Sheet1Funding budget shortfalls As part of your personal budgeting process, you have determined that in each of the next 5 years you will have budget shortfalls. In other words, you will need the amounts shown in the following table at the end of the given year to balance your budgetthat is, to make inflows equal outflows. You expect to be able to earn 8% on your investments during the next 5 years and wish to fund the budget shortfalls over the next 5 years with a single amount. End of year Budget shortfall 1 $5,000 2 4,000 3 6,000 4 10,000 5 3,000a. How large must the single deposit today into an account paying 8% annual interest be to provide for full coverage of the anticipated budget shortfalls?YearCash Flow Required (Budget Shortfall)Present Value Factor @8%Present Value1$5,000.000.9259$4,629.632$4,000.000.8573$3,429.363$6,000.000.7938$4,762.994$10,000.000.7350$7,350.305$3,000.000.6806$2,041.75Total Present Value$22,214.03So amount of single deposit that should be made is $22,214.03b. What effect would an increase in your earnings rate have on the amount calculated in part a? Explain.If earning rate is increased then the amount calculated in part a would decrease because the increase in interest decrease the presesent value of the amount.2. Loan amortization schedule Joan Messineo borrowed $15,000 at a 14% annual rate of interest to be repaid over 3 years. The loan is amortized into three equal, annual, end-of-year payments. a. Calculate the annual, end-of-year loan payment.PV-15000Rate14%N3Annual Payment$6,460.97b. Prepare a loan amortization schedule showing the interest and principal breakdown of each of the three loan payments.YearBeginning BalanceInterest for the YearPayment MadePrincipal PaymentEnding Balance1$15,000.00$2,100.00$6,460.97$4,360.97$10,639.032$10,639.03$1,489.46$6,460.97$4,971.51$5,667.523$5,667.52$793.45$6,460.97$5,667.52$0.01c. Explain why the interest portion of each payment declines with the passage of time.Interest of each payment decline with the passage of time as Principal loan balance outstanding is reducing with each payment made.3. Monthly loan payments Tim Smith is shopping for a used car. He has found one priced at $4,500. The dealer has told Tim that if he can come up with a down payment of $500, the dealer will finance the balance of the price at a 12% annual rate over 2 years (24 months). a. Assuming that Tim accepts the dealer's offer, what will his monthly (end-ofmonth) payment amount be?Monthly Payment would be = Amount / PV factor of Ordinary Annuity at 1% and 24 Periods)

Monthly Payment = 4000/21.24339 = $188.29b. Use a financial calculator or Equation 4.15a (found in footnote 9) to help you figure out what Tim's monthly payment would be if the dealer were willing to finance the balance of the car price at a 9% annual rate.PV-4000Rate0.75%N24Monthly Payment$182.744. Basic bond valuation Complex Systems has an outstanding issue of $1,000- par-value bonds with a 12% coupon interest rate. The issue pays interest annually and has 16 years remaining to its maturity date. a. If bonds of similar risk are currently earning a 10% rate of return, how much should the Complex Systems bond sell for today?FV-1000PMT (Payment Per Period)-120N16Rate10.00%PV$1,156.47So the Bond must sell for $1,156.47b. Describe the two possible reasons why similar-risk bonds are currently earning a return below the coupon interest rate on the Complex Systems bond.Two possibel reason could be 1) The current real interest rate is 10%2) Credit rating of similar bond is higher (that is they are less risky).c. If the required return were at 12% instead of 10%, what would the current value of Complex Systems' bond be? Contrast this finding with your findings in part a and discuss.FV-1000PMT (Payment Per Period)-120N16Rate12.00%PV$1,000.00If the required return is 12% then current value of bond will trade at $1,000. The current value of bond at 12% is lower than the current value at 10%. Also when the coupon rate of then bond is higher than the required return then the bond is more valueable (than it face value) but when coupon rate is same as required rate the price of the bond is same as face value5. Common stock valuationZero growth Scotto Manufacturing is a mature firm in the machine tool component industry. The firm's most recent common stock dividend was $2.40 per share. Because of its maturity as well as its stable sales and earnings, the firm's management feels that dividends will remain at the current level for the foreseeable future. a. If the required return is 12%, what will be the value of Scotto's common stock?Value of Common Stock = D1/(r-g) = 2.4/(.12-0)= $20b. If the firm's risk as perceived by market participants suddenly increases, causing the required return to rise to 20%, what will be the common stock value?Value of Common Stock = D1/(r-g) = 2.4/(.20-0)= $12c. Judging on the basis of your findings in parts a and b, what impact does risk have on value? Explain.As the risk increase the required return increase and value of stock falls. As seen above as risk required retunr increased from 12% to 20%, value of the stock fell from $20 to $12 per share.

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