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intermediate financial management
Financial Management Principles And Applications 14th Global Edition Sheridan Titman, Arthur Keown, John Martin - Solutions
(Calculating the number of annuity periods) Greer is borrowing €300,000 to buy a house in Amsterdam at 5 percent per annum compounded monthly. How long will it take to pay off the amount if she makes monthly payments of €1,600?
(Calculating the 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$300 deposits into a retirement fund on a quarterly basis. Nick has just completed his final payment and is at last ready to
(Calculating annuity payments) Sheef Metal PLC’s factory is on leasehold land. The lease will end in 15 years’ time from now. The directors have decided to buy the title rights from the leaseholder at the end of the lease term, and this is expected to cost£500,000 at the time of the lease’s
(Calculating 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
(Calculating annuity payments) Kelly Yeo plans to buy her own apartment in Singapore in 10 years’ time when she retires. She has identified a location where house prices average at $300,000 at present. She also expects a rise in the house price by 5 percent every year. She plans to have the funds
(Calculating annuity payments) Satya Kumar wishes to have £30,000 at the end of 20 years to pay for his daughter’s pilot training. He plans to do so by depositing an equal amount every year in an account that pays 7 percent compounded annually.How much does he need to deposit every year to reach
(Calculating annuity payments) Jamie Oliver has just graduated and found a job. He had taken a student loan of $40,000 to pay for his university. He has decided to pay off this loan by making equal annual payments over the next 20 years. If the loan charges him compound interest at 8 percent per
(Calculating annuity payments) Donna Langley bought a new luxury car for €50,000.She made a down payment of €5,000 and agreed to pay the rest over the next eight years in eight equal annual payments that include both principal and 12 percent compound interest on unpaid balance. What will these
(Calculating annuity payments) (Related to Checkpoint 6.1 on page 196) James Harrison bought a house for £180,000. He paid £20,000 upfront from his savings and took a mortgage to pay the rest for 25 years. The mortgage was to be paid in 25 equal annual installments that included both principal
(Calculating the present value of an ordinary annuity) (Related to Checkpoint 6.2 on page 199) Nicki Johnson, a sophomore mechanical engineering student, received a call from an insurance agent who believes that Nicki is an older woman who is ready to retire from teaching. He talks to her about
(Calculating the future value of an ordinary annuity) (Related to Finance for Life: Saving for Retirement on page 204) At 25, Manoj Patel decided to leave his public sector job and start a furniture business. The business has grown in two years, and Manoj is now planning for his retirement.a. He
(Calculating the present value of an ordinary annuity) (Related to Checkpoint 6.2 on page 199) Calculate the present value of the following annuities.a. £350 a year for 12 years discounted back to the present at 7 percent.b. €260 a year for 5 years discounted back to the present at 8 percent.c.
(Calculating the future value of an ordinary annuity) Calculate the future value of each of the following streams of payments.a. £430 a year for 12 years compounded annually at 6 percent.b. €56 a year for 8 years compounded annually at 8 percent.c. $75 a year for 5 years compounded annually at 3
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.Is there ever a time when you can treat some of the cash flows as annuities and apply the annuity techniques you learned in this
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.
Calculate the present and future values of complex cash flow streams.
Calculate the present value of a level perpetuity and a growing perpetuity.
Distinguish between an ordinary annuity and an annuity due, and calculate the present and future values of each.
Suggest two ways in which Suzy can have a higher amount available to her at the time of her retirement.(Hint: compare the returns offered by different asset classes like debt, equity, etc.)
How are compounding and discounting related?
What will be the value of her savings if she withdraws S$40,000 for her condo purchase when she turns 30 and leaves the remaining amount in the same treasury bills till she retires at the age of 65?
Assuming that she can earn 6 percent on her savings, how much does Suzy need to deposit now to cover her down payment for her condo in three years’ time? How much will she need if she can earn 12 percent on her savings?
Explain to Suzy how much an investment of S$10,000 will grow in 40 years if it earns 5 percent per annum and advise if it’s beneficial for her to join her pension plan as early as possible.
(Calculating an EAR) In early 2016, typical terms on a payday loan involved a $15 charge for a two-week payday loan of $100. Assuming there are 26 fourteen-day periods in a year, what is the effective annual rate on such a loan?
(Calculating an EAR) If you borrow £100 from a payday lender in the United Kingdom, you are expected to pay back £120 in 15 days. What is the effective annual rate(or annual percentage rate) on this type of loan?
