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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 4. You and your spouse have found your dream home. The selling price is \$220,000; you will put \$50,000 down and obtain a 30-year fixed-rate mortgage at 7.5% APR for the balance. Assume that monthly payments will be made at the end of the month. What will
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