Exam 6: Discounted Cash Flow Valuation

Your neighbour makes you the following offer. He would like to borrow $10,000 today. He will repay the $10,000 by making 10 yearly payments with the first payment being made at the end of this year. If the payments are to grow by 10% each year and the appropriate discount rate is 12%, how much will your neighbour have to pay at the end of the first year?

A 13% APR compounded continuously is equal to an effective rate of:

What is the effective annual rate of 14.9% compounded continuously?

A perpetuity differs from an annuity because:

Which is the best definition of a stated interest rate or quoted interest rate?

A house in Vancouver that was purchased 30 years ago for $250,000 recently sold for $1.5 million. Calculate the annual rate of return for this investment.

You are going to invest $500 at the end of each year for 10 years. Given an interest rate, you can find the future value of this investment by finding the present value of each cash flow, adding all of the present values together, then finding the future value at the end of year 10 of this lump sum.

You are expecting annual cash flows of $10,000 in years 1-5; $15,000 in years 6-10; and $25,000 in years 11-25. If the rate of interest is 6% compounded annually, calculate the future value of this cash flow stream.

The preferred stock of ABC Co. offers a 10.6% rate of return. The stock is currently priced at $80.19 per share. What is the amount of the annual dividend?

You are borrowing money today at a 7.5% interest rate. You will repay the principal plus all the interest in one lump sum of $7,500 two years from today. What is the amount of the loan proceeds?

If you deposit $2,500 at the end of each six months into an account which earns 5.5% interest compounded quarterly, how much will be in the account in five years?

Annuity A makes annual payments of $813.73 for each of the next 10 years, while annuity B makes annual payments of $500 per year forever. At what interest rate would you be indifferent between the two? At interest rates above/below this break-even rate, which annuity would you choose?

Today, you are retiring. You have a total of $413,926 in your retirement savings and have the funds invested such that you expect to earn an average of 3%, compounded monthly, on this money throughout your retirement years. You want to withdraw $2,500 at the beginning of every month, starting today. How long will it be until you run out of money?

You have $10,000 to invest. The First National Bank offers one-year certificates of deposit with a stated rate of 5.50% compounded quarterly. What rate compounded semi-annually would provide you with the same amount of money at the end of one year?

What is the future value of the following set of cash flows four years from now? Assume an interest rate of 5.5%.

You are considering a project with the following cash flows: What is the present value of these cash flows, given a 7.75% discount rate?

Master Meter is planning on constructing a new $20 million facility. The company plans to pay 20% of the cost in cash and finance the balance. How much will each monthly loan payment be if they can borrow the necessary funds for 30 years at 9% compounded monthly?

Your credit card company quotes you a rate of 18.9%. Interest is billed monthly. What is the actual rate of interest you are paying?

You estimate that you will have $24,500 in student loans by the time you graduate. The interest rate is 6.5%. If you want to have this debt paid in full within five years, how much must you pay each month?

If you ran a bank, which rate would you rather advertise on monthly-compounded loans, the EAR or the APR? Which rate would you rather advertise on quarterly-compounded savings accounts, the EAR or the APR? Explain. As a consumer, which would you prefer to see and why?