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Unformatted text preview: 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. As 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. As 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. As 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. 1 FNAN 301, fall 2009, final, solutions Quantitative: FV of annuity and payment associated with PV annuity 3. Calvin has nothing in his retirement account. However, he plans to save $10,000 per year in his retirement account for each of the next 22 years. His first contribution to his retirement account is expected in 1 year. Calvin expects to earn 9.0 percent per year in his retirement account, both before and during his retirement. Calvin plans to retire in 22 years, immediately after making his last $10,000 contribution to his retirement account. after making his last $10,000 contribution to his retirement account....
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This note was uploaded on 02/03/2011 for the course FINANCE 301 taught by Professor Murray during the Spring '09 term at George Mason.
 Spring '09
 MURRAY
 Perpetuity

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