A generous old boy of Tamale Senior High School (Tamasco) (Dr. Mahamoud Bawumiah) has decided to make annual contributions...

 

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A generous old boy of Tamale Senior High School (Tamasco) (Dr. Mahamoud Bawumiah) has decided to make annual contributions of $1,000,000 to the school as part of a five-year capital improvement programme. Because of the need to start the capital improvements immediately, Dr. Bawumiah will immediately disburse $1,000,000 to the school and pay the balance in four equal installments at the end of each year for the next four years. Dr. Bawumiah (the old boy) expects that interest rates will average 18% over the next four years and he is trying to figure out how much funds he should invest today to ensure that he will be able to meet his commitment to his alma mater. Calculate the present value of this annuity due. (5 marks) If Dr. Bawumiah decides that he would make only three annual contributions of $1,000,000 to the capital works programme and that his payments would start at the end of year 2 and continue through year 4. Calculate the present value of this deferred annuity. (5 marks) Imagine that you own a house which you intend to rent out for $300,000 this year. After deducting your maintenance expenses and property rate your net cash flow is $180,000. You expect that this cash flow will grow at 5% annually forever. At an interest rate of 18%, what is the present value of this cash flow? (5 marks) (Total: 20 marks) a. Consider the following data. Beta of company j = 1.23 Yield of short-dated Treasury bills - 6.5% Market risk premium = 9.1% Calculate the rate of return (R₁) for security j using the CAPM equation (5 marks)

Answer rating: 100% (QA)

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