# Fin/Gm 571 Week 2 Problem Set

Text Problems

Abraham Kamara

FIN/GM 571

November 2010
Dr. Furman

Text Problems

Chapter 4
(A9) Rate of Return
PV= C×1/ (1+r) 4
\$208,000 = \$256,000×1/ (1+r)
0.8125= 1/ (1+r) 4
(1+r) 4 = 1/0.8125
r = 1.05328 -1
r = 0.532
r = 5.32% (Rate of Return)

b) Bill’s Rate of Return
PV = C×1/ (1+r) 4
\$195,000 = \$168,000× 1/ (1+r)
\$195,000/\$168,000 = 1/ (1+r) 4
1.6071 = 1/ (1+r) 4
(1+r) 4 = 1/1.16071
(1+r) 4 = 0.861538
Find the roots of both sides
r = -0.963427-1
r = -0.36573
r = -3.66% (Rate of Return)
(A11) Present and Future Value
a) Present Value
PV = 500×1/ (1.10) 3/0.10
PV = \$1,243.43
b) Future Value
FV =500× [(1.1) 3-1]/0.1
FV = \$1,655
Chapter 5

(B20)   Constant Growth
a) P1 = D2/r-g
P1 = 1/ (0.13-0.06) = \$14.29
P0 = \$14.29/ (1+0.13) 1 = \$12.64
b) P3 = Dy/r-g = 1/0.13-0.04 = \$11.11
P0 = \$11.11/ (1+0.13) 3 = \$7.70
Chapter 5
(A1) Bond Valuation
FV = - \$895.94
(A10) Dividend discount Model
P0 = D1/ r-g
5.6/0.10-0.06 = \$140.00
(A12) Required return for a Preferred stock
PV = D/r = D/ PV
PV = 3.38/45.27 = 0.746
PV = 7.6%
(A14)   Stock Valuation
PV = D/r = \$1.00/0.03
PV = \$33.33
(B16)   Interest Rate Risk
a) N = 1×2 = 2
r = .08/2 = 4%
PMT = 45,625 FV = \$1,000

(16)
A1. PV = -\$1,010.61
A2. FV = \$1,000
A3. FV = \$1,000
PV = -\$1,097.27
B1.FV = \$1,000
PV = -\$1,020.18
B2.FV = \$1,000
PV = -\$1,116.03
B3. FV = \$1,000
PV = -195.42
C1. FV = \$1,000
PV = -\$1,001.17
C2. FV =...