What is the relationship between discounting and compounding

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Reference no: EM13974192

Case Study: 1

The final stage in the interview process for an assistant financial analyst at Bencorp involves a test, of your understanding of basic financial concepts. Whether you are offered a position at Bencrop will depend on the accuracy of your response.

To: Application for the position of financial Analyst
From: Mr. John smith, CEO Bencorp
Re: A test of your understanding of basic financial concepts

Please respond to the following questions:

a) What is the appropriate goal for the firm and why?

b) What does the risk-return trade-off meon?

c) Why are we interested in cash flows rather than accounting profits in determining the value of an asset?

d) What is an efficient market and what are the implications of efficient market for us?

e) What is the cause of the agency problem and how do we try to solve it?

f) What do ethics and ethical behaviour have to do with finance?

Case Study 2

Sharon Taylor, 27 just received a promotion at work that increased her annual salary to $37,000. She is eligible to participate in her employer's 401 (k) retirement plan to which the employer matches, dollar for dollar, workers' contributions up to 5 percent of salary.

However, Sharon wants to buy a new $25000 car in three years, and she wants to have enough money to make a $7000 down payment on the car and finance the balance.

Fortunately, she expects a sizable bonus this year that she hopes will cover that down payment in three years.

A wedding is also in her plans. Sharon and her boyfriend, Steve, have set a wedding date two yesrs in the future, after he finishes medical school. In addition, sharan and Steve want to buy a home of their own as soon as possible. This might be possible because at age 30, Sharon will be eligible to access a $50,000 trust fund left to her as an inheritance by her late grandfather. Her trust fund is invested in 7 percent government bounds.

Required

1. Justify Sharon's participation in her employer's 401(k) plan using the time value of money concepts by explaining how much on investment of $10,000 will grow to 40 years if earns 10 percent.

2. Calculate the amount of money that Sharon needs to set aside from her bonus this year to cover the down payment on a new car, assuming she can earn 6 percent on her savings. What if she could earn 6 percent on her savings? What if she could earn 10 percent on her savings?

3. What will be the value of Sharon's trust fund at age 60, assuming she takes possession on half of the money ($25,000 of the $50,000 trust fund) at age 30 for a house down payment, and leaves the other half of the money untouched where it is currently invested?

4. What is the relationship between discounting and compounding?

Reference no: EM13974192

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