Problems

Question 1

Calculate the value in five years of $1,000 deposited in a savings account today if the account pays interest at a rate of 8 percent per year, compounded annually

Answer 1

1000(FV) = 1469.33

Question 2

Calculate the value in five years of $1,000 deposited in a savings account today if the account pays interest at a rate of 8 percent per year, compounded quarterly

Answer 2

interest per compound = .08/4 = .02
periods compounded = 20
1000(FV_2%,20) = 1485.95

Question 3

A business is considering purchasing a machine that is projected to yield cash savings of $1,000 per year over a 10-year period. Using a 12 percent discount rate, calculate the present value of the savings. (Assume that the cash savings
occur at the end of each year.)

Answer 3

1000(PVOA) = 5,650.22

Question 4

How much will $1,000 deposited in a savings account earning a compound annual interest rate of 6 percent be worth at the end of the following number of years?

a. 3 years
b. 5 years
c. 10 years

Answer 4

a. 1000(FV) = 1,191.02
b. 1000(FV) = 1,338.23
c. 1000(FV) = 1,790.85

Question 5

If you require a 9 percent return on your investments, which would you prefer?

a. $5,000 today
b. $15,000 five years from today
c. $1,000 per year for 15 years

Answer 5

a: PV of 5000 today is 5000
b: PV of a lump sum- $15000(.64993) = 9748.95
c: PV of an ordinary annuity - $1000(8.06069) = 8060.69

option 2b has largest PV so this is best option

Question 6

The Lancer Leasing Company has agreed to lease a hydraulic trencher to the Chavez Excavation Company for $20,000 a year over the next 8 years. Lease payments are to be made at the beginning of each year. Assuming that Lancer invests these payments at an annual rate of 9 percent, how much will it have accumulated by the end of the 8th year?

Answer 6

20,000(FVAD) = 240,420.73

Question 7

Determine the present value, discounted at 6 percent per year of $50,000 to be received 5 years from today if the interest rate is compounded Semiannually

Answer 7

periods = 10
discounted compound per year = .06/2 = .03
50,000(PV3%, 10) = 37204
(.74409)

Question 8

Interest Target Capital Structure
Debt 4% 30%
Equity 10% 50%
P.S. 6% 20%

Calculate WACC

Answer 8

.30.04 + .50.10 + .20*.06 = WACC

Question 9

You are considering the purchase of a 20-year, 10% coupon bond. The bond pays coupons annually. The required rate of return for similar bonds is 8%. What price are you willing to pay for the bond?

Answer 9

Required rate of return =.08
Principle payment
Interest AKA Coupon payment = 1000*.1 = 100
P_o = 100*PVIFA_8%,20 + 1000*PVA
=(100*9.81815)+(1000*.21455)=1196.365

Question 10

You are considering the purchase of a 20-year, 10% coupon bond. The bond pays coupons semi-annually. The required rate of return is 8%. What price are you willing to pay for the bond?

Answer 10

(5019.79277)+(1000.20829)=1197.9285

4%, 40 periods

Question 11

Company A issues zero coupon bonds which will mature in 20 years. The required rate of return is 8%. What is the value of the bond today?

Answer 11

(1000*.21455)=214.55

Question 12

Suppose that an individual would like to have 5000 saved within 5 years. The individual plans on making equal deposits per year starting today into an account that has an effective annual rate of 3%. how much should be deposited?

Answer 12

5000/(FVAD)=914.41

5.468

Question 13

Suppose an individual would like to calculate their future balance after 5 years with today being the first deposit. The amount deposited per year is 1000 and the account has an effective rate of 3% per year.

Answer 13

1000(FVAD)=5468.4

5.468

Question 14

Johnson who is currently attending college has a rich uncle who has decided to put aside some money each year for truck so when he graduates he’ll be able to pay off his college loans. Chucks uncle places 5000 into an investment account earning 6% at the beginning of each year. When Chuck graduates from college in 4 years, how much money will he receive from his uncle?

Answer 14

5000(FVAD)=23185.5

4.6371

Question 15

If you invest $1000 at the end of every year for 5 years and received a return of 7%, how much is this worth in today’s dollars?

Answer 15

1000*PVA=4100.2

Question 16

You figure that you would need 20,000 dollars for the down payment on the home you plan to purchase in 4 years how much must you invest in this account today if that account is paying 9 percent per annum to meet this goal?

Answer 16

20000*PVIF=14168.6

.70843

Question 17

If you invest 1000 dollars at the beginning of every year for 5 years and receive a return of 7%, how much is this worth in today’s dollars?

Answer 17

1000*PVAD=4387.21

4.38721

Question 18

An investor is considering the purchase of ABC corp. Bonds. The investor plans on holding the bond until maturity which means she will earn $60 per annum for the next 7 years and received per principle of 1000 dollars at the end of the 7th year. Would she be willing to pay $900 for this bond? Why?

Answer 18

60(PVOA6%,7)+1000(PVIF6%,7)=1000.044

5.58238 .66506

Question 19

If the S&P had a return of 7% and your firm had a beta of 1.5 then we might expect that firm to earn ___

Answer 19

7% x 1.5=10.5%