Does the offer sound too good to be true

Assignment Help Financial Management
Reference no: EM131020151

Jay Wechsler agrees to purchase a car from a local dealer, the Con Car Co. The purchase price is $15,000. Jay has the cash to pay the entire amount and wants to do so. Con's sales manager ises the following argument to convince him to finance the car: "Al we require is a down payment of $3,000. Then you can barrow the $12,000 from our finance company at 12 percent. You will make monthly payments of $266.93 for 5 years (60 months), a total of $16,015.80. If you do that, you get to keep your $12,000. Now suppose you keep this money in a money market account that pays you 8 percent compounded quarterly. In 5 years, the $12,000 will grow to $17,831.40. That means that you will be better off by $1,815.60 than if you pay the $12,000 in cash." Assume all the numbers are correct. Does the offer sound too good to be true? Why? (This is an argument often used by automobile dealers. One of the authors encountered it while buying a car.)

Reference no: EM131020151

Questions Cloud

Management believes that dividends and earnings should grow : Builtrite’s common stock is currently selling for $56 a share and the firm just paid an annual dividend of $3.20 per share. Management believes that dividends and earnings should grow at 9% annually. Based on this, and a marginal tax rate of 34%, wha..
Issued bonds-what is the price of the bonds : Renfro Rentals has issued bonds that have a 7% coupon rate, payable semiannually. The bonds mature in 18 years, have a face value of $1,000, and a yield to maturity of 8%. What is the price of the bonds? Round your answer to the nearest cent.
Construct pro forma income statement for the first year : Construct a pro forma income statement for the first year and second year for the following assumptions: • Units of Sales in Year 1: 110,000. •Price per Unit: $11. • Variable cost per unit: 25%. • Fixed Costs: $129,000.
What is the value of your retirement plan : Assume that you contribute $310 per month to a retirement plan for 25 years. Then you are able to increase the contribution to $620 per month for another 25 years. Given a 8 percent interest rate, what is the value of your retirement plan after the 5..
Does the offer sound too good to be true : Jay Wechsler agrees to purchase a car from a local dealer, the Con Car Co. The purchase price is $15,000. Jay has the cash to pay the entire amount and wants to do so. Con's sales manager ises the following argument to convince him to finance the car..
Use the risk premium approach : Based on the information below, calculate the weighted average cost of capital. Great Corporation has the following capital situation. Debt: One thousand bonds were issued five years ago at a coupon rate of 11%. They had 20-year terms and $1,000 face..
What is the yield on seven-year treasury note : The real risk-free rate is 3%. Inflation is expected to be 3% this year, 4% next year, and 3.5% thereafter. The maturity risk premium is estimated to be 0.05 x (t-1), where t= number of years to maturity. What is the yield on a 7-year Treasury note?
Any other legal or equitable theory of recovery : John Harrington, Jr. (“Junior”) is a 24-year-old, 3-pack-per-day smoker. John Harrington, Sr. (“Senior”) is a very concerned parent. On January 1, father announces to son, “Junior, if you will stop smoking for the entire year, I will pay you $5,000.”..
Assuming they appreciate at an annual rate : Your coin collection contains 100 1952 silver dollars. Required: If your grandparents purchased them for their face value when they were new, how much will your collection be worth when you retire in 2059, assuming they appreciate at an annual rate o..

Reviews

Write a Review

Financial Management Questions & Answers

  What is hierarchical coding with respect chart of accounts

What are the three major types of funds found in most local government accounting information systems?

  What was wallaces total long-term debt

At year-end 2013, Wallace Landscaping’s total assets were $1.0 million and its accounts payable were $350,000. Sales, which in 2013 were $2.5 million, are expected to increase by 25% in 2014. Total assets and accounts payable are proportional to sale..

  Horizontal or a vertical business relationship combine

A hostile merger occurs when two firms with either a horizontal or a vertical business relationship combine. A upside merger occurs when two firms with either a horizontal or a vertical business relationship combine. A friendly merger occurs when two..

  Firm u is an all equity firm and has a market value of

firm u is an all equity firm and has a market value of 500000 and ebit of 100000. firm l is identical in all respects

  Assuming the market is in equilibrium

Crisp Cookware's common stock is expected to pay a dividend of $2 a share at the end of this year (D1 = $2.00); its beta is 1.20; the risk-free rate is 5%; and the market risk premium is 6%. The dividend is expected to grow at some constant rate g, a..

  Compute the expected interest rates

Using the expectations theory, a) compute the expected interest rates (yields) for each security one year from now, b) what will the rates be two years from today?

  Calculate the cost of ending work in process

At the start of November, Penco Refinery had Work in Process inventory consisting of 4,700 units that were 80 percent complete with respect to materials and 60 percent complete with respect to conversion costs. Calculate the cost per equivalent unit ..

  What is the net present value for this project

Phone home inc. is considering a new 4 year expansion project that requires an initial fixed asset investment of $3 million. The fixed asset will be depreciated straight-line to 0 over it's 4 year tax life, after which time it will have a market valu..

  A project that provides annual cash flows

A project that provides annual cash flows of $10857 for eight years costs $76853 today. At what discount rate would you be indifferent between accepting the project and rejecting it?

  Why capm equation might be more relevant than other

Explain with a graph how SML is different from CML. Why CAPM equation might be more relevant than other equations when calculating required rate of return.

  Calculate the dollar-weighted rate of return

On January 1, an investment account is worth 500. On July 1, the value has increased to 600 and W is withdrawn from the account. On November 1, the value is 280 and 120 is deposited in the account. On January 1 of the following year, the investment a..

  What is your return assuming no dividends are paid

Suppose the call money rate is 6.8 percent, and you pay a spread of 1.9 percent over that. You buy 1,100 shares at $55 per share with an initial margin of 40 percent. One year later, the stock is selling for $61 per share, and you close out your posi..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd