...Ch. 5 Study Problems Joseph R. Landini University of Phoenix Finance for Business FIN/370 Professor: Jim Hill March 22, 2010 Chapter 5: Financial Management: Principles and Applications 5-1A A. $5,000 invested for 10 years at 10 percent compounded annually: 5,000 10 years @ 10% = 12,968.71 B. $8,000 invested for 7years at 8 percent compounded annually: 8,000 7 yrs. @ 8% = 13,710.59 C. $775 invested for 12 years at 12 percent compounded annually: 775 12 yrs. @ 12% = 3,019.38 D. $21,000 invested for 5 years at 5 percent compounded annually: 21,000 5yrs. @ 5% = 26,801.91 5-4A A. $800 to be received 10yrs from now discounted back to the present at 10% = 308.43 B. $300 to be received 5yrs from now discounted back to the present at 5% = 235.06 C. $1,000 to be received 8yrs from now discounted back to the present at 3% = 789.41 D. $1,000 to be received 8yrs from now discounted back to the present At 20% = 232.57 5-5A A. $500 a yr for 10yrs compounded annually at 5% = 6603.30 B. $100 a yr for 5 yrs compounded annually at 10% = 671.56 C. $35 a yr for 7 yrs compounded annually at7% = 365.26 D. $25 a yr for 3 yrs compounded annually at 2% = 78.04 5-6A A. $2,500 a year for 10 yrs discounted back to the present at 7% = 17,558.95 B. $70 a yr for 3 yrs discounted back to the present at 3 % = 198.00 C. $280 a year for 7yrs discounted back to the present at 7 % = 1,563.07 D. $500 a yr for...
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...car. b) What are the (1) effective annual rates (EAR) and the (2) effective periodic rates (EPR) of the (i) bank loan rate and (ii) the lease rate? c) What is the present value of the car if Amy buys the car as opposed to leasing? What is the present value if Amy leases the car as opposed to buying? d) If Amy had the option to make 48 monthly payments to buy or lease the car, what would be the new monthly loan payments and the monthly lease payments? e) Using the information from part c) and d), summarize if Amy should buy or lease the car under the 48 month plan or the 60 month plan. S O L U T I O N a) Purchasing the car Given: PV FV PMT n (yr) r 27000 0 ? 5 4.50% Solve for PMT PMT= $453.03 Timeline: yr 0 yr 1 yr 2 yr 3 yr 4 yr 5 PMT= 2700 12*$453 12*$453 12*$453 12*$453 12*$453 Leasing the car Given: PV FV PMT n...
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...Review of attempt 5 Self-Test Chapter 2 Review of attempt 5 Top of Form Bottom of Form Started on | Saturday, September 7, 2013, 01:24 PM | Completed on | Saturday, September 7, 2013, 01:25 PM | Time taken | 1 min 2 secs | Grade | 15 out of a maximum of 15 (100%) | Question 1 Marks: 1 Suppose you have $1,500 and plan to purchase a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures? Choose one answer. | a. $1,781.53 | | | b. $1,870.61 | | | c. $1,964.14 | | | d. $2,062.34 | | | e. $2,165.46 | | N | 5 | I/YR | 3.5% | PV | $1,500 | PMT | $0 | FV | $1,781.53 | | | Correct Marks for this submission: 1/1. Question 2 Marks: 1 How much would $5,000 due in 50 years be worth today if the discount rate were 7.5%? Choose one answer. | a. $109.51 | | | b. $115.27 | | | c. $121.34 | | | d. $127.72 | | | e. $134.45 | | N | 50 | I/YR | 7.5% | PMT | $0 | FV | $5,000 | PV | $134.45 | | | Correct Marks for this submission: 1/1. Question 3 Marks: 1 Ten years ago, Levin Inc. earned $0.50 per share. Its earnings this year were $2.20. What was the growth rate in Levin's earnings per share (EPS) over the 10-year period? Choose one answer. | a. 15.17% | | | b. 15.97% | | | c. 16.77% | | | d. 17.61% | | | e. 18.49% | | N | 10 | PV | $0.50 | PMT | $0 | FV | $2.20 | I/YR | 15.97% | ...
