FINA3310_Chapter 4_Extra practice problems

FINA3310_Chapter 4_Extra practice problems - FINA3310...

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FINA3310 –Chapter 4 Extra practice problems Professor: Alexandra K. Theodossiou Fall 2010 1. The preferred stock of Placer Corp. currently sells for $44.44 per share. The annual dividend of $4 is fixed. Assuming a constant dividend forever, what is the rate of return on this stock? Solution $44.44 = $4 / r; r = 9.0% 2. Fast Eddie's Used Cars will sell you a 1989 Mazda Miata for $5,000 with no money down. You agree to make weekly payments of $60.00 for 2 years, beginning one week after you buy the car. What is the EAR of this loan? Solution PV=5000 PMT=60 N=2x52=104 FV=0 I=? I=.4394%; APR = .4394 x 52 = 22.85% EAR = (1 + .004394) 52 - 1 = 25.61% 3. What is the present value of $600 payments received at the beginning of each year for the next 10 years? Assume an interest rate of 8% compounded monthly. Solution EAR = [1 + (.08/12)] 12 -1 = 8.30% 1
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PVA due = $600 ([((1+0.083) 10 – 1)/(0.083(1+.083) 10 )] / (1+.083) = $4,301.82 Calculator I=8.3 PMT=600 FV=0 N=10 PV= ? PV ORD =$3,972.13 and PV DUE = PV ORD x(1+r)=3,972.13(1+0.083)=$4,301.82
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This note was uploaded on 06/02/2011 for the course FINA 3310 taught by Professor Staff during the Spring '08 term at Texas A&M University, Corpus Christi.

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FINA3310_Chapter 4_Extra practice problems - FINA3310...

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