CHAPTER 6

# CHAPTER 6 - CHAPTER 6 DISCOUNTED CASH FLOW VALUATION...

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CHAPTER 6 DISCOUNTED CASH FLOW VALUATION Solutions to Questions and Problems NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem. 15. The reported rate is the APR, so we need to convert the EAR to an APR as follows: EAR = [1 + (APR / m )] m – 1 APR = m [(1 + EAR) 1/ m – 1] APR = 365[(1.16) 1/365 – 1] = .1485 or 14.85% This is deceptive because the borrower is actually paying annualized interest of 16% per year, not the 14.85% reported on the loan contract. 28. Here the cash flows are annual and the given interest rate is annual, so we can use the interest rate given. We simply find the PV of each cash flow and add them together. PV = \$1,650 / 1.0845 + \$4,200 / 1.0845 3 + \$2,430 / 1.0845 4 = \$6,570.86 32. We need to find the annuity payment in retirement. Our retirement savings ends and the retirement withdrawals begin, so the PV of the retirement withdrawals will be the FV of the retirement savings. So, we find the FV of the stock account and the FV of the bond account and add the two FVs. Stock account: FVA = \$700[{[1 + (.11/12) ] 360 – 1} / (.11/12)] = \$1,963,163.82 Bond account: FVA = \$300[{[1 + (.06/12) ] 360 – 1} / (.06/12)] = \$301,354.51 So, the total amount saved at retirement is: \$1,963,163.82 + 301,354.51 = \$2,264,518.33 Solving for the withdrawal amount in retirement using the PVA equation gives us:

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PVA = \$2,264,518.33 = \$
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## This note was uploaded on 10/24/2010 for the course FIN 311 taught by Professor Layish during the Spring '08 term at Binghamton.

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CHAPTER 6 - CHAPTER 6 DISCOUNTED CASH FLOW VALUATION...

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