1. How much will you have in 10 years if you invest $100 a month starting today for 10 years at a rate of 7%?
2. What is the present value of $200,000 received at the end of every 6 months for the next 8 years at a discount rate of 7%?
3. How are the processes of discounting and compounding related? Explain.
4. In Capital Budgeting, what is the basic flaw of the "Payback Model?"
5. Find MNO's Weighted Average Cost of capital given the following information:
Tax Bracket: 30%
Percent of Company financed By Stock: 60%
Percent of Company financed by Bonds: 25%
Percent of Company financed by Preferred Stocks: 15%
Stock Required Rate of Return: 15%
Bond Yield: 7%
Preferred Stock Yield: 11%
6. You are making a decision for a part of your company's pension plan. You have a choice of buying an annuity for $800,000 that will pay $100,000 at the end of each year for the next 10 years. You also have other investment opportunities that will yield 8% over the next 10 years. Therefore, you will use 8% as your discount rate when making your decision. Which option will you choose and why? (Make sure you show your math)
Here we have to find out the compounded value of annuity
F=A*((1+r)^n-1)/r =100*((1+7%/12)^120-1)/(7%/12) =$17308.48
F=Future value, A= Annuity r= rate of interest n=duration
A= 100, Monthly interest rate= r= 7%/12, n=10*12=120 months
Thus the amount will be $17308.48
See excel file ...
The compounded value of annuity is determined.