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Date Submitted: 02/20/2012 06:38 PM
Chapter #2: How to Calculate Present Value
17.
Period
Present Value
0 −400,000.00
1 +100,000/1.12 = + 89,285.71
2 +200,000/1.12
2
= +159,438.78
3 +300,000/1.12
3
= +213,534.07
Total = NPV = $62,258.56
20. Mr. Basset is buying a security worth $20,000 now. That is its present value. The
unknown is the annual payment. Using the present value of an annuity formula, we have:
$2,653.90
0.08 (1.08)
1
0.08
1
C 000,20$
0.08 (1.08)
1
0.08
1
000,20$ C
r (1 r)
1
r
1
PV C
12
12
t
=
×
= −
×
= × −
× +
= × −
29. Because the cash flows occur every six months, we first need to calculate the equivalent
semi-annual rate. Thus, 1.08 = (1 + r/2)
2
=> r = 7.85 semi-annually compounded APR.
Therefore the rate for six months is 7.85/2 or 3.925%:
846 081,
0 03925 103925
1
0 03925
1
100 000 100 000
9
$
. . .( )
PV $ , $ ,
=
×
= + × −
Chapter #3: Valuing Bonds
10. a. Price today is 108.425; price after 1 year is 106.930.
b. Return = (106.930 1 8)/108.425 - 1 = .06, or 6%. b. If a bond’s yield to maturity is unchanged, the return to the bondholder is
equal to the yield.
14. a. Real rate = 1.10/1.05 – 1 = .0476, or 4.76%
b. The real rate does not change. The nominal rate increases to 1.0476 x 1.07 – 1 =
.1209, or 12.9%.
Chapter #4: The Value of Common Stocks
16. $100.00
0.10
$10
r
DIV
P
1
A = = =
$83.33
0.10 .040
$5
r g
DIV
P
1
B =
−
=
−
=
= + + + + + + ×
6
7
6
6
5
5
4
4
3
3
2
2
1
1
C
1.10
1
0.10
DIV
1.10
DIV
1.10
DIV
1.10
DIV
1.10
DIV
1.10
DIV
1.10
DIV
P
$104.50
1.10
1
0.10
12.44
1.10
12.44
1.10
10.37
1.10
8.64
1.10
7.20
1.10
6.00
1.10
5.00
PC 1 2 3 4 5 6 6
=
= + + + + + + ×
At a capitalization rate of 10%, Stock C is the most valuable.
For a capitalization rate of 7%, the...