10208674 FIRST NAME NAME OF LECTURER (PRINT CLEARLY) DUE DATE MR. SELVANADAN A/L MUNIAPPAN 05/11/2010 Topic of assignment CASE IN FINANCE – WAKE UP AND SMELL THE COFFEE Group or tutorial (if applicable) Course Campus MBA INTERNATIONAL I certify that the attached assignment is my own work and that any material drawn from other sources has been acknowledged. HA NOI, VIETNAM OFFICE USE ONLY Copyright in assignments remains my property. I grant permission to the University to make copies of assignments for assessment, review and/or record keeping purposes. I note that the University reserves the right to check my assignment for plagiarism. 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RECEIVED BY DATE RECEIVED TABLE OF CONTENT Page QUESTION 1 3 QUESTION 2 4 QUESTION 3 5 QUESTION 4 5 QUESTION 5 6 QUESTION 6 6 QUESTION 7 8 BIBLIOGRAPHY 11 1 CASE STUDY: WAKE UP AND SMELL THE COFFEE Provided information: Marty's Salary $50,000 Laura's Salary $25,000 Marty's age 30 Laura's age 30 Credit Card Balance owned $10,000 @ 15.99% per annum College Loans owned @12,000 @ 5.25% per annum (24 months remaining) Minimum monthly payment 3% of balance owned required on credit card debt Car Loans owned $5,000 @ 5.99% per annum (24 payments remaining) Monthly rent Income Tax Rate @1,200 28% 2 QUESTION 1 Based on the information provided in the Table, if the Halls continue making minimum payments on their outstanding debts, how much money will they have left over for all other expenses? ANSWER 1 (1 i ) n Using the formular PV PMT i or PMT PV .i we can compute monthly 1 (1 i ) n expenses of the Halls as following: 12,000 x(0.0525 12) $527.80 1 (1 0.0525 12) 24 (1) PMTCollege (2) PMTCar (3) PMTCredit card = 3% of balance owned = 0.03 x 10,000 = -$300.00 (4) PMTRent = -$1,200 5,000 x( 0.0599 12) $221.58 (1 (1 0.0599 12) 24 Total monthly expenses of the Halls = (1) + (2) + (3) + (4) = = $527.80 + $221.58 + $300.00 + $1,200.00 = = -$2,249.38 The net income of the Halls is shown in the below table: Marty's Salary $50,000.00 Laura's Salary $25,000.00 Total gross income $75,000.00 Tax amount = 28% x $75,000.00 Net income per annum = 75,000.00 – 21,000.00 Net income per month = $54,000.00 ÷ 12 -$21,000.00 $54,000.00 $4,500.00 Total left over = Total net income – Total expenses = $4,500.00 - $2,249.38 = $2,250.62 3 QUESTION 2 How much money will Laura and Marty have to deposit each month (beginning one month after the child is born and ending on his or her 18th birthday) in order to have enough saved up for their child's college education. Assume that the yield on investments is 8% per year, college expenses increase at the rate of 4% per year, and that their child will enter college when he or she turns 18 and will complete the degree in 4 years. ANSWER With PV = $20,000 and Annual inflation rate = 4%, the College expense in year 1 – 4 will be as below: = $20,000 = $20,000 = $20,000 = $20,000 As their deposit ends at their child’s 18th birthday, we have to discount these FV to year 18: Year 0 ……………… 17 1st year 18 2nd year 19 3rd year 20 4th year 21 $40,516.33 $42,136.98 $43,822.46 $45,575.36 Using formula PV FV we have: (1 i) n The total savings that the Halls should have when their child is 18 years old is: The number of period Laura and Marty have to deposit until their child reaches 18 is 18 years × 12 months = 216 periods. The amount that the Halls have to save every month can (1 i) n 1 be computed using formula FV PMT or i PMTEducation FVxi $153,281.95 x(0.08 12) $319.28 n (1 i ) 1 (1 0.08 12) 216 1 4 QUESTION 3 How much money will the Halls have to set aside each month so as to have enough saved up for a down payment on the $140,000 house within 12 months? Assume that the closing costs amount to 2% of the loan and that the down payment is 10% of the price. ANSWER (1) The down payment of 10% = $140,000 × 10% = $14,000 (2) The loan = $140,000 – $14,000 = $126,000 (3) Closing cost of the loan = $126,000 × 2% = $2,520 The total needed for down payment and closing cost = $14,000 + $2,520 = $16,520 In order to calculate