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Fundamentals of Corporate Finance (4th Edition)

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Solutions for select problems/chapters from the textbook:
Fundamentals of Corporate Finance (4th ed.)
R.A. Brealey, S.C. Myers, & A.J. Marcus
McGraw-Hill/Irwin, 2004
New York, NY

I hope this would help you students gain better understanding of the examples/exercises covered in the text and gain better understanding of the concepts discussed in your class.

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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, ...

Solution Summary

The fundamentals of corporate finance are determined.

\$2.19