# ps3 - 10-percent 4 The expected dividend next year is \$1.30...

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FIN300 Introduction to Managerial Finance Professor H. Wang Problem Set #3 Due: Monday, February 22, 2010 Please make sure to write clearly the name of each member in the group. Please turn in your solutions at the beginning of the lecture on the due date. Late submissions or submissions by groups larger than four students will not be accepted. 1. How Long is the Wait? If we deposit \$5,000 today in an account paying 10%, how long does it take to grow to \$10,000? 2. What Rate Is Enough? Assume the total cost of a college education will be \$50,000 when your child enters college in 12 years. You have \$5,000 to invest today. What rate of interest must you earn on your investment to cover the cost of your child’s education? 3. What is the value of a British consol that promises to pay £15 each year, every year until the sun turns into a red giant and burns the planet to a crisp? The interest rate is
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Unformatted text preview: 10-percent. 4. The expected dividend next year is \$1.30 and dividends are expected to grow at 5% forever. If the discount rate is 10%, what is the value of this promised dividend stream? 5. If you can afford a \$400 monthly car payment, how much car can you afford if interest rates are 7% on 36-month loans? 6. A defined-benefit retirement plan offers to pay \$20,000 per year for 40 years and increase the annual payment by 3-percent each year. What is the present value at retirement if the discount rate is 10-percent? 7. You are purchasing a home and applying for a \$500,000 mortgage. The bank quotes you a rate of 7% APR for a 30-year fixed rate loan. What is your monthly payment? • Note: when no compounding interval is stated, it is generally equal to the payment interval – in this case monthly....
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