Fin 571

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Week 2 problems
Chapter 2
A1 (Present and future value)
A.What is the future value of $2,000 invested today if it earns 20% interest for one year? For two years? Rate 20% (1) -(2,000)= $2,400 one year

Rate 20% (2) (-2,000)= $2,880 two years

B.What is the present value of $2,000 discounted at 20% if it is received in one year? In two years? Rate 20 % (1) (-2,000)= 1,666 discounted one year

Rate 20% (2) (-2000)= $1,388 discounted two years

B4. (Present value) What is the present value of $5,000 to be received in two equal installments of ($2,500), four years and five years from today, when the annual discount rate is 10%? PV=FV/(1 r)ⁿ

=2500/(1+.10)4
=2500/1.14
=2500/1.4641
=1707.53

PV=FV/(1 r)ⁿ
=2500/(1+.10)5
=2500/1.15
=2500/1.61051
=1552.30
1707.53+1552.30=3259.84

Chapter 3
B3

(Book and Market Values) Consider the following information about the Dilbert Printing Company. All data are in millions of dollars.
Book ValueMarket Value
Assets, December 31, previous year1,0002,000
Assets, December 31, last year1,2001,400
Liabilities, December 31, previous year600900
Liabilities, December 31, last year6501,050
A.What is the book value of stockholders’ equity at the end of the previous and last years? 400 previous years=1,000-600
550 last years=1,200-650

B.What is the market value of stockholders’ equity at end of the previous and last years? 1,100 previous years=2,000-900
350 last years=1,400-1,050

C.For the latest year during December 31, net income was $175 million. If Dilbert paid its stockholders’ cash dividends of $50 million, what is the total economic income of the stockholder during this year? 750

C1
(Accounting versus Economic Income) During the latest year, McGowan Construction earned a net income of $250,000. The firm neither bought nor sold any capital assets, and the book value of its assets declined by the year’s depreciation charge, which...
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