Midterm Key

# Midterm Key - ARE 171A Winter 2011 A. Havenner Finance...

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ARE 171A Winter 2011 A. Havenner Finance Midterm ExaminatiOn! .... . k Name L:]/ISVJer, CJ-- Student Number _ Twelve questions on five pages. You are responsible for making certain that your examination is complete. Answer all questions. Bracketed values are the points. If you need more room, draw an arrow and write on the back of the page. Box the answer if it is numerical. Show your formula setup and work -- where appropriate, write the annuity factor you are calculating, e.g., A .~i. Carry at least four significant (nonzero) digits in your calculations. Pay attention to stated versus effective interest rates. Actual institutional details prevail (e.g., stocks pay quarterly and bonds pay semiannually) unless otherwise specified. Recall that 1 +nominalrate = (l +realrate) X (l + inflation rate). In addition, the following formulas may prove useful: PV=£ r (1 +;)m -1 PV = C[ 1- C :~ rJ + (r - g) =~ = C AT = C[1-- 1 -Jlr r-g r +r)T T Div(l +g/-I 1 Div T + 1 PV= L +-X-- t=l (l+d (l+r)T r-gz PV:;:::_F_ (I T F PV=CA r +-- T +r) 1 1+p=1+g 1. Effective versus stated annual rates: In all cases, give the formulas you used in obtaining the answers. [2] (i) Suppose the stated annual interest rate (SAIR) is 20% compounded quarterly; what is the quarterly effective rate? C t< _ tJ,:2- _ II Ide:.fI" t,;,,;,, "'. Of? -/. .., (J,uJ".fe E ~.:r - if -= O.cJS - S. -+h,t /!"c.JJ I.i: (0 ~"'IL'C (,~ ()~2.)t., (.Jeti/. lit. ~ (f+'Y"'r·= (In) wht"~ y= EAI{l. . (ii) Suppose the SAIR is 20% compounded quarterly; what is the effective annual interest rate (EAIR)? F-r-au- e/led-ive fo ~~-h'vc- ~v-l~ ! ((r r) '= (1rr-14' I.-J~e.re -yJl::: FQ. .:l:~ , = ( f -+ tJ, 0 s) - 1 =..') I, S' S" J (iii) SUQ 0 EAIR is 20%' what is the four year holding period return? (1/+0,.;.)4_ f = I,O=t:J.6' (iv) Suppose the EAIR is 20%; what is the three month effective rate? ,4ja./If, uJE" EFF: -/-0 EFF. AIAA;.J~: ((-roy) = (f+ 'Y j I.f ""J,t'r- 'Y:: e+:r~ l!_" = (( + ~.~ )'7" -., ~ tJ. Of-b,h ~ ~ "u: J.1 [3] (v) Suppose the EAIR is 20%; what is the rate which when compounded continuously pro- duces a 20% EAIR? f. .2 ~ -=9 r 1"1 (e) ~ I., (I,Ld) ~ [r=t. (,.Ld) : o.lhl," !f.UJ.L

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2. After reading David White's The Good Life Stephanie is ready to fulfill her new dream and open Maverick Cellars. Fortunately, in today's economy she can borrow at 15% for 20 years (makingpayments monthly) even for such a risky venture. Stephaniecan buy new winery equipment for\$I,500,000, or, given theeconomy, she can buy usedequipmentforonly\$800,000. It is estimated that the used equipment will require additional maintenance expenditures of \$3,500 per month compared to the new equipment. The usable life of both types of equipment is 20 years, matching the term of her loan, which is for the amount of her purchase in both cases.
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## This note was uploaded on 02/27/2012 for the course ARE 171A taught by Professor Whitney during the Spring '08 term at UC Davis.

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Midterm Key - ARE 171A Winter 2011 A. Havenner Finance...

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