(Calculating an EAR) (Related to Checkpoint 5.7 on page 179) Royal Leeds Bank gives 5 percent interest on a fixed deposit compounded annually. The Citizen York Bank offers 4.75 percent on its fixed deposit compounded monthly. Where would you prefer to deposit your money?
(Calculating an EAR) (Related to Checkpoint 5.7 on page 179) Lisi Jiang needs to renovate her house. She has loan offers from two banks. Bank A is charging 13 percent interest compounded semiannually, while Bank B is charging 12 percent compounded monthly. Which of these loans would you recommend
(Calculating an EAR) (Related to Checkpoint 5.7 on page 179) You have a choice of borrowing money from a finance company at 24 percent compounded monthly or from a bank at 26 percent compounded annually. Which alternative is the more attractive?
(Calculating an EAR) (Related to Checkpoint 5.7 on page 179) After examining the various personal loan rates available to you, you find that you can borrow funds from a finance company at 12 percent compounded monthly or from a bank at 13 percent compounded annually. Which alternative is the more
(Solving a 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.
(Solving a spreadsheet problem) If you invest $900 in a bank where it will earn 8 percent 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 new business proposal is asking you to invest $30,000 now with a guaranteed return of $320,000 in 30 years’ time. What annual rate of return would you earn if you invested in this business?
(Solving for i) In March 1963, Iron Man was introduced in issue 39 of the comic book Tales of Suspense. The original price for that issue was 12 cents. By March 2016, 53 years later, the value of this comic book, given the condition it’s in, had risen to$10,000. What annual rate of interest would
(Solving for i) (Related to Checkpoint 5.6 on page 176) In September 1963, the first issue of the comic book The X-Men was issued. The original price for the issue was 12 cents. By September 2016, 53 years later, given the condition it’s in, the value of this comic book had risen to $14,500. What
(Comparing present and future values) Greer Hill just had a meeting with the pension advisor of her company. She was presented with three options for withdrawing her contribution so far. If she withdraws now, she will get £15,000 immediately. If she withdraws in 10 years’ time, she will get
(Comparing present and future values) (Related to Checkpoint 5.4 on page 173)You are offered $100,000 today or $300,000 in 13 years. Assuming that you can earn 11 percent on your money, which should you choose?
(Solving for i) (Related to Checkpoint 5.6 on page 176) 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
(Solving for i) (Related to Checkpoint 5.6 on page 176) 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) How long would it take an investment to grow five-fold if it were invested at 8 percent compounded quarterly?
(Solving for n with non-annual periods) Assume that government treasury bonds in India pay 14 percent compounded semi-annually. How long will it take for an investment to double itself?
(Solving for i) A business partner of yours has borrowed £8,000 from you today and has promised to give you £25,000 in 10 years. What annual rate of interest are you going to earn on this loan?
(Solving for i) (Related to Checkpoint 5.6 on page 176) A business offer promises to pay €22,000 in 12 years’ time. You are required to invest €1,600 now to avail this offer. What annual rate of interest would you earn if you took the offer?
(Solving for i) (Related to Checkpoint 5.6 on page 176) 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
(Solving for i) (Related to Checkpoint 5.6 on page 176) Dave Kaminsky bought a Ford Mustang seven years ago for £32,000. He has decided to sell it as he now needs a pick-up truck for his new business. He received £12,000 for it from a dealer in part exchange, which means that since the price of
(Calculating present value) (Related to Checkpoint 5.4 on page 173) Yassir Ismail has recently bought some land from a farmer in Africa. The farmer has asked that, in addition to immediate payment, Yassir will also pay $500,000 in 30 years’ time per local customs related to ownership transfers to
(Solving for n) (Related to Checkpoint 5.5 on page 175) Alena has always wanted to own a Porsche 911 R sports car. She knows that this car is available in the market for£350,000 and sells higher than its cost value as only a limited number of models were produced. She has invested £42,000 in a
(Solving for i) (Related to Checkpoint 5.6 on page 176) You are considering investing in a security that will pay you $1,000 in 30 years.a. If the appropriate discount rate is 10 percent, what is the present value of this investment?b. Assume these securities sell for $365, in return for which you
(Solving for i) (Related to Checkpoint 5.6 on page 176) 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 seven years. Kirk
(Calculating present value) (Related to Checkpoint 5.4 on page 173) 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 percentb. $300 to be received 5 years from now discounted back to the present at 5 percentc.
