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Your task this week is to teach Grammy and the board the time value of money and its related concepts. She would like you to address several specific questions to demonstrate the use of time value of money techniques. 1. What is the relationship between discounting and compounding? 2. What is the relationship between the present-value factor and the annuity present-value factor? 3. What will $5,000 invested for 10 years at 8 percent compounded annually grow to? How many years will it take $400 to grow to $1,671 if it is invested at 10 percent compounded annually? At what rate would $1,000 have to be invested to grow to $4,046 in 10 years? 4. Calculate the future sum of $1,000, given that it will be held in the bank for 5 years and earn 10 percent compounded semiannually. 5. What is an annuity due? How does this differ from an ordinary annuity? 6. What is the present value of an ordinary annuity of $1,000 per year for 7 years discounted back to the present at 10 percent? What would be the present value if it were an annuity due? 7. What is the future value of an ordinary annuity of $1,000 per year for 7 years compounded at 10%? What would be the future value if it were an annuity due? 8. You have just borrowed $100,000, and you agree to pay it back over the next 25 years in 25 equal end-of-year payments plus 10 percent compound interest on the unpaid balance. What will be the size of these payments? 9. What is the present value of a $1,000 perpetuity discounted back to the present at 8 percent? 10. What is the present value of a $1,000 annuity for 10 years, with the first payment occurring at the end of year 10 (that is, ten $1,000 payments occurring at the end of year 10 through 19), given a discount rate of 10 percent? 11. Given a 10 percent discount rate, what is the present value of an perpetuity of $1,000 per year if the first payment does not begin until the end of year 10?
Suppose you know that a company’s stock currently sells for $58 per share and the required return on the stock is 10 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield.
If the interest rate is lower in the U.S. than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:
A thirty-year U.S. Treasury bond has a 4.0 percent interest rate. In contrast, a ten-year Treasury bond has an interest rate of 2.5 percent. A maturity risk premium is estimated to be 0.2 percentage points for the longer maturity bond. Investors expe..
Reasons to invest in marketable securities would not include:
Peyton's Palace has net income of $14 million on sales revenue of $170 million. Total assets were $68 million at the beginning of the year and $90 million at the end of the year. Calculate Peyton's return on assets, profit margin, and asset turnover ..
What recommendations do you have for employees with a current profile similar to Tom’s after seeing the impact of the uncertainty in the annual salary growth rate and the annual portfolio growth rate? Discuss how the financial planning model develope..
Calculate the Pay Back Period (PBP) of each project, assess its acceptability, and indicate which project is best using NPV. Calculate the Internal Rate of Return (IRR) of each project, assess its acceptability.
In forecasting exchange rates, many practitioners use either the Interest Rate Parity, Purchase Price Parity, Asset Approach, or the Balance of Payments Approach. Please define and explain the above four methods of forecasting exchange rates, includi..
You are interested in purchasing a new automobile that costs $35,000. The dealership offers you a special financing rate of 6% APR (0.5%) per month for 48 months. Assuming that you do not make a down payment on the auto and you take the dealer's fina..
You would like to retire at age 65. After consulting an actuarial table, you believe that you will likely live for 30 years in retirement. You estimate that you will require $7,000 per month in living expenses in retirement which you will begin to wi..
Hedging using futures Suppose a farmer is expecting that her crop of oranges will be ready for harvest and sale as 150,000 pounds of orange juice in 3 months time. Suppose each orange juice futures contract is for 15,000 pounds of orange juice, and t..
Essary Enterprises has bonds on the market making annual payments, with seven years to maturity, a par value of $1,000, and selling for $950. At this price, the bonds yield 6 percent. What must the coupon rate be on the bonds?
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