1b. How much can Virginia spend today?
Without a loan If Virginia does not want to borrow from the bank, she can spend a maximum of $2 million. With a loan If Virginia makes use of a bank loan, taking into account the $2million in hand and the present value of her future 3 million, she will be able to spend a maximum of $4.83 million. PV of $3 million is $2.83Million PV. Assuming interest rates are constant for all entities, including the bank, within one year’s time, 6% will have accrued and Virginia can repay the loan to the bank at $3 million.
1c. How much can Virginia spend one year from now?
Future Buying Power
Future Value Future Value of 2 million is 2.12 million – $2M (1+0.06) = $2.12 million $2.12 million + $3 million = $5.12 million – Virginia has this amount to spend in one year’s time if she spends nothing today.
2a. Assume Virginia had a lump sum of 4 million to invest. How much of the $4
million should Virginia invest in the restaurant?
Investment
Remaining Cash
Future Cash Flow from investment
Future Value Cash
Total FV
option 1
$1,000,000.00
$3,000,000.00
$1,800,000.00
$3,180,000.00
$4,980,000.00
option 2
$2,000,000.00
$2,000,000.00
$3,300,000.00
$2,120,001.00
$5,420,001.00
option 3
$3,000,000.00
$1,000,000.00
$4,400,000.00
$1,060,001.00
The Essay on Interest Rates Mortgage Loans Banks
: 10-11 8-953-683-08-38: ... 2011 Kremlin cash revives home loans Cash injections from state-controlled banks are due to breath life into the flagging mortgage market as it seeks to recover from the economic crisis. The government is encouraging its own banks to make home loans more affordable to a wider range of prospective buyers than before in a bid to stimulate the first signs of housing ...
$5,460,001.00
option 4
$4,000,000.00
$0.00
$5,400,000.00
$0.00
$5,400,000.00
PV of FCF from investment
$1,698,113.00
$3,113,208.00
$4,150,944.00
$5,094,340.00
$698,113.00
$1,113,208.00
$1,150,944.00
$1,094,340.00
Net Value of investment
Virginia should choose Option 3, as this will offer the highest Future Value and the highest Net Value of Investment
2a. What happens to Virginia’s wealth when she makes the investment in the retaurant? Virginia spends $3 million on the investment itself, and is left with $1 million cash in hand. She knows the future value of her investment will be $5,460,000
3
Spend
Balance
$3,800,000.00
$200,000.00
Investment
Remaining Endowment
Loan from bank
Interest
Payment to the bank
option 1
$1,000,000.00
$200,000.00
$800,000.00
$48,000.00
$848,000.00
option 2
$2,000,000.00
$200,000.00
$1,800,000.00
$108,000.00
$1,908,000.00
option 3
$3,000,000.00
$200,000.00
$2,800,000.00
$168,000.00
$2,968,000.00
option 4
$4,000,000.00
$200,000.00
$3,800,000.00
$228,000.00
$4,028,000.00
Future Cash Flow
$1,800,000.00
$3,300,000.00
$4,400,000.00
$5,400,000.00
Total FV
$2,012,000.00
$3,512,000.00
$4,612,000.00
$5,612,000.00
$952,000.00
95.20%
$1,392,000.00
69.60%
$1,432,000.00
47.73%
$1,372,000.00
34.30%
option 1
$1,000,000.00
$1,000,000.00
$60,000.00
$1,060,000.00
$1,800,000.00
option 2
$2,000,000.00
$2,000,000.00
$120,000.00
$2,120,000.00
$3,300,000.00
option 3
$3,000,000.00
$3,000,000.00
$180,000.00
$3,180,000.00
$4,400,000.00
option 4
$4,000,000.00
$4,000,000.00
$240,000.00
$4,240,000.00
The Essay on Investment Analysis-Derivatives: Options and Warrants
This report will encompass brief explanation of common derivatives namely, options and warrants. What are Options? A contract which enables the investor to buy or sell a particular financial instrument is known as an option ( Rao, 2003, p. 676). The underlying financial product in equity option is stocks. These contracts have expiry dates; hence an investor can exercise option before its ...
$5,400,000.00
$740,000.00
74%
$1,180,000.00
59%
$1,220,000.00
41%
$1,160,000.00
29%
Virginia’s best option for cash return is Option 3
Overall investment bst rate of return is Option 1
Investment
Loan from bank
Interest
Payment to the bank
Future Cash Flow from investment
Virginia’s best option is Option 3
Overall investment bst rate of return is Option 1
Based upon Question 4 figures, savers wouldchoose Option 1 as it offers highest return on investment. Spenders would want the most cash on hand and would choose Option 3. A compromise solution is to choose Option 2 for a balance of cash on hand and retuen on invstment
Correct Reply: 3 million for both Savers and Spenders. We have to find the FV Spenders and PV for Savers, that canculations will tell us, option 3 is the best for both of them
New Investment
Future Cash Flow
Shares Outstanding
Recommend selling shares to generate cash
$2,500,000.00
$3,400,000.00
200,000.00
based upon a total future value of $4,612,000, divided by 200,000 shares,
each share is worth $23.06 $2.5 million/$23.06 = 108,413 shared will need to be sold to cover the cost of the investment
Correct Reply:
positive investment 3.4 > 2.5 (2.5 + (3.4/1.06) = 0.707 –> profit) Shares = Total Value / Shares = 5.15 / 200.000 = 25.75$
0.707 / 0.2 = 3.54
New Price after announcement = 29.29$
Number of new shares to issue = 2.5M / 29.29 = 85.346 new shares
Balance Sheet
Cash: 1 M Liablities: 0
Rest: 4.15 Equity: 8.35 / 285.346 = 29.29
Ham: 3.2
Total: 8.35 Total: 8.35
