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Week 2 Questions and Answers

Calculate the missing Time Value of Money variable for each of the following sets of data:

Ch 5-1                   Compute Future Value

Ch 5-2                   Compute Future Value

Ch 5-3                   Compute Present Value

Ch 5-4                   Compute Present Value

Ch 5-5                   Compute Interest Rate

Ch 5-6                   Compute Interest Rate

Ch 5-7                   Compute # of Periods

Ch 5-8                   Compute # of Periods

Present Value and Multiple Cash Flows [LO1] Investment X offers to pay you $6,200 per year for eight years, whereas Investment Y offers to pay you $8,500 per year for five years.

Ch 6-1 a                Which investment has the higher present value if the discount rate is 5 percent?

Ch 6-1 b                Which investment has the higher present value if the discount rate is 15 percent?

Calculating Loan Payments [LO2, 4] You want to buy a new SUV for $35,750, and the finance office at the dealership has quoted you an APR of 4.5 percent for a 60-month loan to buy the car.

Ch 6-2 a                What will your monthly payments be?

Ch 6-2 b                What is the effective annual rate on this loan?

Valuing Bonds [LO2] Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 20 years to maturity, and a coupon rate of 4.4 percent paid annually.

Ch 7-1   If the yield to maturity is 5.1 percent, what is the current price of the bond?

Coupon Rates [LO2] A Corporation has bonds on the market with 14 years to maturity, a YTM of 4.8 percent, a par value of $1,000, and a current price of $982. The bonds make semiannual payments.

Ch 7-2   What must the coupon rate be on these bonds?

Stock Values [LO1] A firm just paid a dividend of $2.25 per share on its stock. The dividends are expected to grow at a constant rate of 4.0 percent per year indefinitely. Investors require a return of 11.25 percent on stock.

Ch 8-1 a                What is the current price?

Ch 8-1 b                What will the price be in three years?

Stock Valuation and PE [LO2] A company has earnings of $3.25 per share. The benchmark PE for the company is 12.

Ch 8-2 a                What stock price would you consider appropriate?

Ch 8-2 b                What is the appropriate price if the benchmark PE is 18?

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