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You want to buy a house, but you still need to pay your car loan of $15,000 over the next 3 years. Your annual income is $50,000 and the bank estimates that your monthly mortgage payments should not represent more than 28% of your monthly income.

FINC 610

Homework Assignment 2 (10 marks) (individual Work)

  1. You want to buy a house, but you still need to pay your car loan of $15,000 over the next 3 years. Your annual income is $50,000 and the bank estimates that your monthly mortgage payments should not represent more than 28% of your monthly income. You have decided to use that percentage of your current income to repay your car loan and to save for the down payment on the house. In this way you will adjust your current monthly expenses to be ready to make the same monthly payments for 30 years. You estimate that you can get a fixed interest rate of 6.5% on a 15-year mortgage. Closing costs are estimated to be 3% of the loan value and you can invest at an average rate of 5%. If the interest on the auto loan is 8%, determine the following: (4 marks)

a)      What is the monthly payment on the car loan? How much can you invest each month?

b)      If you decide to repay your car loan and invest the rest for the down payment at the same time, how much money will the bank loan you in five years? How much can you offer for the house?

c)      Is there any change in your answers for part (a) if you decide to pay off the car before you begin to investment for the down payment?                                                                                                                     

2. Assume that a particular firm has a total asset of $150 million and it has to choose a financing among two schemes. The description of these schemes is given below. (3 marks)

  1. Scheme 1: Borrowing today a unique amount equal to 25% of the total assets value. This borrowed amount will be paid off at the end of year 5 and the interests charges will be based on a 4.25% yearly fixed interest rate.
  2. Scheme 2: Borrowing today a unique amount equal to 25% of the total assets value. The banker offered the firm a fully amortizing for 5 years at a 4.25% annual rate. The payment should be paid at the end of each year.

What would you recommend to the CFO (Chief Financial Officer) if we suppose that he has concern about the cost of borrowing and that he would choose the financing scheme that minimizes the amount of interest paid on the financing period? Document your computations and findings. (5 Marks)

You want to buy a car on credit for $45,000 at a rate of 5% for 3 years. (3 marks).0

  1. Create an amortization table of the car loan that shows the portion of interest and principal of each payment. What is the total amount of interest that you will have paid at the end of the loan term?
  2. Create a Stacked Column chart that shows both interest and principal on each column.

Calculate the monthly payment assuming that you were able to trade in your old vehicle for $5,000.


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