QUESTIONS:

1. If debt financing is cheaper, why doesn’t the company avail of 100% debt financing?

Even if debt financing is cheaper, it is no doubt that this still carries many risks. For
instance, a company may find it difficult to obtain the debts and interests would be higher. To
sum it all up, it is still associated with risks which may double up if a company avails 100% debt
financing.

2. At a compound interest a sum of money doubles 15 years. How many years will it become 8
times?

2x = 15 years; 8x = ?; 8x = 23; 3 x 15 years = 45 years

3. Treasury notes are bonds issued by the federal government to cover its expenses. Suppose you
obtain a Php 100,000 T-note with a 4% annual rate, paid semi-annually, with a maturity in 4
years. How much interest will you earn?

P = Php100,000 | r = 2% | t = 8 years

I = Prt = 100,000(0.02)(8) = Php16,000

4. Suppose that we deposit Php200,000 in a bank account offering 3% interest, compounded

monthly. How will our money grow?

P = 200,000 | r = 3/12 = .25% -> Pm = (1+0.0025)Pm-1

Let m represent the number of months:

P1 = (1+0.0025)(200,000) = 200,500
P2 = 201,001.25
P3 = 201,503.75
P4 = 202,007.51
P5 = 202,512.53
P6 = 203,018.81
P7 = 203,526.36
P8 = 204,035.18
P9 = 204,545.27
P10 = 205,056.63
P11 = 205,569.27
P12 = 206,083.19

CASH FLOW STREAM

TIME AMOUNT PV FACTOR OF 6% PRESENT VALUE

Year 1 300 0.943 282.90
Year 2 400 0.890 356
Year 3 500 0.840 420
Net Present Value Php 1,058.90
MR. SOTTO
Option 1 = P8,100,000

Option 2 = 1M x 7.721 = 7,721,000

Option 3 = 1.8M x 4.329 = 7,792,200

Thus, option 1 is the best option.

QUESTIONS

1. Ms. Rodriguez

Php2,000 because the coupon and effective rate are the same.

2. You have a one year Php1,000 bond…

PV of principal (1,000 x .9434) 943.40

PV of interest (50 x .9434) 47.17

Issue Price 990.57

3. Mr. Garcia

PV of principal (1,000 x .9524) 952.40

PV of interest (70 x .9524) 66.67

Issue Price 1,019.07

4. Mac Inc.

1,976,192.
Principal 72

Interest 744,586.97

2,720,779.
Issue Price 69
 Interest Interest Amortizati
Period paid Expense on Balance

11% 2,720,779.69

1 240,000.00 299,285.77 59,285.77 2,780,065.46

2 240,000.00 305,807.20 65,807.20 2,845,872.66

3 240,000.00 313,045.99 73,045.99 2,918,918.65

4 240,000.00 321,081.35 81,081.35 3,000,000.00