ADMS3530_midterm exam_solutions_Winter 2007

ADMS3530_midterm exam_solutions_Winter 2007 - AK/ADMS...

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AK/ADMS 3530.03 Finance Midterm Exam Winter 2007 Solutions Type A Exam Numerical questions (4 points each) 1. (Q. 2 in B) The Joshua Co. plans on saving money to buy some new equipment. The company is opening an account today with a deposit of $15,000 and expects To earn 4% interest annually. After 3 years, the firm wants to add an additional $50,000 to the account. If the account continues and earns 4% interest compounded semi-annually after 3 years, how much money will the Joshua Co. have in their account five years from now? A) $66,872.96 B) $68,249.79 C) $70,952.96 D) $72,385.44 Answer D Using FV = PV × (1+r)^t formula FV in 3yrs = $15,000 × (1 + 0.04) ^3 = $16,872.96 FV in 5 yrs = $(16,872.96 + 50,000) × (1 + 0.04 / 2)^ 4 = $72,385.44. 2. (Q. 1 in B) I want to buy a car that I know will cost me $43,860 (before taxes) in ten years. How much must I save annually, beginning one year from now, in order to accumulate the purchase price plus all applicable taxes by the end of Year 10? In this case taxes are 6% GST and 8% PST which are each applied to the purchase price. Assume that interest is calculated at 9 percent annually. A) $2,887 B) $3,291 C) $4,500 D) $4,587 Answer B 1
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Amount required in ten years = $43,860 × (1.14) = $50,000.40 Using the FV annuity formula where FV= PMT× ((1+r)^t – 1) r $50,000 = PMT × ((1.09) 1) .09 10 - = PMT × 15.1929 PMT = $3,291.04. 3. (Q. 8 in B) A credit card company sends you a promotion that says it will charge you an interest rate of 1.25% monthly. In this case the annual percentage rate (APR) is ____ and the effective annual rate (EAR) is _______ and if I carried a $300 balance throughout the year I would owe _______ at the end of the year. A) 16.08%; 15.00%; $348.24 B) 15.00%; 14.55%; $345.00 C) 14.55%; 15.00%; $345.00 D) 15.00%; 16.08%; $348.24 Answer D APR = 1.25% × 12 = 15% EAR = (1+1.25%)^12 – 1 = 16.08% Balance owing = 300 × (1+0.1608) = $348.24. 4. (Q. 9 in B) Prizes are often not “worth” as much as claimed. Place a value on a prize of $5,000,000 that is to be received in equal annual payments over the next 20 years, with the first payment beginning today. Assume an interest rate of 7 percent over the 20-year period. A) $2,212,652 B) $2,648,504 C) $2,833,899 D) $2,950,567 Answer C 2
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Annual payment = $5,000,000 / 20 = $250,000 PV = PMT + PMT 1 i 1 (1 i) i n - + (for annuities due) = $250,000 + $250,000 1 .07 1 07(1.07) . 19 - = $250,000 + $250,000 [10.3356] =$2,833,898.81. 5. (Q. 3 in B) Which of the following strategies will allow real retirement spending to remain approximately equal, assuming savings of $1,000,000 invested at 8 percent annually, a 25-year time horizon, and a 4 percent expected annual inflation rate? A) Spend approximately $63,000 annually.
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This note was uploaded on 05/20/2010 for the course ADMS 3530 taught by Professor Unknown during the Winter '09 term at York University.

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ADMS3530_midterm exam_solutions_Winter 2007 - AK/ADMS...

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