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Tutorial Questions__Introduction and Time Value of Money

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Tutorial Questions__Introduction and Time Value of Money

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didephonce
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THE INSTITUTE OF FINANCE MANAGEMENT

Academic year 2022/2023


Bacc2, BBF2, BTX2, BEF 2, BAIT 2 & BSP2
Module Name: Corporate Finance
Module Code: AFU 07303, BFU 07315, SPU 07116, ACU 07316

INTRODUCTION AND TIME VALUE OF MONEY


TUTORIAL QUESTIONS
INTRODUCTION
Question One
(a) Describe financial management, its scope and role(s) in corporate management.
(b) Define the financial manager and describe the roles he/she plays in corporate decisions.
(c) The agency problem arises when the directors (financial managers), as agents, have different aims
and objectives from the shareholders (owners), as principals; there is said to be a conflict of interests
(objectives).
Clearly describe any six (06) ways in which directors (financial managers) seek to further their own
interests rather than shareholder (owners) wealth maximization

Question Two
(a) Discuss how agency theory can be used to analyse the relationship between various stakeholders in
a corporation and
(b) Describe any seven (07) ways on how the resulting agency problems may be mitigated
(c) Describe how corporate governance rules can help to solve the agency problem

Question Three
(a) Describe three forms of business organizations
(b) In each of three forms of the business organization described above; describe any seven (07)
advantages and disadvantages of operating under one forms of the business organization over the
other(s)
(c) Clearly explain any six (06) difference between Public Company from a Private Company.
(d) It is said that remuneration schemes linked to performance encourage managers to focus on the
achievement of corporate objectives as opposed to their own personal objectives. Explain the
operations and limitations of such schemes as performance related pay.

Question Four
(a) Discuss the reasons as to why the separation between managerial and ownership affairs in large
companies is necessary.
(b) Differentiate between Shareholder’s wealth maximization and corporate wealth maximization and
discuss which concept is superior over the other

TIME VALUE OF MONEY


Question One
(a) Explain the concept of time value of money and its role in corporate finance.
(b) Discuss any four (4) the practical applications of the Time Value of Money concept?
(c) With a support of relevant calculations differentiate the followings terms as used in corporate
finance,
(i) Simple Interest and Compound Interest
(ii) Compounding and Discounting
(iii)Ordinary Annuity and Annuity Due

Question Two
Momentum Plc have just received a windfall from foreign investment they made last year in a USA
company specialized in hedge funds. They will be paid $30,000 at the end of this year, $60,000 at the
end of the following year, and $90,000 at the end of the year after that (three years from today). The
interest rate is 10.5% per year.
(a) What is the present value of your windfall?
(b) What is the future value of your windfall in three years (on the date of the last payment)?

Question Three
Sunak has just graduated his first degree from Institute of Finance Management (IFM) and has just
secured very lucrative employment contract with one of the top banks in the country. He needs to start
paying back his student loans to the Higher Education Students Loans Board (HESLB). He had borrowed
a total of TZS. 14,350,000. He plans to pay back the loan over 10 years at an interest rate of 9.4% interest,
compounded monthly. How much will his monthly payments be?

Question Four
Following recent war crisis in Europe and upcoming winter season a firm has just opened a new coal
mine in Kiwira-Mbeya, Tanzania. The price of coal is very volatile and the projected cashflows over the
next five years are: TZS. 980,000,000, TZS. 885,000,000, TZS. 710,000,000, TZS. 690,000,000 and
TZS. 650,000,000 respectively. After that cashflows will be a constant TZS. 450,000,000 per year for
next 20 years at which time the mine closes. If 7% is the appropriate discount rate for the first five years
and is 8% after that, what is the present value of the mine?

Question Five
Laser & Ink Jet Printers Plc plan to get a TZS 150,000,000 loan from a printing equipment dealer at 21% annual
interest with annual payments that will be paid off in over 8 years. Prepare loan amortization table

Question Six
You need to have TZS 50,000,000 at the end of 10 years. To accumulate this sum, you have decided to
save a certain amount at the end of each of the next 10 years and deposit it in the bank. The bank pays 8
percent interest compounded annually for long-term deposits. How much will you have to save each
year (to the nearest TZS)?

Question Seven

Mayele is 63 years old and recently retired. He wishes to provide retirement income for himself and is
considering an annuity contract with the ABC Life Insurance Company. Such a contract pays him an
equal-Shilling amount each year that he lives. For this cash-flow stream, he must put up a specific
amount of money at the beginning. According to actuary tables, his life expectancy is 15 years, and that
is the duration on which the insurance company bases its calculations regardless of how long he actually
lives. If ABC Life uses a compound annual interest rate of 5 percent in its calculations, what must Mayele
pay at the outset for an annuity to provide him with TZS 10,000,000 per year? (Assume that the expected
annual payments are at the end of each of the 15 years.)

Question Eight

Kurwa has decided to start saving for his retirement. Beginning on his twenty-first birthday, Kurwa
plans to invest TZS 2,000,000 each birthday into a savings investment earning a 7 percent compound
annual rate of interest. He will continue this savings program for a total of 10 years and then stop making
payments. But his savings will continue to compound at 7 percent for 35 more years, until Kurwa retires
at age 65. Dotto also plans to invest TZS 2,000,000 a year, on each birthday, at 7 percent, and will do so
for a total of 35 years. However, she will not begin her contributions until her thirty-first birthday. How
much will Kulwa’s and Dotto’s savings programs be worth at the retirement age of 65? Who is better
off financially at retirement, and by how much?

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