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Financial Management Principals And Applications 11th Edition Sheridan Titman, John D Martin, Arthur J Keown - Solutions
(Future value of an annuity and annuity payments) You are trying to plan for retirement in 10 years and currently you have $150,000 in a savings account and$250,000 in stocks. In addition, you plan to deposit $8,000 per year into your savings account at the end of each of the next five years, and
(Annuity payments) You plan to buy property in Florida five years from today. To do this, you estimate that you will need $30,000 at that time for the purchase. You would like to accumulate these funds by making equal annual deposits in your savings account, which pays 10 percent annually. If you
(Comprehensive problem) You would like to have $75,000 in 15 years. To accumulate this amount, you plan to deposit an equal sum in the bank each year that will earn 8 percent interest compounded annually. Your first payment will be made at the end of the year.a. How much must you deposit annually
(Annuity number of periods) You’ve just bought a new flat screen TV for $3,000 and the store you bought it from offers to let you finance the entire purchase at an annual rate of 14% compounded monthly. If you take the financing and make monthly payments of $100, how long will it take to pay the
(Annuity payments) You plan to buy some property in Florida five years from today.To do this, you estimate that you will need $20,000 at that time. You would like to accumulate these funds by making equal annual deposits in your savings account, which pays 12 percent annually. If you make your
(Related to Checkpoint 6.1 on page 164) (Annuity payments) A firm borrows $25,000 from the bank at 12 percent compounded annually to purchase some new machinery.This loan is to be repaid in equal annual installments at the end of each year over the next five years. How much will each annual payment
(Annuity interest rate) You’ve been offered a loan of $30,000, which you will have to repay in five equal annual payments of $10,000, with the first payment to be received one year from now. What interest rate would you be paying on that loan?
(Related to Checkpoint 6.1 on page 164) (Loan amortization) On December 31, Beth Klemkosky bought a yacht for $50,000. She paid $10,000 down and agreed to pay the balance in 10 equal annual installments that include both the principal and 10 percent interest on the declining balance. How big would
(Annuity interest rate) Your folks just called and would like some advice from you. An insurance agentjust called them and offered them the opportunity to purchase an annuity for $21,074.25 that will pay them $3,000 per year for 20 years. They don’t have the slightest idea what return they would
(Present value of an annuity) What is the present value of a 10-year annuity that pays$1,000 annually, given a 10 percent discount rate?
(Annuity number of periods) Alex Karev has taken out a $200,000 loan with an annual rate of 8% compounded monthly to pay off hospital bills from his wife Izzy’s illness. If the most Alex can afford to pay is $1,500 per month, how long will it take to pay the loan off? How long will it take for
(Annuity number of periods) How long will it take to pay off a loan of $50,000 at an annual rate of 10% compounded monthly if you make monthly payment of $600?
(Future value of an annuity) Upon graduating from college 35 years ago, Dr. Nick Riviera was already planning for his retirement. Since then, he has made deposits into a retirement fund on a quarterly basis in the amount of $300. Nick has just completed his final payment and is at last ready to
(Annuity payments) The Knutson Corporation needs to save $15 million to retire a$15 million mortgage that matures in 10 years. To retire this mortgage, the company plans to put a fixed amount into an account at the end of each year for 10 years. The Knutson Corporation expects to earn 10 percent
(Annuity payments) The Aggarwal Corporation needs to save $10 million to retire a$10 million mortgage that matures in 10 years. To retire this mortgage, the company plans to put a fixed amount into an account at the end of each year for 10 years. The Aggarwal Corporation expects to earn 9 percent
(Annuity payments) You plan to retire in 10 years and buy a house in Oviedo, Florida.The house you are looking at currently costs $100,000 and is expected to increase in value each year at a rate of 5 percent. Assuming you can earn 10 percent annually on your investments, how much must you invest
(Annuity payments) To pay for your child’s education, you wish to have accumulated$15,000 at the end of 15 years. To do this, you plan to deposit an equal amount into the bank at the end of each year. If the bank is willing to pay 6 percent compounded annually, how much must you deposit each year
(Annuity payments) To pay for your education, you’ve taken out $25,000 in student loans. If you make monthly payments over 15 years at 7 percent compounded monthly, how much are your monthly student loan payments?
(Annuity payments) Emily Morrison purchased a new house for $150,000. She paid$30,000 up front and agreed to pay the rest over the next 25 years in 25 equal annual payments that include principal payments plus 10 percent compound interest on the unpaid balance. What will these equal payments be?
(Related to Checkpoint 6.1 on page 164) (Annuity payments) Mr. Bill S. Preston, Esq., purchased a new house for $80,000. He paid $20,000 upfront on the down payment and agreed to pay the rest over the next 25 years in 25 equal annual payments that include principal payments plus 9 percent compound
(Related to Checkpoint 6.2 on page 167) (Present value of an ordinary annuity) Nicki Johnson, a sophomore mechanical engineering student, received a call from an insurance agent who believes that Nicki is an older woman that is ready to retire from teaching. He talks to her about several annuities
(Related to The Business of Life: Saving for Retirement on page 172) (Future value of an ordinary annuity) You are graduating from college at the end of this semester and after reading the The Business ofLife box in this chapter, you have decided to invest $5,000 at the end of each year into a Roth
(Related to Checkpoint 6.2 on page 167) (Present value of an ordinary annuity)What is the present value of the following annuities?a. $2,500 a year for 10 years discounted back to the present at 7 percentb. $70 a year for 3 years discounted back to the present at 3 percentc. $280 a year for 7 years
(Future value of an ordinary annuity)What is the future value of each of the following streams of payments?a. $500 a year for 10 years compounded annually at 5 percentb. $100 a year for 5 years compounded annually at 10 percentc. $35 a year for 7 years compounded annually at 7 percentd. $25 a year
With an uneven stream of future cash flows, the present value is determined by discounting all of the cash flows back to the present and then adding the present values up. Is there ever a time when you can treat some of the cash flows as an annuity and apply the annuity techniques you learned in
How do you calculate the present value of an annuity? A perpetuity? A growing perpetuity?
What is a level perpetuity? A growing perpetuity?
Distinguish between an ordinary annuity and an annuity due.
Assume you bought a home and took out a 30-year mortgage on it 10 years ago. How would you determine how much principal on your mortgage you still have to pay off?
What is the relationship between the Present Value Interest Factor (from Chapter 5) and the Annuity Present Value Interest Factor (from Equation [6-2])?
How do you calculate the future value of an annuity?
What is an annuity? Give some examples of annuities.
Why would you want to be able to compare cash flows that occur in different time periods with each other?
When are cash flows comparable-that is, when can they be added together or subtracted from each other?
What is a growing perpetuity, and how is it calculated?
Define the term perpetuity as it relates to cash flows.
How would you determine how much you currently owe on an outstanding loan?
Describe the adjustments necessary when annuity payments occur on a monthly basis.
Distinguish between an ordinary annuity and an annuity due.
Define the term annuity as it relates to cash flows.
List at least two actions that Emily and Paul could take to ac¬cumulate more for their retirement (think about i and n).
What is the relationship between discounting and com¬pounding?
What will be the value of Emily’s trust fund at age 60, as¬suming she takes possession of half of the money ($25,000 of the $50,000 trust fund) at age 30 for a house down pay¬ment, and leaves the other half of the money untouched where it is currently invested?
Calculate the amount of money that Emily needs to set aside from her bonus this year to cover the down payment on a new car, assuming she can earn 6% on her savings. What if she could earn 10% on her savings?
Justify Emily’s participation in her employer’s 401 (k) plan using the time value of money concepts by explaining how much an investment of $10,000 will grow to in 40 years if it earns 10%.
(Calculating an EAR) Based on effective interest rates, would you prefer to deposit your money into Springfield National Bank, which pays 8.0% interest compounded annually, or into Burns National Bank, which pays 7.8% compounded monthly?(Hint: Calculate the EAR on each account.)
(Calculating an EAR) Your grandmother asks for your help in choosing a certificate of deposit (CD) from a bank with a one-year maturity and a fixed interest rate. The first certificate of deposit, CD #1, pays 4.95% APR compounded daily, while the second certificate of deposit, CD #2, pays 5.0% APR
(Calculating an EAR) You have a choice of borrowing money from a finance company at 24% compounded monthly or borrowing money from a bank at 26% compounded annually. Which alternative is the most attractive?
(Related to Checkpoint 5.7 on page 145) (Calculating an EAR) After examining the various personal loan rates available to you, you find that you can borrow funds from a finance company at 12% compounded monthly or from a bank at 13% compounded annually. Which alternative is the most attractive?
(Spreadsheet problem) In 20 years, you would like to have $250,000 to buy a vacation home. If you have only $30,000, at what rate must it be compounded annually for it to grow to $250,000 in 20 years? Use a spreadsheet to calculate your answer.
(Spreadsheet problem) If you invest $900 in a bank where it will earn 8% compounded annually, how much will it be worth at the end of seven years? Use a spreadsheet to calculate your answer.
