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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 Part 1 Solution.docx

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 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. 5­4 For the same stated rate, daily compounding is best. You would earn more “interest on interest.” Problems: 5­1 0
1
|
|
PV = 10,000 2
| 3
| 4
| 5
| FV5 = ? FV5 = $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.
5­3 0
|
PV = 250,000 18
|
FV18 = 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%.
5­5 0
1
|
|
PV = 42,180.53 5,000 2
N – 2
| • • • |
5,000
5,000 N – 1
|
5,000 N
|
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. 5­9 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
|
­500 1
| 2
|
$500(1.06)2 = $561.80.
FV = ? Using a financial calculator, enter N = 2, I/YR = 6, PV = ­500, PMT = 0, and FV = ? Solve for FV = $561.80.
c. 0
|
PV = ? 1
|
500 $500(1/1.06) = $471.70. Using a financial calculator, enter N = 1, I/YR = 6, PMT = 0, and FV = 500, and PV = ? Solve for PV = $471.70.
d. 0
|
PV = ? 1
| 2
|
$500(1/1.06)2 = $445.00.
500 Using a financial calculator, enter N = 2, I/YR = 6, PMT = 0, FV = 500, and PV = ? Solve for PV = $445.00. 5­11 a. 2005
|
­6 2006
| 2007
| 20082009 2010
|
|
|
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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