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# Chapter 5 Selected Questions and Problems - Week 5 Fin 324 Seventh Edition Questions: 52 True. The second series is an uneven cash flow stream, but...

Finding I
. Suppose the U.S. Treasury offers to sell you a bond for \$747.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for \$1,000. What interest rate would you earn if you bought this bond at the offer price?

a. 4.37%
b. 4.86%
c. 5.40%
d. 6.00%
e. 6.60%

Finding N
. Janice has \$5,000 invested in a bank that pays 3.8% annually. How long will it take for her funds to triple?

a. 23.99
b. 25.26
c. 26.58
d. 27.98
e. 29.46

Finding N
. Bob has \$2,500 invested in a bank that pays 4% annually. How long will it take for his funds to double?

a. 14.39
b. 15.15
c. 15.95
d. 16.79
e. 17.67

Finding N
. Last year Thomson Inc's earnings per share were \$3.50, and its growth rate during the prior 5 years was 9.0% per year. If that growth rate were maintained, how many years would it take for Thomson’s EPS to triple?

a. 9.29
b. 10.33
c. 11.47
d. 12.75
e. 14.02

Chapter 5 Selected Questions and Problems – Week 5 Fin 324 Seventh Edition Questions: 5-2 True.  The second series is an uneven cash flow stream, but it contains an annuity of \$400  for 8 years.  The series could also be thought of as a \$100 annuity for 10 years plus an  additional payment of \$100 in Year 2, plus additional payments of \$300 in Years 3 through  10. 5-4 For the same stated rate, daily compounding is best.  You would earn more “interest on  interest.” Problems: 5-1 0 1 2 3 4 5 | | | | | | PV = 10,000  FV 5  = ? FV 5 = \$10,000(1.10) 5 = \$10,000(1.61051) = \$16,105.10. Alternatively, with a financial calculator enter the following: N = 5, I/YR = 10, PV = -10000,  and PMT = 0.  Solve for FV = \$16,105.10. 5-3 0 18 | | PV = 250,000 FV 18  = 1,000,000 With a financial calculator enter the following:  N = 18, PV = -250000, PMT = 0, and FV =  1000000.  Solve for I/YR = 8.01%   8%. 5-5 0 1 2 N – 2 N – 1 N | | |         | | | PV = 42,180.53 5,000 5,000 5,000 5,000 FV = 250,000 Using your financial calculator, enter the following data:  I/YR = 12; PV = 42180.53; PMT =  5000; FV = 250000; N = ?  Solve for N = 11.  It will take 11 years to accumulate \$250,000. 5-9 a. 0 1 | | \$500(1.06) = \$530.00.
-500 FV = ? Using a financial calculator, enter N = 1, I/YR = 6, PV = -500, PMT = 0, and FV = ?  Solve for FV = \$530.00. b. 0 1 2 | | | \$500(1.06) 2  = \$561.80. -500 FV = ? Using a financial calculator, enter N = 2, I/YR = 6, PV = -500, PMT = 0, and FV = ?  Solve for FV = \$561.80. c. 0 1 | | \$500(1/1.06) = \$471.70. PV = ? 500 Using a financial calculator, enter N = 1, I/YR = 6, PMT = 0, and FV = 500, and PV = ?  Solve for PV = \$471.70. d. 0 1 2 | | | \$500(1/1.06) 2  = \$445.00. PV = ? 500 Using a financial calculator, enter N = 2, I/YR = 6, PMT = 0, FV = 500, and PV = ?  Solve for PV = \$445.00. 5-11 a. 2005 2006 2007 20082009 2010 | | | | | | -6 12 (in millions) With a calculator, enter N = 5, PV = -6, PMT = 0, FV = 12, and then solve for I/YR =  14.87%. b. The calculation described in the quotation fails to consider the compounding effect of  interest.  It can be demonstrated to be incorrect as follows: \$6,000,000(1.20) 5  = \$6,000,000(2.48832) = \$14,929,920, which is greater than \$12 million. Thus, the annual growth rate is less than 20%; in fact,  it is about 15%, as shown in Part a.

## This question was asked on Aug 12, 2011.

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