(Solving for i) A financial plannerjust offered you a new investment product that would require an initial investment on your part of $35,000, and then 25 years from now will be worth $250,000. What annual rate of interest would you earn if you invested in this product?
(Solving for i—financial calculator needed) In March 1963, Ironman was first introduced in issue number 39 of Tales ofSuspense. The original price for that issue was 12 cents. By March of 2010, 47 years later, the value of this comic book had risen to$9,000. What annual rate of interest would you
(Related to Checkpoint 5.6 on page 143) (Solving for i—financial calculator needed)In September 1963, the first issue of the comic book X-MEN was issued. The original price for the issue was 12 cents. By September 2006, 43 years later, the value of this comic book had risen to $9,500. What annual
(Present value comparison) Much to your surprise, you were selected to appear on the TV show “The Price Is Right.” As a result of your prowess in identifying how many rolls of toilet paper a typical American family keeps on hand, you win the opportunity to choose one of the following: $1,000
(Related to Checkpoint 5.4 on page 139) (Present-value comparison) You are offered$100,000 today or $300,000 in 13 years. Assuming that you can earn 11% on your money, which should you choose?
(Solving for i) You’ve run out of money for college, and your college roommate has an idea for you. He offers to lend you $15,000, for which you will repay him $37,313 at the end of five years. If you took this loan, what interest rate would you be paying on it?
(Related to Checkpoint 5.6 on page 143) (Solving for i) You lend a friend $10,000, for which your friend will repay you $27,027 at the end of five years. What interest rate are you charging your “friend”?
(Solving for n with non-annual periods) Approximately how many years would it take for an investment to grow by sevenfold if it were invested at 10% compounded semiannually?
(Solving for n with non-annual periods) Approximately how many years would it take for an investment to grow fourfold if it were invested at 16% compounded semiannually?
(Solving for i) An insurance agentjust offered you a new insurance product that will provide you with $2,376.50 ten years from now if you invest $700 today. What annual rate of interest would you earn if you invested in this product?
(Solving for i) If you were offered $1,079.50 ten years from now in return for an investment of $500 currently, what annual rate of interest would you earn if you took the offer?
(Solving for i) Springfield Learning sold zero coupon bonds (bonds that don’t pay any interest, instead the bondholder gets just one payment, coming when the bond matures, from the issuer) and received $900 for each bond that will pay $20,000 when it matures in 30 years.a. At what rate is
(Related to Checkpoint 5.6 on page 143) (Solving for i) Seven years ago, Lance Murdock purchased a wooden statue of a Conquistador for $7,600 to put in his home office. Lance has recently married, and his home office is being converted into a sewing room. His new wife, who has far better taste than
(Related to Checkpoint 5.4 on page 139) (Present value) Ronen Consulting has just realized an accounting error that has resulted in an unfunded liability of $398,930 due in 28 years. In other words, they will need $398,930 in 28 years. Toni Flanders, the company’s CEO, is scrambling to discount
(Related to Checkpoint 5.5 on page 141) (Solving for n) Jack asked Jill to marry him, and she has accepted under one condition: Jack must buy her a new $330,000 RollsRoyce Phantom. Jack currently has $45,530 that he may invest. He has found a mutual fund that pays 4.5% annual interest in which he
(Solving for i) You are considering investing in a security that will pay you $1,000 in 30 years.a. If the appropriate discount rate is 10%, what is the present value of this investment?b. Assume these investments sell for $365 in return for which you receive $1,000 in 30 years, what is the rate of
(Related to Checkpoint 5.6 on page 143) (Solving for i) Kirk Van Houten, who has been married for 23 years, would like to buy his wife an expensive diamond ring with a platinum setting on their 30-year wedding anniversary. Assume that the cost of the ring will be $12,000 in 7 years. Kirk currently
(Related to Checkpoint 5.4 on page 139) (Present value) What is the present value of the following future amounts?a. $800 to be received 10 years from now discounted back to the present at 10%b. $300 to be received 5 years from now discounted back to the present at 5%c. $1,000 to be received 8
(Related to Checkpoint 5.6 on page 143) (Solving for i) At what annual interest rate would the following have to be invested?a. $500 to grow to $1,948.00 in 12 yearsb. $300 to grow to $422.10 in 7 yearsc. $50 to grow to $280.20 in 20 yearsd. $200 to grow to $497.60 in 5 years
(Related to Checkpoint 5.5 on page 141) (Solving for n) How many years will the following take?a. $500 to grow to $1,039.50 if it’s invested at 5% compounded annuallyb. $35 to grow to $53.87 if it’s invested at 9% compounded annuallyc. $100 to grow to $298.60 if it’s invested at 20%
(Related to Checkpoint 5.4 on page 139) (Present value) Sarah Wiggum would like to make a single investment and have $2 million at the time of her retirement in 35 years.She has found a mutual fund that will earn 4% annually. How much will Sarah have to invest today? What if Sarah were a finance
(Simple and compound interest) If you deposit $10,000 today into an account earning an 11% annual rate of return, in the third year how much interest would be earned? How much of the total is simple interest and how much results from compounding of interest?
