Chapter 6
Ch. 6: Questions 2 & 20 (Questions and Problems section)
#2
Present Value and Multiple Cash Flows [LO1] Investment X offers to pay you $4,700 per year for eight years,
Investment Y offers to pay you $6,700 per year for five years. Which of these cash flow streams has the higher pre
the discount rate is 5 percent? If the discount rate is 15 percent?
5%
Investment X
Answer:
4700*8
4700 x 1/1.05
4700 x 1/1.05(2)
4700 x 1/1.05(3)
4700 x 1/1.05(4)
4700 x 1/1.05(5)
4700 x 1/1.05(6)
4700 x 1/1.05(7)
4700 x 1/1.05(8)
15%
Years
1
2
3
4
5
6
7
8
Answer:
4700*8
4700 x 1/1.15
4700 x 1/1.15(2)
4700 x 1/1.15(3)
4700 x 1/1.15(4)
4700 x 1/1.15(5)
4700 x 1/1.15(6)
4700 x 1/1.15(7)
4700 x 1/1.15(8)
Years
1
2
3
4
5
6
7
8
$ 37,600.00
$ 4,476.19
$ 4,263.04
$ 4,060.04
$ 3,866.70
$ 3,682.57
$ 3,507.21
$ 3,340.20
$ 3,181.15
$ 30,377.10
Investment X
$ 37,600.00
$ 4,086.96
$ 3,553.88
$ 3,090.33
$ 2,687.24
$ 2,336.73
$ 2,031.94
$ 1,766.90
$ 1,536.44
$ 21,090.42
Investment Y
6700*5 $ 33,500.00
Years
1
2
3
4
5
$ 6,380.95
$ 6,077.10
$ 5,787.71
$ 5,512.11
$ 5,249.63
$ 29,007.50
Investment Y
6700*5 $ 33,500.00
Years
1
2
3
4
5
$ 5,826.09
$ 5,066.16
$ 4,405.36
$ 3,830.75
$ 3,331.08
$ 22,459.44
Answer: At 5% Discount rate the Investment X has the higher present value, but at 15% Invest
higher present value.
#20
Calculating Loan Payments [LO2, 4] You want to buy a new sports coupe for $79,500, and the finance
dealership has quoted you an APR of 5.8 percent for a 60-month loan to buy the car. What will your
payments be? What is the effective annual rate on this loan?
Answer:
I was looking a different way to calulate these numbers. I do not know if this is c
Please let me know if I should delete this? Is this correct ? Doe this have the co
1
Principle
-79500
Months
x
60
2 79500= Payment x {[1-1/1.058 5)]/.058}
79500/4.2353
79500/5
Difference
18770.8/12
Effective Annual Rate
[1+(.058/12)]12 - 1 =
5.95%
x
4.2353
$ 18,770.80
$ 15,900.00
$ 2,870.80
$ 14,354.00
$ 1,564.23
you $4,700 per year for eight years, whereas
sh flow streams has the higher present value if
e is 15 percent?
I took 6700 x 1/1.05
I took 6700 x 1/1.05(2)
I took 6700 x 1/1.05(3)
I took 6700 x 1/1.05(4)
I took 6700 x 1/1.05(5)
I took 6700 x 1/1.15
I took 6700 x 1/1.15(2)
I took 6700 x 1/1.15(3)
I took 6700 x 1/1.15(4)
I took 6700 x 1/1.15(5)
present value, but at 15% Investment Y has the
pe for $79,500, and the finance office at the
n to buy the car. What will your monthly
ate on this loan?
e numbers. I do not know if this is correct, or if I will receive credit for this?
this correct ? Doe this have the correct values ?
Interest
0.0058 equals
Interest a year
Total Interest
Payment?
Monthly Payment
$ 1,572.70
Chapter 7
Ch. 7: Questions 3 &11 (Questions and Problems section)
3. Valuing Bonds [LO2] Even though most corporate bonds in the United States make c
coupon payments. Suppose a German company issues a bond with a par value of €1,000, 23
to maturity is 4.7 percent, what is the cu
Answer
58x[1-1/(1+4.7)23/.047+5000/(1+.047)23
The price of the bond would be the PV of the coupon payments plus th
C
58
N
23
I
4.7
K
1
P $ 1,000.00
11. Valuing Bonds [LO2] Union Local School District has a bond outstanding with a coupo
maturity on this bond is 3.9 percent, and the bond has a par v
Answer
C
37
N
16
I
3.9
K
2
P $ 5,000.00
Value of Bond:
p= 37 /2 ({ 1- [ 1/ (1+.039) 16*2
$ 4,881.80
s in the United States make coupon payments semiannually, bonds issued elsewhere often have annual
with a par value of €1,000, 23 years to maturity, and a coupon rate of 5.8 percent paid annually. If the yield
is 4.7 percent, what is the current price of the bond?
Equals $
846.47
V of the coupon payments plus the PV of the par value.
ond outstanding with a coupon rate of 3.7 percent paid semiannually and 16 years to maturity. The yield to
ent, and the bond has a par value of $5,000. What is the price of the bond?
p= 37 /2 ({ 1- [ 1/ (1+.039) 16*2 ]} + 1,000 [ 1 / ( 1 + .039)16*2 ]
736.7
2695.41
Chapter 8
Question 6
Input area:
Stock price
Required return
$
63.00
10.5%
Next year's dividend
$
3.31
Current dividend
$
3.14
Output area:
Chapter 5
Question 3
Output area:
$
$
$
$
Present value
5,039.79
39,332.59
1,730.78
3.37
Input area:
Years Interest rate Future value
13
9% $
15,451
4
7% $
51,557
29
24% $
886,073
40
35% $
550,164
Chapter 5
Question 4
Input area:
Present value
$
181
335
48,000
40,353
Output area:
Years
4
18
19
25
Interest rate Future value
13.18% $
297
6.72%
1,080
7.37%
185,382
10.86%
531,618
Question and Problem Sets Grading
Guide
FIN/370 Version 11
Finance for Business
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Question and Problem Sets
Grading Guide
FIN/370 Version 11
Individual Assignment: Question and Problem Sets
Purpose of Assignment
Students should be able to calculate time value of money problems including solving for; present value, future
value, rate and payment, determine the value and yield of corporate bonds and use the dividend discount
model to calculate the value and expected return of a common stock.
