Financial Management

FIN 501 - Suggested Problems: Chapter 5

Corporate Finance – Berk DeMarzo, Stangeland – 2nd Canadian ed.

Questions

5-5

You are considering moving your money to a new bank offering a one- year GIC that pays an 8% APR with monthly compounding. Your current bank’s manager offers to match the rate you have been offered. The account at your current bank would pay interest every 6 months. How much interest will you need to earn every 6 months to match the GIC?

5-16

You have just purchased a home and taken out a $ 500,000 mortgage. The mortgage has a 30- year term with monthly payments and an APR (with semiannual compounding) of 6.5%.

a. How much will you pay in interest, and how much will you pay in principal, during the first year?

b. How much will you pay in interest, and how much will you pay in principal, during the twentieth year (i. e., between 19 and 20 years from now)?

5-24

You have credit card debt of $ 25,000 that has an APR (with monthly compounding) of 15%. Each month you only pay the minimum monthly payment. You are required to pay only the outstanding interest. You have received an offer in the mail for an otherwise identical credit card with an APR of 12%. After considering all your alternatives, you decide to switch cards, roll over the outstanding balance on the old card into the new card, and borrow additional money as well. How much can you borrow today on the new card without changing the minimum monthly payment you will be required to pay?

5-28

Consider a project that requires an initial investment of $ 100,000 and will produce a single cash flow of $ 150,000 in five years.

a. What is the NPV of this project if the five- year interest rate is 5% (EAR)?

b. What is the NPV of this project if the five- year interest rate is 10% (EAR)?

c. What is the highest five- year interest rate such that this project is still profitable?

5-34

Your best taxable investment opportunity has an EAR of 4%. Your best tax- free investment...