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Midterm I Review

# Midterm I Review - UNIVERSITY OF NORTH CAROLINA AT CHAPEL...

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U NIVERSITY OF N ORTH C AROLINA A T C HAPEL H ILL K ENAN -F LAGLER B USINESS S CHOOL B USI 408: C ORPORATE F INANCE E XTRA R EVIEW P ROBLEMS P ROF . A RZU O ZOGUZ F ALL 2008 1. You make a \$2000 contribution every year to your IRA. You earn 8% compounded semiannually on your savings, and you would like to retire when you are 65. How much will you have saved when you retire if you start when you are: a. 35 years old: b. 25 years old: 2. What is the present value of a 4-year \$200 annuity if the third payment is skipped (assume r = 8%) ? 3. What is the value of a \$50 perpetuity that starts in 3 years, and grows at 5% per year if the interest rate is 10%, compounded monthly? 4. Dirk Duncan, a first-round pick for the NBAs new expansion team, the Triangle Squirrels, says that he will not sign unless his new contract makes him the highest paid player in the league. Bob O'Neil, the leagues star center, recently signed a contract that included a \$30M signing bonus (he got that amount immediately), \$20M per year for 5 years (paid at year end) and a lump sum payment of \$10M in 6 years (in case he lost all his money before that time). Jack Jones, the Squirrel's owner, is offering Duncan a contract that pays no signing bonus and \$25M per year for 5 years (paid at year end) and a \$20M bonus in 5 years. Jack Jones is telling Duncan that this contract will make him the highest paid player in the league. You are Duncan's agent, and you know that Jack Jones is lying.

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