Resources Required
Tutorial help on Excel® and Word functions can be found on the Microsoft® Office website. There are also
additional tutorials via the web that offer support for office products.
Fundamentals of Corporate Finance: Ch. 5, 6, 7 and 8
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o Questions 3 & 4 (Question and
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templates provided for Problems 3
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• Chapter 6
o Questions 2 & 20 (Questions and
Problems section)
• Chapter 7
o Questions 3 &11 (Questions and
Problems section)
• Chapter
o Questions 1 & 6 (Questions and
Problems section): Microsoft® Excel®
template provided for Problem 6.
Shows all work and analysis for each
question.
Prepare the exercises and problems in a
Microsoft® Word document or Excel®
Spreadsheet.
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1
Question and Problem Sets -Week 2
Mitchell Rehkopf
FIN-370
July 23rd, 2017
Instructor Thomas Gruber
2
Question and Problem Sets - Week 2
Chapter 5: Questions 3 & 4 (Question and Problems section):
Question 3. Calculating Present Values For each of the following, compute the present
value:
Please see the attached Excel spreadsheet
Question 4. Calculating Interest Rates Solve for the unknown interest rate in each of
the following:
Please see the attached Excel spreadsheet
Chapter 6: Questions 2 & 20 (Questions and Problems section)
Question 2. Present Value and Multiple Cash Flows Investment X offers to pay you
$4,700 per year for eight years, whereas Investment Y offers to pay you $6,700 per year for five
years. Which of these cash flow streams has the higher present value if the discount rate is 5
percent? If the discount rate is 15 percent?
Please see the attached Excel spreadsheet
3
20. Calculating Loan Payments You want to buy a new sports coupe for $79,500 and
the finance office at the dealership has quoted you an APR of 5.8 percent for a 60-month loan to
buy the car. What will your monthly payments be? What is the effective annual rate on this loan?
See below:
EMI = (value)*(month rate)/ (1-1/(1+ monthly rate)^t)
Value = 79500
Monthly rate
= 0.058/12 = 0.00483
EMI = (79500)*(0.00483)/(1 – 1/(1+0.00483)^60)
= (383.985)/(1-0.7489)
= 383.985/0.2510
= $1529.82
EAR = (1+0.058/12)^12 -1
= (1.00483)^12 -1
= 1.0596-1
= 0.0596
EAR = 5.96%
Chapter 7: Questions 3 &11 (Questions and Problems section)
Question 3. Valuing Bonds Even though most corporate bonds in the United States
make coupon payments semiannually, bonds issued elsewhere often have annual coupon
payments. Suppose a German company issues a bond with a par value of €1,000, 23 years to
4
maturity, and a coupon rate of 5.8 percent paid annually. If the yield to maturity is 4.7 percent,
what is the current price of the bond?
Please see the attached Excel spreadsheet
Question 11. Valuing Bonds Union Local School District has a bond outstanding with
a coupon rate of 3.7 percent paid semiannually and 16 years to maturity. The yield to maturity on
this bond is 3.9 percent, and the bond has a par value of $5,000. What is the price of the bond?
Please see the attached Excel spreadsheet
Chapter 8: Questions 1 & 6 (Questions and Problems section)
Question 1. Stock Values The Jackson–Timberlake Wardrobe Co. just paid a dividend
of $1.95 per share on its stock. The dividends are expected to grow at a constant rate of 4 percent
per year indefinitely. If investors require a return of 10.5 percent on The Jackson–Timberlake
Wardrobe Co. stock, what is the current price? What will the price be in three years? In 15 years?
Stock Price can be calculated using the following formula:
T=0
D = 1.95
g = growth rate = 0.04
required rate = 10.5 = 0.105
5
Current Price
T=0
P = [1.95*(1+0.04)^1]/(0.105-0.04)
Current Price = $31.2
Price in 3 years
T=3
P = [1.95*(1+0.04)^4]/(0.105-0.04)
P = $35.01
Price in 15 years
T = 15
P = [1.95*(1+0.04)^16]/(0.105-0.04)
P = $56.19
Question 6. Stock Valuation.
Suppose you know that a company’s stock currently sells for $63 per share and the
required return on the stock is 10.5 percent. You also know that the total return on the stock is
evenly divided between a capital gains yield and a dividend yield. If it’s the company’s policy to
always maintain a constant growth rate in its dividends, what is the current dividend per share?
Please see the attached Excel spreadsheet
6
References
Jordan, B., Ross, S., & Westerfield R. (2016). Fundamentals of Corporate Finance (11th ed.).
New York, NY: McGraw-Hill.
https://phoenix.vitalsource.com/#/books/1259798224/cfi/6/36!/4/2/2@0:0
https://courses.lumenlearning.com/boundless-finance/chapter/overview-of-the-workingcapital-financing-decision/
https://www.lynda.com/search?q=Discounted+Cash+Flow+Valuation
https://www.lynda.com/Accounting-tutorials/Stocks/382578/449121-4.html
https://www.lynda.com/Accounting-tutorials/Bonds/382578/449120-4.html
https://www.lynda.com/Accounting-tutorials/Income-approach-time-valuemoney/428722/459214-4.html
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