FINACIAL MANAGEMENT

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THE COUNCIL OF COMMUNITY COLLEGES OF JAMAICA

BACHELOR OF SCIENCE EXAMINATION

SEMESTER I – 2020 DECEMBER

PROGRAMME: BUSINESS ADMINISTRATION

COURSE NAME: FINANCIAL MANAGEMENT I

CODE :

ACCT3402

YEAR GROUP: THREE

DATE ADMINISTERED: THURSDAY, 2020 DECEMBER 16

DURATION: 72 HOURS

ASSESSMENT TYPE: FINAL

This Assessment has 5 pages

INSTRUCTIONS:

1. ANSWER ALL QUESTIONS FROM

SECTION A

2. SECTION B CONSISTS OF THREE (3) QUESTIONS. ANSWER ANY TWO (2)

3. ATTACH THE SIGNED CCCJ ASSIGNMENT COVERSHEET TO THE FRONT

OF YOUR ASSIGNMENT BEFORE

SUBMITTING

4. ATTACH THE TURNITIN RECEIPT TO YOUR ASSIGNMENT BEFORE

SUBMITTING

NOTE: YOUR ASSIGNMENT WILL NOT BE ACCEPTED IF 3. AND 4. ABOVE IS

NOT ATTACHED

YOUR COMPLETED WORK MUST BE SUBMITTED WITHIN THE SPECIFIED

DURATION OUTLINED ABOVE TO PREVENT PENALTIES

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SECTION A

Instruction: Complete ALL questions from this section.

Joanna is a civil servant who recently got a job promotion and decided to purchase a car through

the bank valued at $2 million. She currently earns a monthly salary of $250,000 and wants to

keep her monthly payment at below 25% of her salary due to budgetary constraints. She made

inquiries with two banks who gave her the following information over the phone.

CIBC offered her 90% financing with three years to repay at 8% compounded monthly.

Scotiabank offered 100% financing based on her civil service membership with three years to

repay at 12% compounded monthly. Payments would become due at the end of each month.

Joana sought your assistance as a Finance student to help her understand the terms of the offer so

that she can make her decision.

A. Prepare the amortization schedules for both loans. (12 marks)

B. Which company would be best for Joanna to accept the loan from based on her
constraints and why? (2 marks)

Three months into the loan Joanna accepted a line of credit (like a credit card) with a $650,000

limit from her bank. There is no interest payment if the line of credit is not used. However, the

bank charges 30% interest compounded monthly on any outstanding balance.

The impact of covid-19 caused Joanna to lose her income temporarily for two months. She was

unable to make her monthly payments. Joanna decided to borrow from her line of credit so that

she does not default on her loan. A month later she is back at work and is hoping to settle the

outstanding sum.

C. Advise her what would be the Effective Rate of Interest (EAR) on the credit line?
(2 marks)

D. Recommend to Joanna the amount outstanding for the two months, including the interest
for the credit line if she had gotten the loan from CIBC. (4 marks)

(Total 20 marks)

END OF SECTION A

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SECTION B

Instruction: Complete any TWO (2) questions from this section.

Question 1

Ken, the Director of Finance in a prominent hotel has been planning a $30,000 extravagant

vacation this year to mark his 10th year of wedded anniversary. He has been investing $1,000

into an investment fund at the end of each month at a rate of 12% for the past two years.

The impact of covid-19 derailed his plans somewhat as he was made redundant from his job after

being with the company for 35 years. His severance package was a hefty sum but the uncertainty

surrounding the pace of economic recovery made Ken thought wisely about his future financial

stabililty.

Ken needed a new car but despite his current access to cash he decides to buy the car in five

years time, opting to make an investment now at 12 percent with the hope of amassing $250,000

then.

He is also of the opinion that given the rampage of covid-19 and its potential medium-to-long-

term effect, an investment that provides regular cashflow would help in the interim. He

purchased an investment at 6% that will give him $1,000 at each of the next three years, $2,000

at the end of year 4, $3,000 at the end of year 5 and $5,000 at the end of year 6.

As his financial guru buddy, he asked you to help him assess his financial position guided by the

questions or statement below.

A. Despite Ken’s redundancy, would he have succeeded with his vacation investment?
(4 marks)

B. How much should Ken have invested monthly to have realized his goal? (3 marks)

C. What would be a reasonable sum for Ken to invest now so that he can reach his goal of
buying the car? (3 marks)

D. What is the total cashflow of the investment and how much is it worth today? (10 marks)

(Total 20 marks)

(To be prorated to 30 marks)

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Question 2

Levi Company Ltd has been experiencing a period of rapid growth. Dividends are expected to

grow at a rate of 10% during the next 2 years, at 8% in the third year and at a constant rate of 6%

thereafter. Their last dividend was $2.50 and the required rate on the company’s stock is 12%.

The stock currently trades for $49.75 per share on the stock exchange.

In January 2020, the company’s investment grade bond of $20 million at $1,000 par, had 25

years to mature, with a semiannual coupon rate of 6% and a yield to maturity of 8%.

The company has been hit hard by the impact of covid-19. General interest rate have declined

from governments’ monetary response to economic stability. The company also suffered a

downgrade from Moody’s Bond Rating Agency to a Baa3. Bonds with similar risk, return a 12%

yield to maturity, given the increased level of risk.

Prior to covid-19 these options appeared to be very attractive investment options for your client

but now he wants to get an update on the performance of his portfolio. As his investment

advisor, assess your clients investment portfolio to ascertian the potential of realizing a loss.

A. Determine the current market value of the company’s stock. (10 marks)

B. How much is the change in the value of the bond after the downgrade? (6 marks)

C. How would you summarize your client’s current investments? (4 marks)

(Total 20 marks)
(To be prorated to 30 marks)

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Question 3

Amidst several project postponements due to the financial fallout associated with covid-19, the

government must proceed with critical infrastructural development especially in the areas of

health and education. Consistent with procurement guidelines, the Project Management Team

has solicited quotations on two mutually exclusive projects in Health and Education.

The project at the Health Ministry is estimated to cost $24.5 million and The Education Project’s

quotation is valued at $29.25 million. The government predicts that the nominal cost of capital

for health is 7 percent and 9 percent for education.

The cashflows associated with both projects over a four-year period is as follows:

Year Health (in millions) Education (in millions)

1 7 10.5

2 5.5 7.75

3 8.75 10.25

4 6.5 12

Provide the team with the best project to implement based on the following criteria:

A. Payback period (5 marks)

B. Net Present Value (10 marks)

C. Profitability Index (3 marks)

D. Recommend the most viable project for implementation (2 marks)

(Total 20 marks)
(To be prorated to 30 marks)

END OF ASSESSMENT