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
    a) Adrian’s 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 =...