10-24-2011, 08:00 PM
Mr. Naeem is working as a finance manager at Superior Textile Mills Limited,
after completing his MBA (Finance) from Virtual University of Pakistan.
Recently, he got married and shifted his family in a rented house near the
office. Paying monthly rent is a painful experience and in this way he cannot
save much for his future needs. Therefore, he is planning to purchase his own
house for avoiding monthly rental expense. For this purpose he is expecting to
sell share in his native house for Rs. 1,500,000/- which is not a sufficient
amount to buy house in a big city. After considering various areas in
Faisalabad city, he chose Model Town for his desired future residency. Based
on the house prices data in that area, he learned that an average two bed room
house currently costs Rs.2,400,000/-. So he has to set aside some funds for the
next eight years so that he may be able to purchase his own house after having
sufficient funds.
As Mr. Naeem is planning to purchase the house after eight years, so it is
quite clear that the prices of the houses will not remain the same overtime. In
order to estimate the rate at which the house price will increase he considered
the historical price appreciation data in that area and resulted that house prices
appreciated at the rate of 4% per annum.
Mr. Naeem is planning to invest the funds that will be devoted for purchasing
the house, in a portfolio of investment. He feels that this investment portfolio
containing stocks, bonds and govt. securities will give him the rate of return of
9% p.a.
Required: (4 marks each)
Q#1: Considering the fact that the house prices will grow at the rate of
4% per annum, what will be the future house price of the house Mr.
Naeem intends to buy after 8 years.
Q#2: Based on the answer from Q#1(FV), how much amount Mr.
Naeem should invest today (which earns 9% rate of return) so that he
may be able to purchase his house after 8 years.
Q#3: Assume the house prices appreciate at the rate of 6% per annum
instead of 4% then how much he should invest today in order to be able
to purchase the house after 8 years.
Q#4: If Mr. Naeem decides to deposit in less risky certificate of deposits
earning only 5% p.a. then how much funds he has to deposit in his bank
to be able to purchase the house after 8 years.
Q#5: If Mr. Naeem decides to invest in more risky growth stocks
earning 12% rate of return then how much funds he has to invest to
purchase his house after eight years.
solution will be uploaded soon
after completing his MBA (Finance) from Virtual University of Pakistan.
Recently, he got married and shifted his family in a rented house near the
office. Paying monthly rent is a painful experience and in this way he cannot
save much for his future needs. Therefore, he is planning to purchase his own
house for avoiding monthly rental expense. For this purpose he is expecting to
sell share in his native house for Rs. 1,500,000/- which is not a sufficient
amount to buy house in a big city. After considering various areas in
Faisalabad city, he chose Model Town for his desired future residency. Based
on the house prices data in that area, he learned that an average two bed room
house currently costs Rs.2,400,000/-. So he has to set aside some funds for the
next eight years so that he may be able to purchase his own house after having
sufficient funds.
As Mr. Naeem is planning to purchase the house after eight years, so it is
quite clear that the prices of the houses will not remain the same overtime. In
order to estimate the rate at which the house price will increase he considered
the historical price appreciation data in that area and resulted that house prices
appreciated at the rate of 4% per annum.
Mr. Naeem is planning to invest the funds that will be devoted for purchasing
the house, in a portfolio of investment. He feels that this investment portfolio
containing stocks, bonds and govt. securities will give him the rate of return of
9% p.a.
Required: (4 marks each)
Q#1: Considering the fact that the house prices will grow at the rate of
4% per annum, what will be the future house price of the house Mr.
Naeem intends to buy after 8 years.
Q#2: Based on the answer from Q#1(FV), how much amount Mr.
Naeem should invest today (which earns 9% rate of return) so that he
may be able to purchase his house after 8 years.
Q#3: Assume the house prices appreciate at the rate of 6% per annum
instead of 4% then how much he should invest today in order to be able
to purchase the house after 8 years.
Q#4: If Mr. Naeem decides to deposit in less risky certificate of deposits
earning only 5% p.a. then how much funds he has to deposit in his bank
to be able to purchase the house after 8 years.
Q#5: If Mr. Naeem decides to invest in more risky growth stocks
earning 12% rate of return then how much funds he has to invest to
purchase his house after eight years.
solution will be uploaded soon
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