Fin1set02spr09 - CARNEGIE MELLON UNIVERSITY Tepper School of Business INTRO FINANCE FIN 70-391 Prof Spencer Martin Problem Set 2 Time Value

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CARNEGIE MELLON UNIVERSITY Tepper School of Business INTRO FINANCE – FIN 70-391 Prof. Spencer Martin Problem Set 2: Time Value Training NOTE: List all contributing group members legibly on the first page of your submission. A Multiple Choice Warmup Note: sometimes multiple choice questions may have multiple correct answers. Read carefully. 1. If the 4-year discount factor is 0.889 what is the 3-year rate of interest? (a) At least 4% (b) No more than 4% (c) 6% (d) None of the above 2. If the 2-year discount factor is 0.900 and the 3-year discount factor is 0.772, what is the present value of a 3-year annuity of $1 a year? (a) $0.70 (b) $2.53 (c) $3.00 (d) Can’t say 3. Michael Parsnip has just taken out a $100,000 mortgage at an interest rate of 8%. If the mortgage calls for 20 equal annual installments, what is the amount of each installment? (a) $ 7,358 (b) $10,185 (c) $21,445 (d) None of the above 4. See question number 3 – What is the value of the mortgage (in second year dollars) after the payment of the second annual installment? (a) $79,630 (b) $88,990 (c) $95,453 1
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(d) None of the above 5. You own an office building. A fair rent for this building next year would be $100,000 and you expect that thereafter rents will increase indefinitely by 5% a year. Somebody has expressed an interest in renting the building at a fixed annual rent for 20 years. If the cost of capital is 15%, what would be a fair (i.e., equivalent) rental for 20 years? (a) $134,000 (b) $150,000 (c) $160,000 6. Suppose you have just won the lottery and must choose one of the following (guaranteed) payoffs. Which one would you choose? The interest rate is 7% EAY; ignore tax consequences. (a) $100,000 paid today (b) $140,000 paid five years from today (c) $50,000 paid one year from today and $68,000 paid four years from today (d) $14,000 paid per year for ten years, with the first year’s payment made today 7. Company A’s dividends are expected to grow at a constant rate of g = 4%, Div 1 = $50 and r = 0.08. What is the current price,
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This note was uploaded on 01/20/2012 for the course FINANCE 101 taught by Professor Unknown during the Spring '08 term at Carnegie Mellon.

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Fin1set02spr09 - CARNEGIE MELLON UNIVERSITY Tepper School of Business INTRO FINANCE FIN 70-391 Prof Spencer Martin Problem Set 2 Time Value

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