the amount that the Halls have to set aside each month, we use formula (1 i) n 1 $16,520 x(0.08 12) FVxi FV PMT $1,326.92 or PMTDown. payment n i (1 i ) 1 (1 0.08 12)12 1 QUESTION 4: If the interest rate on a 30-year mortgage is at 5% per year when the Halls purchase their $140,000 house, how much will their mortgage payment be? Ignore insurance and taxes. ANSWER After the down payment, the mortgage = $140,000 - $14,000 = $126,000 The mortgate rate = 5% The number of periods = 30 years x 12 months = 360 periods In order to calculate monthly payment for mortgage, we use the formula 1 (1 i ) n PVxi $126,000 x(0.05 12) PV PMT or PMTMortgage 1 (1 i ) n 1 (1 0.05 12) 360 $ 676.40 i 5 QUESTION 5: Construct an amortization schedule for 5%, 30-year mortgage. ANSWER Total of mortgage payment = $126,000 Mortgage rate = 5% Number of periods = 30 years x 12 months = 360 The amortization schedule will be as below: Month Beginning Principal Balance Monthly payment (result in Q4) Interest rate (per month) Interest payment Deduction of principal Outstanding balance 1 126,000.00 -676.40 0.004167 525.00 -151.40 125,848.60 2 125,848.60 -676.40 0.004167 524.37 -152.03 125,696.58 3 125,696.58 -676.40 0.004167 523.74 -152.66 125,543.92 …….. …….. …….. …….. …….. …….. 358 2,012.39 -676.40 0.004167 8.38 -668.01 1,344.38 359 1,344.38 -676.40 0.004167 5.60 -670.79 673.59 360 673.59 -676.40 0.004167 2.81 -673.59 0.00 ……. QUESTION 6 If the Halls want to have as much of an after tax income when they retire as they currently have, and assuming they live until they are 80 years old, how much money should they set aside each month so as to have enough money accumulated in their retirement nest egg? Assume that annual inflation rate is 4% per year for the whole term, the investment return is 8% per year before and after retirement, and that their tax rate is 28% throughout their life. ANSWER As counted in Question 1, the total income after tax of the Hall’s is $54,000 Their current age is 30 and they will retire at 65, meaning that they have 35 years until they retire. Their desired annual income at age of 65, when they start retirement, will be = $213,088.806 Supposed that they will live until 80, the amount that the Halls have to save for their 15 years retirement will be counted as below: 6 Ages Year (n) Annual Income FV= PV(1+i)n 65 0 213,088.81 66 1 221,612.36 0.9259 205,196.6277 67 2 230,476.85 0.8573 197,596.7526 68 3 239,695.93 0.7938 190,278.3544 69 4 249,283.76 0.7350 183,231.0079 70 5 259,255.11 0.6806 176,444.6743 71 6 269,625.32 0.6302 169,909.6863 72 7 280,410.33 0.5835 163,616.7350 73 8 291,626.74 0.5403 157,556.8559 74 9 303,291.81 0.5002 151,721.4168 75 10 315,423.49 0.4632 146,102.1051 76 11 328,040.43 0.4289 140,690.9160 77 12 341,162.04 0.3971 135,480.1413 78 13 354,808.53 0.3677 130,462.3583 79 14 369,000.87 0.3405 125,630.4191 80 15 383,760.90 0.3152 120,977.4406 PVIFi,n with i=0.04 1 (1 i) n PV at year 65 (FV*PVIF) (with i=0.08) TOTAL ACCUMULATED 2,394,895.4900 Thus, the accumulated present value for their Retirement Nest egg is $2,394,895.49 In order to know how much the Halls have to set aside every month to save for their Retirement Nest Egg, which is up to $2,394,895.49, we use the formula (1 i) n 1 FVxi FV PMT or PMT i (1 i ) n 1 PMTRe tirement FVxi $2,394,895.49 x(0.08 12) $1,044.04 n (1 i) 1 (1 0.08 12) 35 x12 1 7 QUESTION 7: If the Halls continue paying the minimum 3% on their credit card debt each month, how long will it take them to pay it off and how much total interest will they have paid? If you were Dan, what would you advise them to do? ANSWER Credit Card balance Owed (FV) $10,000 Interest rate (i) 15.99% pa Minimum payment 3% (PMT) $300 We have the number of periods to clear the debt is: months And the total interest = $300 x 44.36705 months - $10,000 = $3,310.1153 With the net income of $4,500.00 every month, if I were Dan, in the two coming years (divided into 4 phases), I will advise the Halls as following: Phase 1 As per the calculation in Question 1, the left over after paying Car