Finance Assignment 1

 Assignment 1.  At an interest rate of 12%, the six-year discount factor is .507. How many dollars is $.507 worth in six years if inested at 12%!

"om#oundin factor  1& discountin factor  1&.507  1.'72 ()  *) + ()(12,/ ()  .507 +1.'72  1 2. An inestment of $22 will #roduce $12.1 in two years. hat is the annual interest rate!

()  12.1 *)  22 t  2 years ()  *) + ()(r, 2/ ()(r, 2/  12.&22  1.32 4 1 %

3. An inestment costs $1,53 and #ays $1 in #er#etuity. f the interest rate is '%, what is the *)!

*) as #er #er#etuity #aid / 1&'  15. 15.  *resent "ost  153  *)  153 6 15.  13.7  ou win a lottery with a #ri8e of $1.5 million. 9nfortunately, 9nfortunately, the #ri8e is #aid in 10 annual installments. 4. ou :he first #ayment is next year. How much is the #ri8e really worth! :he discount rate is %. nstallment alue alue A/  1.5 mn&10  150000 ;iscount rate  % *) of ordinary annuity /  A + *((A,10/ *((A,10/  150000+ .7101  100515

5. Want to be a millionaire?  o #rou##ose you are currently 21 years old, and can earn 10 #ercent on your money a
@  10% 21----------------------------5 )alue  1000,000 ()  1000000 @ 10% :  33 *)  () + *)( 10, 33/  1000000+.0151  15100 1

6.Answer each of the followin 

a.:he cost of a new automo
7. :he continuously com#ounded interest rate is 12%.

a.ou inest $1,000 at this rate. hat is the inestment worth a fter fie years! ()  *) + eB.12+5  1000+ 1.2212  <. hat is the *) of $5 million to
2

8. ou are Cuoted an interest rate of % on an inestment of $10 million. hat is the alue of your inestment after four years if the interest rate is com#ounded

a.annually ()  10mn + ()(,3/  <. monthly ()  10mn + ()(&12,3/ c.continuously! ()  10 mn + e.0+3

9. An inestment will increase
()  *)  1Dr&3/3+17 ()  .70+*) .70  1D.25r/ 1Dr&3  1.01'3 r  7.7%

10. A factory costs $00,000. ou rec?on that it will #roduce an inflow after o#eratin costs of $170,000 a year for 10 years. f the o##ortunity cost of ca#ital is 13%, what is the net #resent alue of the factory! hat will the factory
"ost  00000 "ash (low A/  170,000 :  10 @ 13% *)  A+ *)(A13,10/  170000+ 5.211  77  *)  77 -00000  $86737  et worth  *) at the end of fie years /  170000+ *)(A13,5/  170000+.31  527

11. Er Fa
"ash (low A/ ! *)  20000 @  % :  12 A *) + ()(A,12/  20000+2.512  503

12. Ganaroo Autos is offerin free credit on a new $10,000 car. ou #ay $1,000 down and then $00 a month for the next 0 months. :urtle Eotors next door does not offer free credit
Ganaroo ;own #ayment  1000 "ash flow A/  00 : 0 @  10&12  . 9sin xcel  $7938  Total paid = 1000+ $7938 = $8938

 Turtle :  Total cost = 10000 – 1000 = 9000 Kangaroo ofers better deal wit diference o! $"#

13. (or an inestment of $1,000 today, the :i
a/ *)  1000 ()  100 :   years 100&1000  1Dr/ 1. 1&  1Dr  r  .05%  
1.  er  r  ln1./  3.70%

14.ou hae Iust read an adertisement statin, J*ay us $100 a year for 10 years and we will #ay you $100 a year thereafter in #er#etuity.J f this is a fair deal, what is the rate of interest!

"onsiderin ordinary annuity 3

"ash (low A/  100 : 10 ()  A+ ()(Ar, 10/ KKK.eC 1 *)  100&r KKKKKeC 2 Lien eC1 eC2 ()(Ar,10/  1&r  1Dr/10 6 1  1 r  2.1 6 1  7.17%

15. hile acationin in Hammamet Feach, Eamet saw the acation home of his dreams. t was listed with a sale #rice of $200,000. :he only catch is that Eamet is 30 years old and #lans to continue wor?in until he is 5. >till, he
a. nflation is ex#ected to aerae 5% a year for the next 25 years. hat will EametMs dream house cost when he retires! ()house/  20000+ ()(5,25/  $"77#70%99

 <. How much must Eamet inest at the end of each of the next 25 years in order to hae the cash #urchase  #rice of the house when he retires! ()  A + ()(A',25/ ()  $"77#70%99 A  $"77#70%99&8'%70 = $799"%03 c. f Eamet inests at the
16. ou are as?ed to #ut a alue on a
*) of
5

b) hat should you
*)  50+ *)(A'%, 2/ D 1000+ *)('%,2/  $87%9" + $8'1%"8 = $9#9%"'

17. hat is the alue of a consol that #ays $250 eery  months when the annual mar?et interest rate is 13%!

@ate  13% annual/  7% semi annually ;iidend  $250 *)  ;&r  250&.07  $571.32 18. ou are thin?in a
Eaturity  2 years "ou#on  % (ace alue  $1000 "ou#on cash flow  3% + 1000  30 N##ortunity cost r/  % annually  % semi annually *)  30 + *)(A,3/ D 1000+ *)(,3/  $1037%17

19."om#any O is ex#ected to #ay diidends of $5.50 a share in 1 yearMs time and $5.0 share in 2 yearsM time, after  which its stoc? is ex#ected to sell at $'1. ;o you
;iidend  $5.50 #er share r  10% *)  5.50+*)(10,1/ D 5.0 + *)(10,2/ D '1+ *)(10,2/  $5 >toc? is oer#riced so it is not worth to
20.ou forecast that the @oyal Fan?Ms earnins will
@etention ratio  50%  .5 @  15% Lrowth rate  ' % Pshares  1
arnin  $3.  3. ;*>  1 6retention ratio  1 - .5  .5 ;iidend #ay out  .5 + *>  .5 + 3.  2.3 *)  ;1& r 6   2.3 & .15 - .0'  2.3 &.0  30

21. The Scene arly eenin in an ordinary family room in Eanhattan. Eodern furniture with old co#ies of the all >treet Qournal and the (inancial :imes scattered around. Autora#hed #hotos of Alan Lreens#an and Leores >oros are #rominently dis#layed. A #icture window reeals a distant iew of lihts on the Hudson @ier. Qohn Qones sits at a com#uter terminal, lumly si##in a lass of chardonnay and tradin Qa#anese yen oer the nternet. His wife Earsha enters. Marsha Hi, honey. Llad to achsMs forein exchane
Marsha >ure, Qohnny. ohn (Takes a deep breath and stands u#./ Anyway, how aeasons.  Everyone exits. Announcer ere the oil wells really neatie-*)! ill Qohn and Earsha hae to fiht a hostile ta?eoer! ill QohnnyMs deriaties team use Flac?->choles or the
"ost  $500,000 @  '% a. (orecast future cash flows, ta?in account of the decline in #roduction and the #artially/ offsettin forecasted increase in oil #rices.  <. hat is the *) of the ellsS #roduction assumin the wells ?ee# #roducin for eer!

c. hat is the *) of the ellsS #roduction assumin the wells only #roduce for ten years!

22. S#rea$sheet Mo$elin% "hec? for details on how to
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