Determine principal balance at the end of the term, Financial Management

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1. CompuSystems was supposed to pay a manufacturer $19,000 four month ago and another $14,000 two months from now.  CompuSystems is proposing to pay $10,000 today and the balance in 5 month, when it will receive payment on the major sale to the provincial government.  What will the payment be in five months if the manufacturer requires 18% compounded monthly because the account is overdue?

2. A $40,000 mortgage loan charge interest at 9.75% compounded monthly for a 4 year term.  Month payments were calculated for a 15 year amortization.

a.  What will be the principal balance at the end of the first term?

b.  What will the monthly payment be on renewal for a 3 year term if it is calculated for an interest rate of 9%compounded monthly and an 11 year amortization period?

3.  A $1000, 8.5% coupon, 2 year Government of Canada bond was issued on June 1, 1986.   At what price died it sell on April 27, 1990 if the markets required return was 11.2% compounded semi-annually?

4.  A City can borrow $400,000, at 8% compounded quarterly or can issue $400,000 of bonds paying interest at 4% compounded quarterly.  By law the City must create a sinking fund to retire the bonds at the end of 20 years.  If the sinking fund earns 8% compounded quarterly, which is cheaper- getting the loan or issuing the bonds- and by how much each payment period?

5.  The timber rights to a tract of forest can be purchased for $90,000.  The harvesting agreement would allow 25% of the timber to be cut in each of the first, second, fourth and fifth years.  The purchaser of the timber rights would be required to replant, at its expense, the logged areas in Years 3 and 6. Arrowsmith Lumber calculates that its profit in each of the 4 cutting years would be $50,000 and that the cost of replacing the harvested areas in each Years 3 and 6 would be $20,000.

a. Should Arrowsmith Lumber by the timber rights if its cost of capital is 18%?

b. By what amount would the economic value of Arrowsmith Lumber be increased or decreased if it proceeded with purchasing the timber rights for $90,000?


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