PATRICK JOHN G.

SANQUI
AUGUST 6, 2022 3:00PM
21510085

Final Examination
Investment Management

Concept Application: For questions 1, 11, and 12 answer correctly and to the best of your
knowledge. Questions 2-10, compute for the following problems with solutions and provide brief
explanation (2-3 sentences) on how you arrive to your answers.

1. You have P10,000 to Invest. You do not want to take any risk, so you will put the funds in a
savings account at the local bank. Of the following choices, which one will produce the largest
sum at the end of 22 years? An account that compounds interest.
a. Annually
b. Daily
c. Quarterly
d. Monthly

The account that will produce the largest sum at the end of 22 years is letter B (Daily).

2. The company is setting aside funds to acquire a property for its new warehouse. The company
needs P74,735 to make the down payment. The company deposits P5000/month in the fund
account which pays 1% per month. As the financial manager, you have been tasked to determine
how long it will take to accumulate enough funds to acquire the property.

74,735
=14.79 months∨15 months
(5,000∗1 %)

I did not use the compounding interest since the problem is silent; hence I multiplied the monthly
deposit of 5000 to its interest of 1% then use it to divide the needed fund of 74,735. As a result, it
will take 14.79 months or 15 months to accumulate the needed fund.

3. An investment will pay P500 in three years, P700 in five years, and P1,000 in 9 years. If the
opportunity rate is 6%, what is the present value of the investment?

1
PV (Investment 1)=500 3
(1.06)
1
PV (Investment 1)=500
1.19

PV ( Investment 1 )=500 ( .84 )

PV ( Investment 1)=420.17

1
PV (Investment 2)=700 5
(1.06)
PATRICK JOHN G. SANQUI
AUGUST 6, 2022 3:00PM
21510085

1
PV (Investment 2)=700
1.34

PV ( Investment 2 )=700 ( .75 )

PV (Investment 2)=525

1
PV ( Investment 3)=1,000 9
(1.06)
1
PV ( Investment 3)=1,000
1.69

PV ( Investment 3 ) =1,000 ( .59 )

PV (Investment 3)=590

PV of Investment = 420.17 + 525 + 590

= 1,535.17

Compute for the present value of each investment then get the sum of the three investments.

4. Tom Co. is considering acquiring ordinary shares of Nico Corporation. Tom anticipates that
Nico will pay dividends of P5/share next year and P7.50/share in the following year. Tom also
believes that it can sell the ordinary shares two years from now for P30/share. If Tom requires a
14% rate of return on this investment, what is the maximum price that Tom would be willing to
pay for a share of Nico’s ordinary share?

Future Va lue ( FV )−Current Value(CV )

Rate of Return=
Current Value(CV )
30−CV
14 %=
CV

.14 CV =30−CV
.14 CV +CV =30
1.14 CV =30
1.14
CV =26.31

5. If your opportunity cost (discount rate) is 10%, how much are you willing to pay for an
investment promising P750/year for the first four years and P450 for the next six years?

Total Value of Investment = (750*4)+(450*6)

=1,500+2,700
=4,200
PATRICK JOHN G. SANQUI
AUGUST 6, 2022 3:00PM
21510085

1
PV =4,200 10
(1.10)
1
PV =4,200
2.59
PV =4,200∗.38
PV =1,596

First, get the total value of investment by getting the product of first four years payment and the
product of the next six years. Then, get the present value of the total value of investment and
arrive at 1,596.

6. If the company has P450,000 today and it increases to P6,185,000 at the end of 20
years, what is the rate of return for this investment?

Future Va lue−Current Value

Rate of Return=
Current Value
6,185,000−450,000
Rate of Return=
450,000
5,735,000
Rate of Return=
450,000
Rate of Return=12.74 %

The difference of the future and current value is divided to the current value to arrive at the rate
of return of 12.74%.