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...ALTERNATIVE PROBLEMS 5-1A. (Compound Interest) To what amount will the following investments accumulate? a. $4,000 invested for 11 years at 9% compounded annually b. $8,000 invested for 10 years at 8% compounded annually c. $800 invested for 12 years at 12% compounded annually d. $21,000 invested for 6 years at 5% compounded annually 5-2A. (Compound Value Solving for n) How many years will the following take? a. $550 to grow to $1,043.90 if invested at 6% compounded annually b. $40 to grow to $88.44 if invested at 12% compounded annually c. $110 to grow to $614.79 if invested at 24% compounded annually d. $60 to grow to $73.80 if invested at 3% compounded annually 5-3A. (Compound Value Solving for i) At what annual rate would the following have to be invested? a. $550 to grow to $1,898.60 in 13 years b. $275 to grow to $406.18 in 8 years c. $60 to grow to $279.66 in 20 years d. $180 to grow to $486.00 in 6 years 5-4A. (Present Value) What is the present value of the following future amounts? a. $800 to be received 10 years from now discounted back to present at 10% b. $400 to be received 6 years from now discounted back to present at 6% c. $1,000 to be received 8 years from now discounted back to present at 5% d. $900 to be received 9 years from now discounted back to present at 20% 5-5A. (Compound Annuity) What...
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...CHAPTER 1 3. Assume that the inflation-free rate of interest is 3 percent and that the inflation rate is 10 percent with complete certainty and no taxes. Determine the nominal interest rate. i = nominal rate r = inflation-free rate i = r + p + rp p = inflation rate r = 3%; p = 10%; i = ? i = 0.03 + 0.1 + (0.03)(0.1) i = 0.133 = 13.3% 4. In a world of certainty with no taxes, the nominal interest rate is 10 percent and the inflation-free interest rate is 5 percent. What is the inflation rate? i = 10%; r = 5%; p = ? i = r + p + rp 0.1 = 0.05 + p + 0.05p 0.05 = 1.05p p = 0.0476 = 4.76% 5. Assume no taxes. Suppose the inflation-free interest rate is 5 percent. The market forecasts a deflation rate of 15 percent. What is the nominal interest rate? r = 5%; p = -15%; i = ? i = r + p + rp i = 0.05 + (-0.15) + 0.05(-0.15) i = -0.1075 = -10.75% *The nominal interest rate cannot be negative; no one will invest at a negative rate. CHAPTER 2 4. The Treasury announces an auction of $10 billion par value of 52-week Treasury bills. $2 billion of noncompetitive bids are received. The competitive bids are as follows: Price per $1 of par Par value 0.9200 $3 billion 0.9194 $3 billion 0.9188 $4 billion 0.9180 $2 billion 0.9180 $2 billion 0.9178 $6 billion Compute the price per dollar of par paid by noncompetitive...
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...ALTERNATIVE PROBLEMS 5-1A. (Compound Interest) To what amount will the following investments accumulate? a. $4,000 invested for 11 years at 9% compounded annually b. $8,000 invested for 10 years at 8% compounded annually c. $800 invested for 12 years at 12% compounded annually d. $21,000 invested for 6 years at 5% compounded annually 5-2A. (Compound Value Solving for n) How many years will the following take? a. $550 to grow to $1,043.90 if invested at 6% compounded annually b. $40 to grow to $88.44 if invested at 12% compounded annually c. $110 to grow to $614.79 if invested at 24% compounded annually d. $60 to grow to $73.80 if invested at 3% compounded annually 5-3A. (Compound Value Solving for i) At what annual rate would the following have to be invested? a. $550 to grow to $1,898.60 in 13 years b. $275 to grow to $406.18 in 8 years c. $60 to grow to $279.66 in 20 years d. $180 to grow to $486.00 in 6 years 5-4A. (Present Value) What is the present value of the following future amounts? a. $800 to be received 10 years from now discounted back to present at 10% b. $400 to be received 6 years from now discounted back to present at 6% c. $1,000 to be received 8 years from now discounted back to present at 5% d. $900 to be received 9 years from now discounted back to present at 20% 5-5A. (Compound Annuity) What...
