business finance subject

Major Assignment

CMF201 – Business Finance

Semester 2, 2014

Maximum Marks: 25

Q.1

Summit Systems has an equity cost of capital of 11

%, will pay a dividend of $1.50 in one year

& its dividends had been expected to grow by 6% per

year. You read in the paper that Summit has

revised its growth prospects & now expects its divi

dends to grow at a rate of 3% per year for ever.

Required:

a)

What is the drop in the value of a Summit System’s

share based on this information?

b)

If you tried to sell your Summit Systems shares aft

er reading the news, what price would you

be likely to get? Why?

Marks: 10

Q.2

The mortgage on your house is five years old. It r

equired monthly payments of $1402, had

an original term of 30 years & had an interest rate

of 10%. In the intervening five years, interest

rates have fallen & so you have decided to refinanc

e- that is, you will roll over the outstanding

balance into a new mortgage. The new mortgage has a

30-year term, requires monthly payments &

and has an interest rate of 6.625%

Required:

a)

What monthly repayments will be required with the n

ew loan?

b)

If you still want to pay off the mortgage in 25 yea

rs, what monthly payments should you

make after you refinance?

Marks : 15