7. Suppose you are 40 years old and plans to retire in exactly 20 years. Twenty one years
from now you will need to withdraw P50,000 per year from your retirement fund to add
to your SSS pension. Assume you are to live for 85 years, how much money should you
place in the retirement fund each year for the next 20 years to reach your retirement
goal if you can earn 12% interest per year from the fund?

Given:
Current age: 40
Retirment age: 60 (40 + 20 years)

First, get the value of the retirement goal:

Retirement goal = (85-60) * 50,000

= (25) * 50,000
= 1,250,000

Then get the Future Value (FV) factor:

FV Factor = 1.1220
= 9.65
PATRICK JOHN G. SANQUI
AUGUST 6, 2022 3:00PM
21510085

Then divide the retirement goal by the FV factor

Annual placement = 1,250,000 / 9.65

= 129,533

8. Suppose you have P1,000 to invest for a period of two years. Currently, default risk-free
one-year securities (such as those issued by the Bureau of Treasury) are paying a 12 percent
interest rate per year, on the last day of each of the two years over your investment horizon. If
you earn simple annual interest on this investment, or you do not reinvest the annual (12 percent)
interest earned, the value of your investment at the end of the first year is 1,120:
*Value in 1 year (simple interest) = Principal + Interest (year 1)

Value in 1 year (simple interest) = 1,000 + (1,000*.12)

= 1,000 + 120
= 1,120

With simple interest, the 120 in interest earned in year 1 is not reinvested in year 2. Rather, you
take the 120 in interest out of the investment account and hold it until the end of year 2. Only the
original P1,000 investment is carried forward and earns interest in year two. Thus, the value at
the end of the two-year investment horizon is 1,240:
*Value in 2 years (simple interest) = Principal + Interest (year 1) + Interest (year 2)

Value in 2 years (simple interest) = 1,000 + 120 + 120

= 1,240

9. If instead the annual interest earned is reinvested immediately after it is received at 12 percent
(i.e. interest is compounded), the value of the investment at the end of the first year is: *Value in
1 year (compounded interest) = Principal + Interest (year I)

Value in 1 year (compounded interest) = 1,000 + (1,000*.12)

= 1,000 + 120
= 1,120

10. Notice that after the first year of the two-year investment horizon, you have 1,120 whether
the investment earns simple or compounded interest. With compounded interest, however the
120 in interest earned in year 1 is reinvested in year 2. Thus, the whole 1,120 is carried forward
and earns interest in year 2. In this case, the value of the investment at the end of the two-year
investment horizon is:*Value in 2 years (compounded interest) = Principal + Interest (year I) +
Interest on original principal (year 2) + compounded interest or interest on interest received in
year 1)

Value in 2 years (compounded interest) = 1,000 * 1.12 * 1.12

= 1,254.4
PATRICK JOHN G. SANQUI
AUGUST 6, 2022 3:00PM
21510085

11. How would economic transactions between suppliers of funds (e.g. Households) and users of
funds (e.g. corporations) occur in a world without Financial Institutions?

I believe that in a world where there is no Financial Institutions, it will be difficult both for the
household and corporations to deal with the needed economic transactions every day. Supplier of
funds will have to approach and directly deal or transact with the corporations when they want to
invest which is a costly and very time consuming. On the corporation’s perspective, when a
corporation needs to borrow money, it will be a long process to transact one-by-one each lender
in order to satisfy how much they need. Unlike with the current situation, a corporation can
easily raise and borrow funds with the help of financial institutions.

12. How do financial institutions help individuals to diversify their portfolio risks? Which
financial institution is best able to achieve this goal?

Financial Institutions helps individuals by risk sharing. It gives many options to the investor.
Investors are able to balance the rate of return they want to receive depending on their risk
appetite. Each financial institution provides a wider array of investments that steers away the
portfolio risk of an investor. The different level of risks associated with the investments will
compensate for the drastic changes in the world of trading. A mutual fund invested in diverse
group of stocks and fixed income securities would be the best financial institution that can
achieve this goal.