Question

The revered Rossignol Brothers Investment Banking House ‘goes public’ with an IPO (coincidentally) on the very same day you receive a $12,000 signing bonus as their new employee. As part of a “Rossie” profit-sharing plan, this dynamic company’s new equity issue is available to you (one time only!) at $100 per share. If returns to Rossie equityholders are now expected to average 17.5%(annually-stated, compounding on a weekly basis), how many years will it take for your ‘lump sum’ t=0 investment to provide the 25% down payment on that coveted $97,000 Viper? a. ~4.35 b. ~7.0 c. ~2.95 d. ~11.1 e. ~4.0 4. What is the effective annual rate of return on Rossie stock? a. 4384% b. 17.84% c. 19.08% d. 18.68% e. 20.21% 5. After the period calculated above passes,‘generous’ financing is provided by New York Auto World(found in the same building as Rossie). NYAW’s credit terms are 25% down, with the balance payable in monthly installments at a fixed 24% (annually- stated) interest rate. But loan maturity is in only one year! What would your month-by-month payment to NYAW be equal to?

Answer 1

Required Future value = 25% *97,000 = $24,250

Present Principal = $12,000

Interest @17.5% Compounded weekly = 19.0897% p.a or 0.33654% weekly

So 24,250 = 12000 * (1.0033654)ⁿ

n is in weeks

n = log_1.0033654(24250/12000) = 209.4 weeks

a.)That is 4.03 Years ~4.04 years

b.)19.09%

Using PMT function in financial calculators or Excel or by calculating manually,

We can easily find monthly payment for 2% monthly rate, 12 months and $72,750 (97000 - 24250) as

c.)$6,879

Good luck