FIN622 Corporate Finance Assignment 1 Spring 2011 Idea Solution

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[INDENT] Question # 2: (10 Marks)
Mr. Aamir is considering two different saving plans. The first plan would have his deposit Rs. 850every quarter, and he would receive interest at an 8% annual rate, compounded quarterly. Under the second plan he would deposit Rs.1,700 every six months with a rate of interest of 9%, compounded semiannually. Suppose the initial deposits with both the plans are made now.
Required:
(i) What will be the future value of annuity for the first plan at the end of 6 years?
(ii) What will be the future value of annuity for the second plan at the end of 6 years?
(iii) Which plan would be more feasible keeping the value of saving in consideration?

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P a g e | 1
Financial Ratios based on the balance sheet given for AST Company
A) Current Ratio = Current Assets / Current Liabilities
Current Ratio = 166,689 / 219,186
Current Ratio = 0.760
B) Quick Ratio = Current Assets - Inventories - Prepaid Expense / Current Liabilities
Quick Ratio = 166,689-104,339/219,186
Quick Ratio = 0.284
C) Cash Ratio = Cash Equivalent + Cash/ Current Liabilities
Cast Ratio = 18,288 / 219,186
Cash Ratio = 0.083
D) Debt Ratio = Total Liabilities / Total Assets
Debt Ratio = 409,186 / 748,879
Debt Ratio = 0.546%
E) Debt - Equity Ratio = Total Liabilities / Total Shareholder Equity
Debt - Equity Ratio = 409,186 / 339,693
Debt - Equity ratio = 1.21%
Mr. Aamir is considering two different saving plans. The first plan would have his deposit Rs. 850every
quarter, and he would receive interest at an 8% annual rate, compounded quarterly. Under the second
plan he would deposit Rs.1,700 every six months with a rate of interest of 9%, compounded
semiannually. Suppose the initial deposits with both the plans are made now.
(i) What will be the future value of annuity for the first plan at the end of 6 years?
FV of annuity = CCF x {[(1=i/m)nxm-1]/ (i/m)}
FV of annuity = 850 x {[(1+0.08/4)6x4]-1/(0.08/4)}
FV of annuity = 850 x {[(1+0.02)24-1]/(0.02)}
FV of annuity = 850 x {[(1.02)24-1/(0.02)}
P a g e | 2
FV of annuity = 850 x {[0.608]/(0.02)}
FV of annuity = 850 x 30.4
FV of annuity = 258580.58
(ii) What will be the future value of annuity for the second plan at the end of 6 years?
FV of annuity = CCF x {[(1=i/m)nxm-1]/ (i/m)}
FV of annuity = 1700 x {[(1+0.09/4)6x2-1]/(0.09/2)}
FV of annuity = 1700 x {[(1+0.045)12-1]/(0.045)}
FV of annuity = 1700 x {[(1.045)12-1/(0.045)}
FV of annuity = 1700 x {[0.695881432]/(0.045)}
FV of annuity = 1700 x 15.46403184
FV of annuity = 26288.85
(iii) Which plan would be more feasible keeping the value of saving in consideration?
Second plan would be more feasible keeping the values of saving in consideration