Corpfin

All problems are from:

Berk, J., & DeMarzo, P. (2014). Corporate Finance. Boston, MA: Pearson.

3.

Calculate the future value of $2000 in

a. Five years at an interest rate of 5% per year.  -$2,552.56

b. Ten years at an interest rate of 5% per year.  -$3,257.79

c. Five years at an interest rate of 10% per year.  -$3,221.02

d. Why is the amount of interest earned in part (a) less than half the amount of interest earned in part (b)?

Solution for above answers using an Excel worksheet:

d. The longer term in part (b) accounts for the amount of interest earned in part (a) being less than that in part (b).

4.

What is the present value of $10,000 received -

a. Twelve years from today when the interest rate is 4% per year?  -$6,245.97

b. Twenty years from today when the interest rate is 8% per year?  -$2,145.48

c. Six years from today when the interest rate is 2% per year?  -$8,879.71

Solution for above answers using an Excel worksheet:

5.

Your brother has offered to give you either $5,000 today or $10,000 in 10 years. If the interest rate is 7% per year, which option is preferable?

Today’s $5,000 invested at 7% per year will be $9,835.76 or about $164.24 less than the $10,000 promised to me in 10 years. I will then have my brother give me the $10,000 in 10 years.

6.

Consider the following alternatives:

i. $100 received in one year

ii. $200 received in five years

iii. $300 received in ten years

a. Rank the alternatives from most valuable to least valuable if the interest rate is 10% per year.

b. What is your ranking if the interest rate is only 5% per year?

c. What is your ranking if the interest rate is 20% per year?

8.

Your daughter is currently eight years old. You anticipate that she will be going to college in 10 years. You would like to have $100,000 in a savings account to fund her education at that time. If the account promises to pay a fixed interest rate of 3% per year, how much money do you need to...