Fundamentals of Corporate Finance (4th Edition)
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Fundamentals of Corporate Finance (4th ed.)
R.A. Brealey, S.C. Myers, & A.J. Marcus
McGraw-Hill/Irwin, 2004
New York, NY
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The fundamentals of corporate finance are determined.
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Please see attached for the answers. Please refer to your textbook for the actual questions.
Solutions for Select Problems from the Book
Fundamentals of Corporate Finance (4th ed.)
R.A. Brealey, S.C. Myers, & A.J. Marcus
McGraw-Hill/Irwin, 2004
New York, NY
Chapter 4
1. a. $100/(1.08)10 = $46.32
b. $100/(1.08)20 = $21.45
c. $100/(1.04)10 = $67.56
d. $100/(1.04)20 = $45.64
2. a. $100 ´ (1.08)10 = $215.89
b. $100 ´ (1.08)20 = $466.10
c. $100 ´ (1.04)10 = $148.02
d. $100 ´ (1.04)20 = $219.11
6.
Present Value Years Future Value Interest Rate*
a. $400 11 $684
b. $183 4 $249
c. $300 7 $300
To find the interest rate, we rearrange the basic future value equation as follows:
FV = PV ´ (1 + r)t Þ r =
10. In these problems, you can either solve the equation provided directly, or you can use your financial calculator, setting: PV = (-)400, FV = 1000, PMT = 0, i as specified by the problem. Then compute n on the calculator.
a. $400 ´ (1.04)t = $1,000 Þ t = 23.36 periods
b. $400 ´ (1.08)t = $1,000 Þ t = 11.91 periods
c. $400 ´ (1.16)t = $1,000 Þ t = 6.17 periods
20. The PV for the quarterback is the present value of a 5-year, $3 million annuity:
$3 million ´ annuity factor(10%, 5 years)
The receiver gets $4 million now plus a 5-year, $2 million annuity. The present value of the annuity is:
With the $4 million immediate payment, the receiver's contract is worth:
$4 million + $7.58 million = $11.58 million
The receiver's contract is worth more than the quarterback's even though the receiver's undiscounted total payments are less than the quarterback's.
22. a. PV = 100 ´ annuity factor(6%, 3 periods) = 100 ´
b. If the payment stream is deferred by an additional year, then each payment is discounted by an additional factor of 1.06. Therefore, the present value is reduced by a factor of 1.06 to: ($267.30/1.06) = $252.17
37. a. Using a financial calculator, enter: PV = (-)1,000, FV = 0, i = 8%, n = 4, and compute PMT = $301.92
b.
Time Loan
balance Year-end interest due Year-end
payment Amortization
of loan
0 $1,000.00 $80.00 $301.92 $221.92
1 $778.08 $62.25 $301.92 $239.67
2 $538.41 $43.07 $301.92 $258.85
3 $279.56 $22.36 $301.92 $279.56
4 $ 0.00 $ 0.00 -- --
c. 301.92 ´ annuity factor (8%, 3 years) = $778.08
Therefore, the loan balance is $778.08 after one year.
39. The present value of the $2 million, 20-year annuity, ...
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