Week 2 assignment (corporate finance) PDF

Preview

Summary

Assignment for week 2...

Description

1. First City Bank pays 7.5 percent simple interest on its savings account balances, whereas Second City Bank pays 7.5 percent interest compounded annually. If you made a $7,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of 10 years? Simple Interest from first bank = $7,000 * 7.5 * 10 = $5250 Compound Interest from second bank = $7,000 (1 + (0.075/1) ^1*10 = $14,427.22 So, Interest gained from second bank = $14,427.22 – $7,000 = $7,427.22 Extra money earned through compound interest = $7,427.22 - $ 5250 = $2177.22 2. Compute the future value of $1,000 compounded annually for a. 10 years at 6 percent. b. 10 years at 12 percent. c. 20 years at 6 percent. d. Why is the interest earned in part (c) not twice the amount earned in part (a)? The formula used here to calculate future value is FV = PV (1+r) ^ t a. FV for 10 years at 6 percent = $1,790.85 b. FV for 10 years at 12 percent = $3,105.85 c. FV for 20 years at 6 percent = $3,207.14 d. The principal amount is compounded annually as a result the amount is not doubled. If the interest rate is calculated through simple interest, then the interest earned in part (C) would have been twice that of part (a). 3. For each of the following, compute the present value:

PV calculated using excel spread sheet 

PV for FV = $13827 with 7% interest and for 8 years = $ 8,047.44



PV for FV = $43,825 with 15% interest and for 13 years = $7,122.79



PV for FV = $725,380 with 11% interest and for 17 years = $123,048.11



PV for FV = $590,710 with 18% interest and for 26 years = $7,988.07

4. Solve for the unknown interest rate in each of the following:

Calculated using excel spread sheet 

Interest rate for PV = $242 and FV = $345 for 4 years = 9.27%



Interest rate for PV = $410 and FV = $927 for 8 years = 10.74%



Interest rate for PV = $51,700 and FV = $152,184 for 16 years = 6.98%



Interest rate for PV = $18,750 and FV = $538,600 for 27 years = 13.24%

5. Solve for the unknown number of years in each of the following:

Calculated using excel spread sheet    

#of years with PV = $625 and FV = $1,284 with 7% interest = 10.64 years #of years with PV = $810 and FV = $4,341 with 12% interest = 14.81 years #of years with PV = $16,500 and FV = $402,662 with 17% interest = 20.35 years #of years with PV = $21,500 and FV = $147,350 with 8% interest = 25.01 years

6. At 6.5 percent interest, how long does it take to double your money? To quadruple it? Time to double the money: Let’s take PV = $1 and FV = $2 and r = 6.5% Using excel spread sheet, # of years = 11.01 years Time to quadruple the money: Let’s take PV = $1 and FV = $4 and r = 6.5% # of years to quadruple = 22.01 years

7. An investor purchasing a British consol is entitled to receive annual payments from the British government forever. What is the price of a consol that pays $125 annually if the next payment occurs one year from today? The market interest rate is 3.9 percent. Present Value = Annual Payment/Rate of interest Present Value = $125/0.039 =$3,205.13 8. An investment offers $5,650 per year for 15 years, with the first payment occurring one year from now. If the required return is 8 percent, what is the value of the investment? What would the value be if the payments occurred for 40 years? For 75 years? Forever? Calculated using excel spreadsheet 

Cash flow =$5,650, rate = 8%, years = 15, Present Value = $4,8361.05



Cash flow =$5,650, rate = 8%, years = 40, Present Value = $67,374.07



Cash flow =$5,650, rate = 8%, years = 75, Present Value = $70,405.12



Cash flow =$5,650, rate = 8%, years = Forever, Present Value = $70,625.00...