1. Frasier needs £250,000 to set up his business. Bank A is willing to lend him the money under the following conditions: the loan is to be repaid in equal instalments at the end of each of the next five years and the interest rate is 15%. How much of the third payment applies to the principal balance?

2. To ensure she has the necessary capital in 5 years’ time to set up her own business, Jane plans to deposit £9,000 per annum for 5 years, beginning on January 1st 2022. Jane’s savings account pays 8% p.a. compounded annually. However, at the end of the third year of her five-year planning horizon, Jane withdraws £4,000 to purchase a car. And at the end of the fourth year, she withdrew £5,000 to fund a holiday in New Zealand. Relative to the amount Jane had originally planned on savings, what was the shortfall in her savings at the end of the fifth year?

3. Travis & Sons has a capital structure that is based on 35 percent debt, 5 percent preferred stock, and 60 percent common stock. The pretax cost of debt is 7.8 percent and the cost of preferred stock is 9.4 percent. The firm’s common stock has a beta of 2.3 and the market risk premium is 5.83%. The tax rate is 21 percent and Treasury Bills offer a 3% return. A project is being considered that is equally as risky as the overall company. This project has initial costs of £250,000 and annual cash inflows of £101,000, £201,000, and £160,000 over the next three years, respectively. Based on the NPV approach, should this project be accepted? Why / why not?

Answer rating: 100% (QA)

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