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# ADMS 3541 Winter 2013 Assignment 2.doc

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School
Department
Administrative Studies
Course
ADMS 3541
Professor
Chris Robinson
Semester
Winter

Description
ADMS 3541 Winter 2013-03-19 Assignment 2 Due Start of Class Week 11 Question 1 (20 marks, 4 marks each part) The following parts of the question are unrelated: (a)Fred Heath wants to borrow \$500 for 20 days from the Friendly Payday Loan Inc. The company charges a flat rate of \$10 per loan, plus 6% on the principal, plus EAR of 50% on the first \$300 borrowed and EAR of 59% on the next \$500. Calculate (i) the cost of the loan for Fred, and (ii) the EAR of the loan. (b)Chris Poor just inherited \$50,000. He wants to have \$1 million in ten years. (i)Calculate the required rate of return to achieve his goal. (ii) If he can borrow at 5% interest to invest in a mutual fund that has an expected rate of return of 11%, calculate the target debt-to- equity ratio that will make it possible to achieve his goal. (c)Jill bought a house 15 years ago for \$300,000, and she bought a home insurance policy to provide coverage for \$250,000 of replacement value. There is an inflation protection provision in the policy so that the amount of insurance coverage automatically increases every year at the rate of inflation. The current replacement value of the house is 440,000. The average rate of inflation has been 2.5% per year. The deductible is \$1,000. Recently, the home suffered a fire damage of \$120,000. How much will the insurance company pay her? (d)Bobby Rich plans to buy a 20-year, 5% coupon Canada government bond for \$9,600. He plans to hold the bond for ten year, at the end of which he expects to sell it for \$9,900. His marginal tax rate on interest income is 45% and marginal tax rate on realized capital gain is 25%. The face value of the bond is \$10,000. What is the after- tax EAR? (e)Lesley Young is a very loyal customer of the local bank, where she keeps all her investments in various accounts, as follows:- Chequing account \$3,000 Savings account 7,000 Term Deposits 100,000 RRSP (invested in the bank’s GIC’s) 120,000 TFSA (in the bank’s stock mutual fund) 15,000 Joint savings account with husband 130,000 2 Joint savings account with daughter 10,000 After vacationing in Asia for a few weeks, she returned to find out that the bank was bankrupt. The bank is a CDIC member. To what extent will her investments be covered by the CDIC? Question 2 (25 marks) Gordon and Morgan Ho-Ballantyne have found their dream house in a small town in Northern Ontario. The owner wants to sell the house privately on order to save commission. He has agreed to sell for \$260,000, but Gordon thinks it is too high. He wants to estimate the value of the home himself, by the Cost Approach. With the help of a friend who lives there, Gordon has collected the following data/information:- - Lot size = 50’x100’ - Size of the house = 1,850 sq. ft. - Replacement cost of some damaged broadloom = \$2,000 - Two windows and one storm door must be replaced, total costs = \$3,500 - Interior walls need to be painted, at a cost of \$1,200 - Cost of land in the neighbourhood = \$300 per front foot - Construction cost of the house = \$140 per sq. ft. The friend has also found three comparable sales in that neighbourhood, with the following information:- Features Subject Property Sale 1 Sale 2 Sale 3 Selling Price N/A 260,000 240,000 270,000 Time of Sale recent 3 months recent Lot Size 50x100 50x95 45x100 55x110 House Size 1,850 sf 2,000sf 2,100sf 1,900sf Air Conditioning no yes yes yes Fire Place yes yes no yes Finished Rec room no no yes yes Additional information: 1. House prices increased by 2% per month starting 3 months ago 2. Each foot of frontage on the lot costs \$300 3. Each 100 square foot of house size will add \$1,000 to value 4. Air conditioning costs \$1,000 3 5. Fire place costs \$5,000 6. Finished rec room costs \$10,000 There is no other observable depreciation. Required: (a)What is the value of the house, using the Cost Approach? (6 marks) (b)What is the value of the house, using the Direct Market Comparison Approach? (8 marks) (c)Gordon and Morgan have only \$50,000. Their friend reminds them that they need at least \$5,000 for legal and closing costs. To help them out, the vendor is willing to take back a two-year mortgage at 6% interest and 20 years amortization, conditional on a minimum selling price of \$260,000. (i) What is the amount of the mortgage? (2 mark) (ii) What is the monthly payment? (2 mark) (iii) What is the outstanding balance after two years? (3 marks) (iv) What is the amount of interest
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