Question

Dimension 1

Question #1 You would like to buy a home. Unfortunately, you have no cash to pay the whole price of the house. So, you are taking mortgage to finance the purchase. Now you are shopping for the best mortgage.

A. What financial model you will use in order to estimate the mortgage you can take?

B. List three necessary values you have to know in order to compute the value of the mortgage.

C. What assumptions you are making when you are computing the mortgage payments?

Dimension 2

Question #2: A. What is P/E ratio and how it is used?

2. List 2 examples of Liquidity ratio

Dimension 3:

Question # 3: A. Briefly explain the meaning of NPV and IRR.
B. Under what two conditions would make NPV and IRR similar?

Dimension 4

Question #4

According to CAPM, the expected return on a risky asset depends on three components. Describe each component, and explain its role in determining expected return of an investment in the capital markets.

Answer 1

Ans 2) P/E Ratio

Price Earning Ratio is the ratio of the company's current share price to its earning per share. It is used to evaluate the market value of the shares. It is used for the measure of the growth potential of an investment, It is calculated as Market price per share/Earning per share

Examples of Liquidity ratio

Current ratio= Current assets/ Current Liabilities

Quick Ratio= Current assets-Inventories-/Current Liabilities

Ans 3) NPV (Net present value)

It is a technique of capital budgeting. It considers the Time value of money. It uses a discounting factor to bring Future cash flows from investment to the current value for evaluation with the current outflow of cash. It is the most common technique of Capital Budgeting. It is calculated as the present value of future cash inflows- Initial Investment. Negative NPV indicates that the project should not be selected.

IRR( Internal Rate of Return)

Definition-Internal Rate of return for an investment proposal is the discount rate that equates the present value of the expected Net cash flows with the initial cash outflows.

This IRR is then compared to a criterion rate of return that can be the organization's desired rate of return for evaluating the capital investment.

In simple terms, IRR is the method of capital budgeting in which also present value of the cash inflows recalculated and compared to cash outflows but unlike NPV it does not use the desired rate of return but estimates the discount rate that makes the present value of subsequent net cash flows equal to the initial investment.

Ans B) NPV and IRR will give the same result if the following two conditions are present

1) Independent project- The projects are mutually exclusive

2) If there is only one cash inflow in the year 0

Ans 4) Components of Risk Under CAPM

1) Interest rate changes

2) Inflation

3) Political changes

Ans 1)

a) Financial Models for estimating mortgage-Expanded open Model in this Banks issue mortgage loan to the client

b) The amount that has to be mortgaged Rate of interest and the period of the mortgage are the three most important values should be known in order to compute the value of the mortgage payments

c)assumptions While computing Mortgage  

a) Payments are divided equally during the life of the mortgage loan

b) There is no uncertainty in the payment of a loan.

c)Interest is compounded annually