BA350 Principles of Finance: Week 5 Homework (Q4-2, Q4-4, Q4-5, P4-3, P4-7, P4-10, P4-29)

BA350 Principles of Finance
Week 5 Homework

Q4-2. What is an opportunity cost rate? How is this rate used in discounted cash flow analysis, and where is it shown on a time line? Is the opportunity rate a single number that is used to evaluate all potential investments?

Q4-4. If a firm’s earnings per share grew from $1 to $2 over a 10-year period, the total growth would be 100%, but the annual growth rate would be less than 10%. True or false? Explain

Q4-5. Would you rather have a savings account that pays 5% interest compounded semi-annually or one that pays 5% interest compounded daily? Explain.

P4-3: Finding the Required Interest Rate
Your parents will retire in 18 years. They currently have $250,000, and they think they will need $1 million at retirement. What annual interest rate must they earn to reach their goal, assuming they don’t save any additional funds?

P4-7: Present and Future Values of a Cash Flow Stream
An investment will pay $100 at the end of each of the next 3 years, $200 at the end of Year 4, $300 at the end of Year 5, and $500 at the end of Year 6. If other investments of equal risk earn 8% annually, what is this investment’s present value? Its future value?

P4-10: Present and Future Values of a Single Cash Flow for Different Interest Rates
Use both the TVM equations and a financial calculator to find the following values. See the Hint for Problem 4-9. a. An initial $500 compounded for 10 years at 6% b. An initial $500 compounded for 10 years at 12% c. The present value of $500 due in 10 years at a 6% discount rate d. The present value of $500 due in 10 years at a 12% discount rate

P4-29: Loan Amortization
Assume that your aunt sold her house on December 31, and to help close the sale she took a second mortgage in the amount of $10,000 as part of the payment. The mortgage has a quoted (or nominal) interest rate of 10%; it calls for payments every 6 months, beginning on June 30, and is to be amortized over 10 years. Now, 1 year later, your aunt must inform the IRS and the person who bought the house about the interest that was included in the two payments made during the year. (This interest will be income to your aunt and a deduction to the buyer of the house.) To the closest dollar, what is the total amount of interest that was paid during the first year?