loan, College loan, Credit card ($300) and Rent, the balance left for their living is $2,550.62. I would sugget the Halls to live cheap in this phase and pay maximum on credit card debt. If they target to clear the debt within 6 months, then the monthy credit card payment should be: PMT FVxi 10,000 x( 0.1599 12) $1,612.00 n (1 i ) 1 (1 0.1599 12) 6 1 Thus, the Halls have to pay the following expenses: Car loan -$221.58 College loan -$527.80 Monthly rent -$1,200.00 Credit card -$1,612.00 Total expenses -$3,561.38 Left over for cheap livings $938.62 Phase 2 In the Phase 2, when the Halls already cleared their Credit card debt, they should stop renting, buying their own house and starting their retirement saving. The payments during this phase include the following: 8 Car loan -$221.58 College loan -$527.80 Down payment and closing cost -$1,326.92 Retirement -$1,044.04 Total expenses -$3,120.34 Left over $1,379.66 The balace of $1,379.66 should be enough to cover their living costs and also, they should save some money for their baby. Phase 3 This is the time when they are 31 years old and when their first baby is born, they should continue expenses/payments as in Phase 2 and start saving for education plan Car loan -$221.58 College loan -$527.80 Down payment and closing cost -$1,326.92 Credit card -$1,612.00 Education Total expenses Left over for cheap livings -$319.28 -$3,439.62 $1,060.38 Phase 4 This is the time when the House Down payment and closing cost finish. The Halls should start the mortgage plan. Car loan -$221.58 College loan -$527.80 Mortgage -$676.40 Retirement Education Total expenses Left over for livings -$1,044.04 -$319.28 -$2,798.10 $1,710.90 Thus, within 24 months, the Halls will pay off their Car loan, College loan and Credit card debt. Their total expenses now will be much reduced to $2,039.72 and the left over for their living will be $2,460.28. Starting from their age of 32, they could work towards paying off their mortgage as quick as possible. 9 The Table below will present Expenses, Net Income and Balance every month that the Halls should have within 24 months when they are at the ages of 30 and 31 Ages 30 31 Down payment & closing cost Total monthly expenses Monthly Net Income Monthly Balance 1,612.00 3,561.38 4,500.00 938.62 1,200.00 1,612.00 3,561.38 4,500.00 938.62 1,200.00 1,612.00 3,561.38 4,500.00 938.62 527.80 1,200.00 1,612.00 3,561.38 4,500.00 938.62 221.58 527.80 1,200.00 1,612.00 3,561.38 4,500.00 938.62 221.58 527.80 1,200.00 1,612.00 3,561.38 4,500.00 938.62 7 221.58 527.80 1326.92 1044.04 3,120.34 4,500.00 1,379.66 8 221.58 527.80 1326.92 1044.04 3,120.34 4,500.00 1,379.66 9 221.58 527.80 1326.92 1044.04 3,120.34 4,500.00 1,379.66 10 221.58 527.80 1326.92 1044.04 3,120.34 4,500.00 1,379.66 11 221.58 527.80 1326.92 1044.04 3,120.34 4,500.00 1,379.66 12 221.58 527.80 1326.92 1044.04 3,120.34 4,500.00 1,379.66 13 221.58 527.80 1326.92 319.28 1044.04 3,439.62 4,500.00 1,060.38 14 221.58 527.80 1326.92 319.28 1044.04 3,439.62 4,500.00 1,060.38 15 221.58 527.80 1326.92 319.28 1044.04 3,439.62 4,500.00 1,060.38 16 221.58 527.80 1326.92 319.28 1044.04 3,439.62 4,500.00 1,060.38 17 221.58 527.80 1326.92 319.28 1044.04 3,439.62 4,500.00 1,060.38 18 221.58 527.80 1326.92 319.28 1044.04 3,439.62 4,500.00 1,060.38 19 221.58 527.80 676.4 319.28 1044.04 2,789.10 4,500.00 1,710.90 20 221.58 527.80 676.4 319.28 1044.04 2,789.10 4,500.00 1,710.90 21 221.58 527.80 676.4 319.28 1044.04 2,789.10 4,500.00 1,710.90 22 221.58 527.80 676.4 319.28 1044.04 2,789.10 4,500.00 1,710.90 23 221.58 527.80 676.4 319.28 1044.04 2,789.10 4,500.00 1,710.90 24 221.58 527.80 676.4 319.28 1044.04 2,789.10 4,500.00 1,710.90 676.4 319.28 1044.04 2,039.72 4,500.00 2,460.28 Month Car loan College Rent 1 221.58 527.80 1,200.00 2 221.58 527.80 3 221.58 527.80 4 221.58 5 6 25 Credit card Mortgage Education Retirement …….. 10 BIBLIOGRAPHY Gitman/Juchau/Flanagan, 2008. Principles of Managerial Finance, 5th edition. Pearson Education Australia. 11
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