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...Chapter 2: Time Value of Money Practice Problems FV of a lump sum i. A company’s 2005 sales were $100 million. If sales grow at 8% per year, how large will they be 10 years later, in 2015, in millions? PV of a lump sum ii. Suppose a U.S. government bond will pay $1,000 three years from now. If the going interest rate on 3‐year government bonds is 4%, how much is the bond worth today? Interest rate on a simple lump sum investment iii. The U.S. Treasury offers to sell you a bond for $613.81. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price? Number of periods iv. Addico Corp's 2005 earnings per share were $2, and its growth rate during the prior 5 years was 11.0% per year. If that growth rate were maintained, how long would it take for Addico’s EPS to double? PV of an ordinary annuity v. You have a chance to buy an annuity that pays $1,000 at the end of each year for 5 years. You could earn 6% on your money in other investments with equal risk. What is the most you should pay for the annuity? Payments on an annual annuity vi. Suppose you inherited $200,000 and invested it at 6% per year. How much could you withdraw at the end of each of the next 15 years? Payments on a monthly annuity vii. You are ...
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...Review Test Submission: Quiz Chapter 5 Content User Ngan Tran Course ETROY Fundamentals of Financial Math FIN-3331-XTIB 14/T3 (Dodd) Test Quiz Chapter 5 Started 1/27/14 11:28 PM Submitted 1/27/14 11:35 PM Due Date 2/2/14 11:59 PM Status Completed Attempt Score 4.99995 out of 4.99995 points Time Elapsed 6 minutes out of 45 minutes Instructions • Question 1 0.33333 out of 0.33333 points Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements. If the APR is stated to be 18.00%, with interest paid monthly, what is the card's EFF%? Selected Answer: 19.56% Answers: 18.58% 19.56% 20.54% 21.57% 22.65% Response Feedback: APR = Nominal rate 18.00% Periods/yr 12 EFF% = (1 + (rNOM/N))N 1 = 19.56% • Question 2 0.33333 out of 0.33333 points You want to buy a new ski boat 2 years from now, and you plan to save $8,200 per year, beginning one year from today. You will deposit your savings in an account that pays 6.2% interest. How much will you have just after you make the 2nd deposit, 2 years from now? Selected Answer: $16,908 Answers: $15,260 $16,063 $16,908 $17,754 $18,642 Response Feedback: N 2 I/YR 6.2% PV $0.00 PMT $8,200 FV $16,908 • Question 3 0.33333 out of 0.33333 points Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods. Selected Answer:...
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...This is because of the 2nd 3-year period interest rate would take into account the 1st 3-year period interest earned. The 3rd 3-year period interest rate would then take into account for the 1st and 2nd 3-years period interest earned P3-2. Dixon Shuttleworth has a large sum of money that he wants to invest to finance his retirement. He has been presented with three options. The first investment offers a 5% return for the first five years, a 10% return for the next five years, and a 20% return thereafter. The second investment offers 10% for the first ten years and 15% thereafter. The third investment offers a constant 12% rate of return. Determine which of these investments is the best for Dixon if he plans to retire in the following number of years. a. fifteen years b. twenty years c. thirty years Lets assume that $100 is to be Invested A. 15 yrs Op1: 1st 5 yr 5%, next 5yr 10% & then next 5Yr 20% Future value FV at Y5 = PV*(1+r)^n = 100*(1+5%)^5 = 128 FV at Y10 = 128*(1+10%)^5 = 206 FV at Y15 = 206*(1+20%)^5 = 513 SO In Option 1, He will get 5.13 times in 15 Yrs Op II :...
