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# midterm - k A = A k = 11.3.k A =k RF(k M-k RF)b11.3 = 5(10...

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k A = A k = 11.3%.k A = k RF + (k M - k RF )b11.3% = 5% + (10% - 5%)b b = 1.26.4.Effective annual rateAnswer: d Diff: EStatement d is correct. The equation for EAR is as follows:EAR = 1mk1 mNom   + .If annual compounding is used, m = 1 and the equation abovereduces to EAR = k Nom . The equation for the periodic rate is: PERNom k=km. .If annual compounding is used then m = 1 and k PER = k Nom , and sinceEAR = k Nom then k PER = EAR. 5.PV of an uneven CF streamAnswer: b Diff: E NPV = \$10,000/1.08 + \$25,000/(1.08) 2 + \$50,000/(1.08) 3 + \$35,000/(1.08) 4 = \$9,259.26 + \$21,433.47 + \$39,691.61 + \$25,726.04= \$96,110.38

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\$96,110. Financial calculator solution: Using cash flows Inputs: CF 0 = 0; CF 1 = 10000; CF 2 = 25000; CF 3 = 50000; CF 4 = 35000; I = 8.Output: NPV = \$96,110.39 \$96,110. 6.Time value of money and retirementAnswer: b Diff: E N Step 1:Find the number of years it will take for each \$150,000 investment togrow to \$1,000,000. BRUCE:
I/YR = 5; PV = -150,000; PMT = 0; FV = 1,000,000; and then solvefor N = 38.88. BRENDA: I/YR = 10; PV = -150,000; PMT = 0; FV = 1,000,000; and then solvefor N = 19.90. Step 2:Calculate the difference in the length of time for theaccounts to reach \$1 million:Bruce will be able to retire in 38.88 years, or 38.88 –19.90 = 19.0 years after Brenda does.11 17.Remaining loan balanceAnswer: a Diff: E N

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