Chapter_04_sol_students

# Chapter_04_sol_students -...

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Corporate Finance: The Core  (Berk/DeMarzo) Chapter 4  -  The Time Value of Money Use the table for the question(s) below. Year A B 0 - \$150 - \$225 1 40 175 2 80 125 3 100 - 50 6)

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Draw a  timeline detailing the cash flows from investment "A."  Answer:
Diff: 1  Topic: 4.1 The Timeline  Skill: Conceptual    7)

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Draw a  timeline detailing the cash flows from investment "B."  Answer:
Diff: 1  Topic: 4.1 The Timeline  Skill: Conceptual    Use the information for the question(s) below. Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their  child's college education.  Currently, college tuition, books, fees, and other costs, average \$12,500 per year.  On average, tuition and  other costs have historically increased at a rate of 4% per year.   8)

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Assume  that  college  costs  continue to increase an average of 4% per year and that all her college savings are invested in an account paying 7%  interest.  Draw a timeline that details the amount of money she will need to have in the future four each of her four years of  her undergraduate education.     Answer:
\$25,322.71 \$25,322.71(1.04) 1 \$25,322.71(1.04) 2 \$25,322.71(1.04) 3 18 19 20 21 Note that the tuition  for the first year is  calculated as:  \$12,5000(1.04) 18   = \$25,322.71

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Diff: 2  Topic: 4.1 The Timeline  Skill: Conceptual    9)
Suppose  that a  young  couple  has just  had their first baby and they wish to insure that enough money will be available to pay for their child's college education.  They decide to make deposits into an educational savings account on each of their daughter's birthdays, starting with her  first birthday.  Assume that the educational savings account will return a constant 7%.  The parents deposit \$2000 on their  daughter's first birthday and plan to increase the size of their deposits by 5% each year.  Draw a timeline that details the  amount that would be available for the daughter's college expenses on her 18th birthday.  Answer:

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Diff: 2  Topic: 4.1 The Timeline  Skill: Analytical  3)
Which of  the following statements is false?  A)

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The process of  moving a value or cash flow backward in time is known as discounting.  B)
FV   =   (1 ) n C r + C)

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The process of  moving a value or cash flow forward in time is known as compounding.  D)
The value of a  cash flow that is moved forward in time is known as its future value.  Answer:

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Explanation:
A)

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D)
Diff: 1  Topic: 4.2 The Three Rules of Time Travel  Skill: Conceptual    5)

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Consider  the  following  timeline: If the current market rate of interest is 10%, then the future value of this timeline is closest to:  A)
\$666  B)

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\$500  C)
\$605  D)

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Explanation:

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A)  F
D)

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Diff: 1  Topic: 4.2 The Three Rules of Time Travel  Skill: Analytical  7)
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## This note was uploaded on 12/28/2009 for the course FEWEB CORPFIN taught by Professor Dorsman during the Spring '09 term at Vrije Universiteit Amsterdam.

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Chapter_04_sol_students -...

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