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... Securities Analysis FI560 Abstract My stock analysis project is on Energy Transfer Equity, Inc. The analysis consists of a very extensive study in five areas: 1. The background of the company with a life cycle analysis 2. An analysis of Return on Equity 3. The company’s projected future growth rate of earnings 4. An analysis of its required rate of return using CAPM measurement 5. The company’s intrinsic value using the discount valuation techniques. This analysis was done on weekly basis in conjunction with learning objectives and real-world applications in our course. My stock analysis should substantiate an investor to invest or not to invest in this stock in a well balanced portfolio. Based on the analysis of good performance and growth potential, I would recommend investing in this stock. Company Background With Life Cycle Analysis A Texas-based energy company that began in 1995 as a small intrastate natural gas pipeline company, Energy Transfer is now one of the country’s fastest-growing natural gas transportation companies with widespread business operations that are highly regarded throughout the energy industry and the investment community. Energy Transfer owns and operates a diversified portfolio of energy assets. Their operations include the gathering, treating, processing, marketing and transportation of natural gas. The company is also one of the nation’s largest distributors of propane...
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...SOLUTIONS TO END OF CHAPTER ASSIGNED PROBLEMS 3-2 NI = $3,000,000; EBIT = $6,000,000; T = 40%; Interest = ? Need to set up an income statement and work from the bottom up. EBIT $6,000,000 Interest 1,000,000 EBT $5,000,000 EBT = Taxes (40%) 2,000,000 NI $3,000,000 Interest = EBIT – EBT = $6,000,000 – $5,000,000 = $1,000,000. 3-3 EBITDA $7,500,000 (Given) Depreciation 2,500,000 Deprec. = EBITDA – EBIT = $7,500,000 – $5,000,000 EBIT $5,000,000 EBIT = EBT + Int = $3,000,000 + $2,000,000 Interest 2,000,000 (Given) EBT $3,000,000 Taxes (40%) 1,200,000 Taxes = EBT × Tax rate NI $1,800,000 (Given) 3-4 NI = $50,000,000; R/EY/E = $810,000,000; R/EB/Y = $780,000,000; Dividends = ? R/EB/Y + NI – Div = R/EY/E $780,000,000 + $50,000,000 – Div = $810,000,000 $830,000,000 – Div = $810,000,000 $20,000,000 = Div. 3-8 Statements b and d will decrease the amount of cash on a company’s balance sheet. Statement a will increase cash through the sale of common stock. Selling stock provides cash through financing activities. On one hand, Statement c would decrease cash; however, it is also possible that Statement c would increase cash, if the firm receives a tax refund for taxes paid in a prior year. 3-9 Ending R/E = Beg. R/E Net income Dividends $278,900,000 = $212,300,000 Net income $22,500...
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...the Problems 6.1 - 6.5 from the back of the chapter. (In doing so, interpret "annual costs" as total controllable costs.) Problem 6.1 Suppose you purchase from a supplier at $4 per unit a part with which you assemble rd widgets. On average, you use 50,000 units of this part each year. Every time you order this particular part, you incur a sizeable ordering cost of $800 regardless of the number of parts you order. Your cost of capital is 20% per year. a. How many parts should you purchase each time you place an order? b. To satisfy annual demand, how many times per year will you place orders from this part? Solution: The data in the question is: throughput rate R = 50,000 parts/yr, fixed setup cost S = $800, purchasing cost C = $4/part, cost of capital r = 200%/yr, and physical storage cost h = 0%/yr. Thus the annual unit holding cost is H = (r+h)C = $0.80/part/yr. The economic order quantity tells us to purchase each time: a. [pic] b. Order R/Q = 5 times per year. Problem 6.2 BIM Computers Inc. sells its popular PC-PAL model to distributors at a price of $1,250 per unit. BIM’s profit margin is 20%. Factory orders average 400 units a week. Currently, BIM works in a batch mode and produces a 4-week supply in each batch. BIM’s production process involves three stages: • PC board assembly (the automatic insertion of parts and the manual loading, wave soldering, and laser bonding of electronic components purchased from outside sources), ...