(Future value) If you deposit $3,500 today into an account earning an 11% annual rate of return, what would your account be worth in 35 years (assuming no further deposits)?In 40 years?
(Future value) You have just introduced “must have” headphones for the iPod. Sales of the new product are expected to be 10,000 units this year and are expected to increase by 15% per year in the future. What are expected sales during each of the next three years? Graph this sales trend and
(Related to Checkpoint 5.2 on page 134) (Future value) A new finance book sold 15,000 copies following the first year of its release, and was expected to increase by 20% per year. What sales are expected during years two, three, and four? Graph this sales trend and explain.
(Related to Checkpoint 5.3 on page 136) (Compound interest with non-annual periods) Your grandmother just gave you $6,000. You’d like to see what it might grow to if you invest it.a. Calculate the future value of $6,000, given that it will be invested for five years at an annual interest rate of
(Related to Checkpoint 5.2 on page 134) (Compound interest with non-annual periods)You just received a $5,000 bonus.a. Calculate the future value of $5,000, given that it will be held in the bank for five years and earn an annual interest rate of 6%.b. Recalculate part (a) using a compounding
(Related to Checkpoint 5.3 on page 136) (Compound interest with non-annual periods) Calculate the amount of money that will be in each of the following accounts at the end of the given deposit period:
(Related to Checkpoint 5.2 on page 134) (Future value) Bob Terwilliger received$12,345 for his services as financial consultant to the mayor’s office of his hometown of Springfield. Bob says that his consulting work was his civic duty and that he should not receive any compensation. So, he has
(Related to The Business of Life: Saving for Your First House on page 137) (Future value)You are hoping to buy a house in the future and recently received an inheritance of$20,000. You intend to use your inheritance as a down payment on your house.a. If you put your inheritance in an account that
(Future value) Leslie Mosallam, who recently sold her Porsche, placed $10,000 in a savings account paying annual compound interest of 6%.a. Calculate the amount of money that will accumulate if Leslie leaves the money in the bank for 1,5, and 15 years.b. Suppose Leslie moves her money into an
(Related to Checkpoint 5.2 on page 134) (Future value) To what amount will the following investments accumulate?a. $5,000 invested for 10 years at 10% compounded annuallyb. $8,000 invested for 7 years at 8% compounded annuallyc. $775 invested for 12 years at 12% compounded annuallyd. $21,000
(Related to Chapter Introduction: Payday Loans on page 127) In the introduction to this chapter, payday loans were examined. Go to the Responsible Lending Organization website www.responsiblelending.org/payday-lending/. How does the“debt trap” {www.
(Related to Chapter Introduction: Payday Loans on page 127) The introduction to this chapter examined payday loans. Recently, Congress passed legislation limiting the interest rate charged to active military to 36%. Go to the Predatory Lending Association website www.predatorylendingassociation.com
Compare some of the different financial calculators that are available on the Internet.Look at Kiplinger Online calculators (www.kiplinger.com/tools/index.html) which include saving and investing, mutual funds, bonds, stocks, home, auto, credit cards, and budgeting online calculators. Also go to
How would an increase in the interest rate (i) or a decrease in the number of periods until the payment is received (n) affect the present value (PV) of a sum of money?
How would an increase in the interest rate (i) or a decrease in the number of periods(n) affect the future value (FVn) of a sum of money?
What is the relationship between the number of times interest is compounded per year on an investment and the future value of that investment? What is the relationship between the number of times compounding occurs per year and the EAR?
The processes of discounting and compounding are related. Explain this relationship.
What is the time value of money? Give three examples of how the time value of money might take on importance in business decisions.
What is the effect of having multipie compounding periods within a year on future values?
Flow does an EAR differ from an APR?
How is discounting related to compounding?
What does the term discounting mean with respect to the time value of money?
How does increasing the number of compounding periods affect the future value of a cash sum?
Describe the three basic approaches that can be used to move money through time.
What is compound interest, and how is it calculated?
Does year 5 represent the end of the fifth year, the beginning of the sixth year, or both?
What is a timeline, and how does it help you solve time value of money problems?
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