# Fundamentals of Corporate Finance (4th Edition)

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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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, ...

#### Solution Summary

The fundamentals of corporate finance are determined.