Financial Asset Valuation VB = C 1 - 1/(1 + rD)"] FT + (1 + ID ) T (Bond price equation) C PB - PB YTM = PB + PB (Yield to maturity for a bond) D1 D3 VS = DT + VS 1+ rs - + (1 + rs)2 + (1+rs) 3 + .+ (1 + rS)T (Stock price equation) D1 PS - PS Stock return = = + PS PS Risk and Return Arithmetic average return = R = Et=1 Rt T Var(R) = 02 - 2t=1(Rt - R)2 T- 1 E(R) = PSRS 2/3 S=1 Var(R) = > Ps [RS - E(R)]2 S=1 N E(RP) = wi E (R; ) 1=1 N BP = wiBi E(R;) = RF + Bi[E(RM) - RF] E WACC = FIE + yrp + vrD(1 - Tc) Capital Budgeting Decision CF NPV = (1 + WACC) 1=0 CF 0 = (1 + IRR) t t= 0Appendix: Formula Sheet Finance and Financial Statements Cash flow from assets = Cash flow to creditors + Cash flow to shareholders Cash flow to creditors = Interest paid - Net new borrowing Cash flow to shareholders = Dividends paid - Net new equity raised Current assets Current ratio = Current liabilities Total liabilities Debt-equity ratio = Total equity EBIT Times interest earned (TIE) = Interest expense Sales Total asset turnover = Total assets Net income Profit margin = Sales Net income Return on assets (ROA) = Total assets Price per share Price-earnings (PE) = Earnings per share ROE = Profit margin x Total asset turnover x Equity multiplier Time Value of Money Ct PVo = (1 +r )t 1=0 PVo = C 1- 1/(1 + r)"] (PV of an annuity) r PVo = (PV of a growing annuity) C1 PVo =; r - g (PV of a growing perpetuity) mt Effective t-year rate = ( 1 + (APR) - 1 mQuestion 1 Peter has a housing loan with UOB Bank before the COV1Dl9 pandemic broke out. The details of the loan are as follows: Principal: $1,000,000 Interest rate: 4% per annum Tenure: 25 years Repayment: Amortization with monthly repayment. The lives of many were affected with jobs lost and businesses declining by the pandemic. Peter was adversely affected, too, and was unable to service his loan. Many banks, UOB included, showed compassion by allowing homeowners to defer full loan repayments by paying interest only for 18 months as a relief. When this was announced, Peter had just paid the 120th instalment of his housing loan. (a) Compute the monthly repayment before the pandemic broke out? (5 marks) (b) Compute how much Peter has to pay each month during the relief period? (5 marks) (0) Compute how much Peter is still owing the bank at the end of the relief period? (4 marks) (d) Compute the monthly repayment when the loan repayment resumes if he still plans to discharge the loan fully at the end of the 25th year? (5 marks) (e) Compute how many more months he needs to extend the loan from the original 25 years if the monthly repayment in part (a) above is maintained when the repayment resumes? Show your workings and also justify your answer intuitively. (6 marks) CF PI = t=1 (1 + WACC)t/ CFo Cash flow from assets (CFFA) = Operating cash flow - Net capital spending - Changes in net working capital Operating cash flow (OCF) = Earnings before interest and taxes (EBIT) + Depreciation - Taxes OCF = (Sales - Costs) (1 - Tax rate) + (Depreciation x Tax rate) Net capital spending (NCS) = Ending net fixed assets - Beginning net fixed assets + Depreciation Financing Decisions Perfect capital markets VL = Vu TE = rut (ru - rD)T Working Capital Decision Operating cycle = Inventory period + Accounts receivable period Cash cycle = Inventory period + Accounts receivable period - Accounts payable period Total annual inventory cost = (> > CC) + (ox F) 2T X F EOQ = CC 3/3(f) Upon repayment resumption, what if Peter wishes to maintain the same repayment in part (a) and still discharging the loan at the end of 25th year, compute how much the nal balloon payment should be at that time