quiz1_w07_ans - Also write your Note In responding...

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Unformatted text preview: Also write your Note: In responding to "WHY/Explain" you should NAME________________________________ name on the give a meaningful explanation that would convince a skeptic. back. FINANCE 350 SCHOOL OF BUSINESS ADMINISTRATION QUIZ #1 PROF. JARRAD HARFORD 1. List the three tasks of a financial manager and explain which is the most important one. [2 pts] 1. Make investment decisions 2. Make financing decisions 3. Manage cash flow The most important task is making investment decisions. These decisions determine how the resources of the firm will be allocated and fundamentally determine what the firm will do and whether value will be created for the shareholders. 2. You graduate from college and start saving for the down payment on your first house. You assume that you will earn 12% per year on your savings and that you will make annual deposits to your investment fund, starting in one year. If you want to have $40,000 saved at the end of 8 years, how much do you have to save per year? [2 pts] 0 1 CF 2 CF ... CF 8 CF FV=40,000 Two steps: first take the PV of the 40,000. Second, set your annuity equal to that PV and solve for the CF. PV = 40, 000 ( 1.12 ) 8 = 16,155.33 1 1 16,155.33 = CF - .12 .12 ( 1.12 ) 8 CF = $3, 252.11 3. You are looking to borrow $558 and repay it in one year. A bank offers you a loan with an APR of 9%, compounded monthly. Your friend offers to loan you the money as long as you repay her $609 in one year. Which is the better offer? [2pts] You need to put these on equal footing. You should compute the total interest you will effectively pay with each offer. Use the EAR for the bank loan and then just solve for the rate with your friend's loan. Since your friend's loan has only one payment (at the end), there is no compounding to deal with. r .09 EAR = + - 1 = + 1 1 - 1 = .0938 m 12 m 12 Note: In responding to "WHY/Explain" you should NAME________________________________ give a meaningful explanation that would convince a skeptic. With your friend's loan, you can solve for the rate: 1 1 V FV n g 609 11 m r = - 1 = - 1 = 0.0914 m 1 PV 558 So you should take your friend's offer. r EAR = + - 1 1 m m PV = FV r 1 + m m n 1 1 PV = CF - m n r r r 1 m m + m r FV = PV + 1 m mV n 1 FV m gn r= - 1 m PV ...
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This note was uploaded on 04/07/2008 for the course FIN 350 taught by Professor Schonlau during the Winter '08 term at University of Washington.

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