FNAN 301, fall 2009, final, solutions
Quantitative: value of a growing perpetuity and return of a fixed perpetuity
1. You own two investments, A and B, that have a combined total value of $14,700.
Investment
A is expected to make its next monthly payment in 1 month.
A’s next payment is expected to be
$56 and subsequent payments are expected to grow by 0.2 percent per month forever.
The
expected return for investment A is 1.0 percent per month.
Investment B is expected to pay $67
a month forever and make its next payment in 1 month.
What is the monthly expected return for
investment B?
1. You own two investments, A and B, that have a combined total value of $15,500.
Investment
A is expected to make its next monthly payment in 1 month.
A’s next payment is expected to be
$56 and subsequent payments are expected to grow by 0.3 percent per month forever.
The
expected return for investment A is 1.0 percent per month.
Investment B is expected to pay $64
a month forever and make its next payment in 1 month.
What is the monthly expected return for
investment B?
1. You own two investments, A and B, that have a combined total value of $15,400.
Investment
A is expected to make its next monthly payment in 1 month.
A’s next payment is expected to be
$48 and subsequent payments are expected to grow by 0.2 percent per month forever.
The
expected return for investment A is 1.0 percent per month.
Investment B is expected to pay $62
a month forever and make its next payment in 1 month.
What is the monthly expected return for
investment B?
Quantitative: compute present value of two cash flows of different signs
2. You just bought a new car today.
What is the present value of your cash flows if the discount
rate is 12.3 percent, you will receive a rebate of $2,000 from the dealer in 2 years, and you will
pay $40,000 to the dealer in 4 years?
Note: the correct answer is less than zero.
2. You just bought a new car today.
What is the present value of your cash flows if the discount
rate is 13.3 percent, you will receive a rebate of $2,000 from the dealer in 2 years, and you will
pay $45,000 to the dealer in 4 years?
Note: the correct answer is less than zero.
2. You just bought a new car today.
What is the present value of your cash flows if the discount
rate is 14.3 percent, you will receive a rebate of $2,000 from the dealer in 2 years, and you will
pay $50,000 to the dealer in 4 years?
Note: the correct answer is less than zero.
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