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Present value

1. You will require $700 in 5 years. If you earn 5 percent interest on your funds, how much will you need to invest today to reach your goal?
a. $575.34
b. $548.47
c. $545.44
d. $573.35
2. You deposit $1,000 in your bank account. If the bank pays 4 percent compounded interest, how much will you accumulate in your account after 10 years?
a. $1,400
b. $1,500
c. $1,480
d. $1,343
3. A General Motors bond carries a coupon rate of 8 percent, has 9 years until maturity, and sells at a yield to maturity of 7 percent. At what price does the bond sell for?
a. $1,065
b. $1,108
c. $1,080
d. $1,040

4. Given two projects what are the decision models that you can use to make a decision as to which project you should accept? Which is the better?

5. Why do companies pay dividends? In what ways can dividends be paid? How do companies decide on dividend payments?

6. In what ways is preferred stock like long-term debt? In what ways is it like common stock?

7. When securities are issued (IPO) what is the role of the underwriter?

Problem Show work

8. Presented are two mutually exclusive projects under consideration by the BUILDERS-R-US Company:

Year Project A Project B
0 -30,000 -50,000
1 10,000 15,000
2 10,000 15,000
3 10,000 15,000
4 10,000 15,000

The cost of capital is 10%.

A) Payback period
B) NPV
C) IRR

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Solution Preview

1. You will require $700 in 5 years. If you earn 5 percent interest on your funds, how much will you need to invest today to reach your goal?
a. $575.34
b. $548.47
c. $545.44
d. $573.35

We will use present value formulae:
P=present value, F= Future value r= rate of interest n=duration
P=F/(1+r)^n
P= 700/(1+5%)^5
=$548.47

2. You deposit $1,000 in your bank account. If the bank pays 4 percent compounded interest, how much will you accumulate in your account after 10 years?
a. $1,400
b. $1,500
c. $1,480
d. $1,343

Here we will use future value formulae:

P=present value, F= Future value r= rate of interest n=duration
F=P*(1+r)^n

F=1000*(1+4%)^10
=$1480

The answer is c.

3. A General Motors bond carries a coupon rate of 8 percent, has 9 years until maturity, and sells at a yield to maturity of 7 percent. At what price does the bond sell for?
a. $1,065
b. $1,108
c. $1,080
d. $1,040

Price of Bond= Present Value of Inflows=$ 1065
Note:
Price of Bond = Present value of annual coupons Interest received + Present value of Principal repayment

PV of coupons= $521
Here we have to find out the present value of annuity
P=A*((1/r)-((1/(r*((1+r)^n)))
P=present value, A= Annuity r= rate of interest n=duration
A=80, r =7% n=9

PV of Principal Repayment=$544
P=present value, F= Future value r= rate of interest n=duration
P=F/(1+r)^n

Hence option a is the answer .

4. Given two projects what are the decision models that you can use to make a decision as to ...

Solution Summary

Response helps in providing the steps to compute the present value

$2.19