Reference no: EM132459155

1. Three years ago Daniel Pascoe purchased a new home for $400,000. Mr. Pascoe obtained financing for his home from Lenapah Federal Savings under a variable rate loan program designed for professionals who wished to purchase homes they cannot afford. The terms of the loan permitted Mr. Pascoe to borrow the full $400,000 purchase price of the home and to pay interest at a below market interest rate over the first three years of the 25-year loan term. Although the mortgage requires that Mr. Pascoe pay off the loan over a 25-year period. However, the first 36 monthly mortgage payments were determined as if the loan would be amortized (paid off) over 25 years at a monthly compounded rate of 4.2 percent. Three years have now passed (36 monthly payments) and the interest rate on the loan is to reset to the current market rate, a monthly compounded rate of 3.6 percent, with the outstanding balance of the loan to be paid off over the remaining term of the loan (22 years). Assuming that Mr. Pascoe has made his monthly payments as scheduled over the last three years, determine

a. the original monthly payment on the loan, b. the new monthly payment (after 36 monthly payments) if the interest rate on the loan is reset to a monthly compounded rate of 3.6 percent.

2. Guymon Solar Energy just raised (borrowed) $250 million by issuing innovative new bonds referred to as "Biennial" bonds. The bonds, which were issued on February 14, 2020 have a par/face value of $1000. Although the biennial bonds will make an interest payment of $75 once every two years in perpetuity, so that the principal will never be returned to the bondholders, the first interest payment on the bonds is scheduled to be paid on February 14, 2021, with biennial interest payments to be received every two years from that date on (e.g., the second payment is scheduled for February 14, 2023). Assuming that the semiannually compounded yield to maturity for the bonds is 5.0 percent, determine the current value of one (and only one) of the Biennial bonds issued by Guymon Solar Energy.

3. Bluejacket Manufacturing plans to retain 75 percent of earnings at the end of each of the next four years to finance new investments offering a rate of return on equity ROE of 30 percent. Security analysts' consensus forecast for Bluejacket's earnings per share at the end of this year (at date 1) is $3.00. Beginning with the end of year five (date 5) and continuing in perpetuity (forever), the firm plans to cut the retention rate to 60 percent of earnings. Assuming the required return for Bluejacket's stock is 11.5 percent and that the ROE for the firm's new investments is expected to fall to 12.5 percent at date 5 and to remain constant from that date on, determine the current (date 0) value of Bluejacket's stock.

4. Flip Bonner has just been awarded a $3,100,000 settlement in as personal injury lawsuit against his former employer, Central Manufacturing. The settlement agreement gave Mr. Bonner an immediate settlement payment of $100,000, with the remaining $3,000,000 to be paid out in equal annual installments over the next 20 years, with the first installment payment for the settlement to occur on February 15, 2021. Unfortunately, Mr. Bonner lost the initial settlement payment playing high stakes bingo at the casino in Durant, Oklahoma and needs immediate access to the remaining settlement payments. JD Moore Financial, which specializes in purchasing structured payout streams from personal injury settlements, has offered to make an immediate lump-sum payout to Mr. Bonner of $1,844,229.45 in exchange for 100 percent of the installment payments from his personal injury settlement. Determine the borrowing cost (to the nearest 1/100th of one percent) implicit in the lump-sum payout offered by JD Moore.