The UNIVERSITY OF TOLEDO
College of Business and Innovation
BUAD 6200-041/051 Corporate Finance
Summer-2016
Homework-01 (Ch-04)
Due: May 11, 2016
Please type up your homework. For explanation type questions, please be brief
CH-04 Discounted Cash Flow Valuation
Problem-1: First City Bank pays 8 percent simple interest on its savings account balances, whereas Second City Bank pays 8 percent interest compounded annually. |
Problem-2: Although appealing to more refined tastes, art as a collectible has not always performed so profitably. During 2010, an auction house sold a painting, at auction for a price of $1,010,000. Unfortunately for the previous owner, he had purchased it three years earlier at a price of $1,590,000. |
Problem-3: An investor purchasing a British consol is entitled to receive annual payments from the British government forever. |
What is the price of a consol that pays $250 annually if the next payment occurs one year from today? The market interest rate is 5.6 percent. |
Problem-4: Investment X offers to pay you $6,200 per year for nine years, whereas Investment Y offers to pay you $9,000 per year for five years. |
Calculate the present value for Investments X and Y if the discount rate is 4 percent. |
Problem-5: The Perpetual Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $14,500 per year forever. |
If the required return on this investment is 5.1 percent, how much will you pay for the policy? |
Problem-6: Find the EAR in each of the following cases |
Stated Rate (APR) | | Number of Times Compounded | | Effective Rate (EAR) |
| 8.7 | % | | | Quarterly | | | % | |
| 17.7 | | | | Monthly | | | | |
| 13.7 | | | | Daily | | | | |
| 10.7 | | | | Infinite | | | | |
|
Problem-7: A well-known...
