Time Value of Money for Albrecht

A. Albrecht - Chapter 18, Exercise 18-2
Exercise 18-2 Time Value of Money
Your late, rich uncle left you $250,000. The executor of the estate has asked if you would rather receive the full amount now or $30,000 a year for the next 40 years.
Which of these options would you take, assuming that your desired rate of return is:
1. 10%?
2. 12%?

B. Brealey - Chapter 7, Practice Problem 13
13. NPV/IRR. Consider projects A and B:
Project Cash Flows, Dollars NPV at 10%
C0 C1 C2
A -30,000 21,000 21,000 +$6,446
B -50,000 33,000 33,000 +$7,273
Calculate IRRs for A and B. Which project does the IRR rule suggest is best? Which project is really best?

C. Brealey - Chapter 6, Quiz Problem 6

Rate of Return. Steady As She Goes, Inc., will pay a year-end dividend of $3 per share. Investors expect the dividend to grow at a rate of 4 percent indefinitely.
1. If the stock currently sells for $30 per share, what is the expected rate of return on the stock?
2. If the expected rate of return on the stock is 16.5 percent, what is the stock price?

D. Brealey - Chapter 18, Quiz Problem 1
1. Financial Planning. True or false? Explain.
a. Financial planning should attempt to minimize risk.
b. The primary aim of financial planning is to obtain better forecasts of future cash flows and earnings.
c. Financial planning is necessary because financing and investment decisions interact and should not be made independently
d. Firms' planning horizons rarely exceed 3 years.
e. Individual capital investment projects are not considered in a financial plan unless they are very large.
f. Financial planning requires accurate and consistent forecasting.
g. Financial planning models should include as much detail as possible.

E. Brealey - Chapter 22, Practice Problem 8

8. Merger Gains and Costs. Velcro Saddles is contemplating the acquisition of Pogo Ski Sticks, Inc. The values of the two companies as separate entities are $20 million and $10 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and administrative costs by $500,000 per year in perpetuity. Velcro Saddles is willing to pay $14 million cash for Pogo. The opportunity cost of capital is 8 percent.
a. What is the gain from merger?
b. What is the cost of the cash offer?
c. What is the NPV of the acquisition under the cash offer?