(Solving for i) (Related to Checkpoint 5.6 on page 176) 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
(Solving for n) (Related to Checkpoint 5.5 on page 175) How many years will the following take?a. $500 to grow to $1,039.50 if it’s invested at 5 percent compounded annuallyb. $35 to grow to $53.87 if it’s invested at 9 percent compounded annuallyc. $100 to grow to $298.60 if it’s invested at
(Calculating present value) (Related to Checkpoint 5.4 on page 173) Thomas Hill would like to have £1,500,000 at the time of his retirement, which is due in 40 years’time. He has found a fixed income fund that pays 5 percent per annum. How much does he have to invest today? If he invests in a
(Calculating simple and compound interest) (Related to Checkpoint 5.2 on page 168) Jake Mai deposited ¥300,000 in a bank account earning 9 percent per annum.How much interest will he earn in the fourth year? How much of the total will be simple interest and how much will be the result of compound
She wants to buy a small cottage in the Alps after retirement. She has just deposited €25,000 in an account that pays 6 percent. What amount will she get upon retirement? How much will she get if she decides to retire five years earlier, at the age of 60?
(Calculating future value) (Related to Checkpoint 5.2 on page 168) Penny has just turned 35 years old and plans to retire when she turns
(Calculating future value) (Related to Checkpoint 5.2 on page 168) 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 to increase by 15 percent per year in the future. What are expected sales during each of the
(Calculating future value) (Related to Checkpoint 5.2 on page 168) Parisian Window Ltd. is a new business that has just booked €140,000 in sales in its first year of trading. The managers expect that they will achieve 25 percent sales growth per year.What will their expected sales in Years 2, 3,
(Calculating compound interest with non-annual periods) (Related to Checkpoint 5.3 on page 170) Your grandmother just gave you $6,000. You’d like to see how much it might grow if you invest it.a. Calculate the future value of $6,000, given that it will be invested for five years at an annual
(Calculating compound interest with non-annual periods) (Related to Checkpoint 5.2 on page 168) 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 percent.b. Recalculate part a using a
(Calculating compound interest with non-annual periods) (Related to Checkpoint 5.3 on page 170) Calculate the amount of money that will be in each of the following accounts at the end of the given deposit period:Account Holder Amount Deposited Annual Interest Rate Compounding Periods per Year
(Calculating future value) (Related to Checkpoint 5.2 on page 168) John Meyers recently graduated from university and has managed to find a job. He is from an economically weak community and has received help from a local charity supported by the city council. John has decided to donate one
(Calculating future value) (Related to Finance for Life: Getting on the Property Ladder on page 171) Rosalee has recently received a bonus of £12,000 from her employer. She plans to use this amount as down payment for her first house.a. If she puts this money in an account earning 8 percent
(Calculating future value) (Related to Checkpoint 5.2 on page 168) Leslie Mosallam, who recently sold her Porsche, placed $10,000 in a savings account paying annual compound interest of 6 percent.a. Calculate the amount of money that will accumulate if Leslie leaves the money in the bank for 1, 5,
(Calculating future value) (Related to Checkpoint 5.2 on page 168) To what amount will the following investments accumulate?a. $5,000 invested for 10 years at 10 percent compounded annuallyb. $8,000 invested for 7 years at 8 percent compounded annuallyc. $775 invested for 12 years at 12 percent
In the Payday Loans feature on page 161, we examined these short-term, high-interest loans. Go to the Responsible Lending Organization website at www.responsiblelending.org/payday-lending/. What are some of their concerns about payday and other small dollar loans? Summarize their research papers.
In the Payday Loans feature on page 161, we examined short-term, high-interest loans. Recently, Congress passed legislation limiting the interest rate charged to active military to 36 percent. Go to the Predatory Lending Association website at www.predatorylendingassociation.com, find the military
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 how much you need to retire, the value of boosting your 401(k)contributions, and how much you can save by biking to work.
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 on future values of having multiple compounding periods within a year?
How 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 problems involving the time value of money?
Understand how interest rates are quoted and know how to make them comparable.
Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.
Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.
Construct cash flow timelines to organize your analysis of problems involving the time value of money
(Analyzing efficiency) Frankfurt Chemicals GmbH is based in Frankfurt, Germany, and has declared sales of €25 million last year. Three-fifth of the company sales are on credit while the remainder are in cash. Their current assets are worth €3 million, while current liabilities are worth €2
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