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...following: N = 10; I/YR = YTM = 9%; PMT = 0.08 1,000 = 80; FV = 1000; PV = VB = ? PV = $935.82. 7-2 VB = $985; M = $1,000; Int = 0.07 $1,000 = $70. a. Current yield = Annual interest/Current price of bond = $70/$985.00 = 7.11%. b. N = 10; PV = -985; PMT = 70; FV = 1000; YTM = ? Solve for I/YR = YTM = 7.2157% 7.22%. c. N = 7; I/YR = 7.2157; PMT = 70; FV = 1000; PV = ? Solve for VB = PV = $988.46. 7-3 The problem asks you to find the price of a bond, given the following facts: N = 2 8 = 16; I/YR = 8.5/2 = 4.25; PMT = 45; FV = 1000. With a financial calculator, solve for PV = $1,028.60. 7-4 With your financial calculator, enter the following to find YTM: N = 10 2 = 20; PV = -1100; PMT = 0.08/2 1,000 = 40; FV = 1000; I/YR = YTM = ? YTM = 3.31% 2 = 6.62%. With your financial calculator, enter the following to find YTC: N = 5 2 = 10; PV = -1100; PMT = 0.08/2 1,000 = 40; FV = 1050; I/YR = YTC = ? YTC = 3.24% 2 = 6.49%. Since the YTC is less than the YTM, investors would expect the bonds to be called and to earn the YTC. 7-5 a. 1. 5%: Bond L: Input N = 15, I/YR = 5, PMT = 100, FV = 1000, PV = ?, PV = $1,518.98. Bond S: Change N = 1, PV = ? PV = $1,047.62. 2. 8%: Bond L: From Bond S inputs, change N = 15 and I/YR = 8, PV = ?, PV = $1...
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...Chapter 7(13E) Bonds and Their Valuation Answers to End-of-Chapter Questions 7-1 From the corporation’s viewpoint, one important factor in establishing a sinking fund is that its own bonds generally have a higher yield than do government bonds; hence, the company saves more interest by retiring its own bonds than it could earn by buying government bonds. This factor causes firms to favor the second procedure. Investors also would prefer the annual retirement procedure if they thought that interest rates were more likely to rise than to fall, but they would prefer the government bond purchase program if they thought rates were likely to fall. In addition, bondholders recognize that, under the government bond purchase scheme, each bondholder would be entitled to a given amount of cash from the liquidation of the sinking fund if the firm should go into default, whereas under the annual retirement plan, some of the holders would receive a cash benefit while others would benefit only indirectly from the fact that there would be fewer bonds outstanding. On balance, investors seem to have little reason for choosing one method over the other, while the annual retirement method is clearly more beneficial to the firm. The consequence has been a pronounced trend toward annual retirement and away from the accumulation scheme. 7-2 Yes, the statement is true. 7-3 False. Short-term bond prices are less sensitive than long-term bond prices to interest rate changes...
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...CALCULATOR KEYSTROKES FOR THE HP-10BII [pic] ******* NOTE: The HP calculators come from the factory with the PMTS/YR set to 12. Change this setting to 1 PMT/YR by going to #6 below. Change this setting before you do any of the time value of money problems!!!! You only have to change the PMT/YR setting one time! ********* GENERAL: Note that every HP-10BII calculator key has two functions, the main ones are in WHITE LETTERS and a second function in ORANGE. To access the second function, you simply enter the ORANGE key first, and then press the key to access the function in ORANGE. There is also a PURPLE button, which accesses some statistical functions that we will not be using in this class. In the examples below, the slash symbol: / is used to separate keystrokes 1. SETTING THE NUMBER OF DECIMAL PLACES: Orange Key / = Key (DISP) / Number of desired decimal places Examples: Orange Key / = / 2 (to set display to two places, good for bond prices, e.g. $975.42) Orange Key / = / 4 (to set display to four places, good for ex-rates, e.g. $1.5074 / £) NOTE: Setting to two decimal places is not appropriate when calculating answers involving certain percentages or interest rates. For example, suppose your answer is an interest rate: .0851, or 8.51%. If your calculator is set to two decimal places, it will round your answer to .09 or 9%, which is almost .5% away from 8.51%. Be sure in this case that you set your calculator to display three or four decimal places...
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