CHAPTER 3
THE TIME VALUE OF MONEY
OVERVIEW
A dollar in the hand today is worth more than a
dollar to be received in the future because, if you
had it now, you could invest that dollar and earn
interest. Of all the techniques used in finance,
none is more

Pr. 2,3,7,9, 11, 12&13
Problem 2: At what tax rate would an investor be indifferent between these two bonds?
Corporate Bonds issued by Johnson Corp yield 8%
Municipal Bonds of equal risk currently yield 6%
Tax Rates: 15%, 20%, 25%
Corporate Bonds:
ATR = B

Pr. 5,7,8,9,12,19,22, &23
Problem 5 What is the default risk premium on the corporate bond?
Treasury Note: Term = 10 Years, Yield = 6%
Corporate Bond: Term = 10 Years, Yield = 9%, Liquidity Premium = 0.5%
Formula: r = r* + IP + DRP + LP + MRP
DRP = (Chang

Pr.10,12,13,14,19,20,24,33,&34
Problem 10 Present and Future Value of Single Cash Flow: See Below
a) An Initial $500 compounded for 10 years at 6%:
(N = 1, I/Y = 6, PMT = 0, PV = -500) = CPT FV = $895.42
b) An Initial $500 compounded for 12 years at 6%:
(

Pr. 6,8,9,10,11, 12
Problem 6: What is the companys total asset turnover? What is the firms equity multiplier?
ROA = 12%
Profit Margin = 5%
ROE = 20%
ROA = Profit Margin X TATO
ROA = (NI/S) X (S/A)
12% = 5% X TATO
TATO = 12/5
TATO = 2.4X
ROE = Profit Marg