# HW3_Answers - Q3-2.From a time-value-of-money perspective...

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Unformatted text preview: Q3-2.From a time-value-of-money perspective, explain why maximizing shareholder wealth and maximizing profits may not offer the same result or course of action.A3-2.Maximizing profits might not be the same as maximizing shareholder wealth. Profits are an accounting number that can be easily manipulated. Usually profits and cash flows are highly correlated, but this does not necessarily have to be the case.Q3-4.What would happen to the future value of an annuity if interest rates fell in later periods? Could the future value of an annuity factor formula still be used to determine the future value?A3-4.If interest rates fell in later periods, the future value of an annuity would decline. Here you would have to make individual calculations using changing interest rates rather than using the factor formula.Q3-6.Look at the formula for the present value of an annuity. What happens to the numerator as the number of periods increases? What distinguishes an annuity from a perpetuity? Why can’t we calculate the future value of a perpetuity?A3-6. As the number of periods increases, the present value increases. You are receiving more payments and adding to present value. An annuity last for a finite number of years, while a perpetuity last forever. There is no future value for a perpetuity because infinity is not a specified time into the future.P3-1.You have \$1,500 to invest today at 7 percent interest compounded annually.a.How much will you have accumulated in the account at the end of the following number of years?1. Three years2. Six years3. Nine yearsb.Use your findings in part (a) to calculate the amount of interest earned in1. the first three years (years 1 to 3)2. the second three years (years 3 to 6)3. the third three years (years 6 to 9)c.Compare and contrast your findings in part (b). Explain why the amount of interest earned increases in each succeeding 3-year period.A3-1.Future Value: FVn = PV ×(1 + r)nor FVn= PV ×(FVFr%,n)a.1. FV3= PV ×(1.07)3b. 1. Interest earned = FV3– PVFV3= \$1,500 ×(1.225)Interest earned = \$1,837.57FV3= \$1,837.57 -1,500.00\$ 337.572. FV6= PV ×(1.07)62. Interest earned = FV6– FV3FV6= \$1,500 ×(1.50073)Interest earned = \$2,251.10FV6= \$2,251.10 -1,837.57\$ 413.533. FV9= PV ×(1.07)93. Interest earned = FV9– FV6FV9= \$1,500 ×(1.838)Interest earned = \$2,757.69FV9= \$2,757.69-2,251.10\$ 506.59c. The fact that the longer the investment period the larger the total amount of interest collected is not unexpected and is due to the greater length of time that the principal sum of \$1,500 is invested. The most significant point is that the incremental interest earned per 3 year period increases with each subsequent 3 year period. The total interest for the first 3 years is \$337.57, however, for the second 3 years (from year 3 to 6) the additional interest earned is \$413.93. For the third 3 year period the incremental interest is \$506.19. This increasing change in interest earned is due to compounding, the earning of interest on pervious interest...
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HW3_Answers - Q3-2.From a time-value-of-money perspective...

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