2010-03-09_033255_wishbook

# 2010-03-09_033255_wishbook - 1 After graduation Adrian...

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1. After graduation, Adrian moved across the country to Brownville and bought a small house for \$208,000. Bill moved to Columbus and bought a house for \$195,000. Four years later, they both sold their houses. Adrian netted \$256,000 when she sold her house and Bill netted \$168,000 on his. a. What annual rate of return did Adrian realize on her house? b. What annual rate of return did Bill realize on his house? a. CALC: n = 4 r = ? PV = -\$208,000 PMT = 0 FV = \$256,000 r = 5.33% b. CALC: n = 4 r = ? PV = -\$195,000 PMT = 0 FV = \$168,000 r = -3.66% a. PV = 4 1 (1 ) C r × + 4 1 \$208,000 \$256,000 (1 ) r = × + 4 \$208,000 1 \$256,000 (1 ) r = + 4 4 4 4 4 4 1 0.8125 (1 ) 1 (1 ) 0.8125 (1 ) 1.23077 (1 ) 1.23077 (1 ) 1.05328 1.05328 1 0.05328 r r r r r r r = + + = + = + = + = = - = r = 5.33% b. PV = 4 1 (1 ) C r × + 4 1 \$195,000 \$168,000 (1 ) r = × +

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4 \$195,000 1 \$168,000 (1 ) r = + 4 4 4 4 4 4 1 1.16071 (1 ) 1 (1 ) 1.16071 (1 ) 0.861538 (1 ) 0.861538 (1 ) 0.963427 0.963427 1 0.036573 r r r r r r r = + + = + = + = + = = - = - r = -3.66% 2. Assume an ordinary annuity of \$500 at the end of each of the next three years. a. What is the present value discounted at 10%? b. What is the future value at the end of year 3 if cash flows can be invested at 10%? a. CALC: n = 3 r = ? PV = ? r = 10% PMT = \$500.00 FV = 0 PV = -\$1,243.43 b. CALC: n = 3 r = ? PV = 0 r = 10% PMT = \$500.00 FV = ? FV = -\$1,655.00 a. PV = 3 1 1 (1.10) \$500 0.10 - × = \$1,243.43 b. FV= 3 [(1.1) 1] \$500 0.1 - × = \$1,655 A1.(Bond valuation) A \$1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond’s coupon rate is 7.4%. What is the fair value of this bond?
CALC: n = 10 x 2 r = 9% / 2 PV = ? PMT = 7.4% x 1,000 / 2 = 37 FV = 1,000 PV = -\$895.94 A10. .(Dividend discount model) Assume RHM is expected to pay a total cash dividend

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