Chapter 5 case study solution 7th edition PDF

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Chapter 5 case study solution 7th edition Class: FIN 200 1. What are the monthly payments for a 30-year traditional mortgage? What are the payments for a 20-year traditional mortgage? The payment for a loan repaid with equal payments is the annuity payment with the loan value as the PV of the annuity. So, the 30-year loan payment will be: PVA = C({1 – [1/(1 + r)]t } / r) $22,000,000 = C{[1 – 1 / (1 + .061/12)360] / (.061/12)} C= 133,318.85 And the monthly payments for the 20-year loan will be: PVA = C({1 – [1/(1 + r)]t } / r) $22,000,000 = C{[1 – 1 / (1 + .061/12)240] / (.061/12)} C= 158,886.65 2. Prepare an amortization table for the first six months of the traditional 30-year mortgage. How much of the first payment goes toward the principal? Beginning payment Payment Ending Balance Total Payment Interest Principal Balance 1 22,000,000 133,318.85 111833.3333 21485.51667 21866681.15 2 21,866,681.15 133,318.85 111155.6292 22163.22082 21733362.3 3 21,733,362.30 133,318.85 110477.925 22840.92498 21600043.45 109800.220 4 21,600,043.45 133,318.85 9 23518.62913 21466724.6 109122.516 5 21,466,724.60 133,318.85 7 24196.33328 21333405.75 108444.812 6 21,333,405.75 133,318.85 6 24874.03744 21200086.9 3. How long would it take for S&S Air to pay off the smart loan assuming 30-year traditional mortgage payments? Why is this shorter than the time needed to pay off the traditional mortgage? How much interest would the company save? The bi-weekly payment is one-half of the 30-year traditional mortgage payment, or: Bi-weekly payment = 133,318.85 / 2 Bi-weekly payment = 66,659.43

Now we have the present value of an annuity, the interest rate, and the number of payments. We need to find the number of periods of the annuity payments. Note that if you make apayment every two weeks, you will make 52/2 = 26 payments per year. C= Pv * r ( 1- 1/(1+r)t) We want to find the T: PVA = C({1 – [1/(1 + r)]t } / r) In this case, the C is half of 133,318.85 which is 66,659.43. the “r” is the biweekly interest rate = 6.1% * 14/ 365 = 0.234 % $22,000,000 = $66,659.43{[1 – 1 / (1 + .061/26)t] / (.061/26)} 1/1.0038125 t= 1 – ((22000000)(0.00381)/(66659.43) 1.0038125 t= 1/0.2574= 3.8850 T= ln 3.8850 / ln 1.00381 T= 356.87 periods Since they are 26 bi-weekly periods in a year, the time necessary to pay of the bi-weekly mortgage will be: Bi-weekly payoff = 356.87 / 26 Bi-weekly payoff = 13.72 years Interest saving: 360 months x 133,318.85 = 47,994,786 356,87 Biweekly period x 66,659.43= 23,788,750.78 Saving = 47,994,786 - 23,788,750.78= 24,207,035.22

4. Assume S&S Air takes out a bullet loan under the terms dsecribed. What are the payments on the loan? For the first 60 months, the payment will be the same as with 30 years fixed: 133,318.85. After that the remaining bullet payment will be due, and according to Christie, is equal to present value of the remaining principle of the loan: PV= C ( 1-1/1+r)t)/ r PV=133,318.85 x (1-1/(1+0.061/12)360- 60) / (0.061/ 12) PV= 20,497,095.41

So both the 60th months payment 133,318.85 and the remaining principle 20,497,095.41 will be due.

5. What are the payments for the interest-only loan? The payment of interest is only interest payment each month. Monthly interest payments = 22000000 x (0.035/12) Monthly interest payments= 64,166.66 The final payment will include both the interest and the entire principle: 64,166.66 + 22000000 = 22,064,166.66 6. Which mortgage is the best for the company? Are there any potential risks in this action? As I think the best choice is interest only loan because it has the lowest interest rate which is an interest rate of 3.5%. one of the potentail risk the loan is that the company can not be able to pay the principal before maturity, which it means that it may refinance at a higher rate in the future. One way to show that the interest-only loan is the best option is to consider what happens if the company makes the same payments as it would if took out the traditional 30-year mortgage.

References: Jordan, B. Westerfield, R. Ross, S. (2010). Corporate Finance Essential ( 7th ed). New York : McGraw-Hill/Irwin...