1) A $100 deposit today that earns an annual interest rate of 10% is worth how much at the end of two years? Assume all interest received at the end of the first year is reinvested the second year. 2) An investment of $100 today is worth $116.64 at the end of two years if it earns an annual interest rate of 8%. How much interest is earned in the first year and how much in the second year of this investment? 3) Which of the following investments has a larger future value? A $100 investment earning 10% per year for 5 years or a $100 investment earning 5% per year for 10 years? 4) The current price on a 60-inch flat panel LCD HD television is $2,300. Big screen HD television prices have dropped at an average rate of 9% per year in recent years. If you expect this trend to continue, how much will this style of television cost in three years? 5) You have purchased a Treasury bond that will pay $10,000 to your newborn child in 15 years. If this bond is discounted at a rate of 4% per year, what is today's price (present value) for this bond? 6) Your university is running a special offer on tuition. This year's tuition cost is $18,000. Next year's tuition cost is scheduled to be $19,080. The university offers to discount next year's tuition at a rate of 6% if you agree to pay both years' tuition in full today. How much is the total tuition bill today if you take the offer? 7) An investment promises a payoff of $195 three years from today. At a discount rate of 8% per year, what is the present value of this investment? 8) Your parents plan to spend $20,000 on a car for you upon graduation from college. If you will graduate in three years and your parents can earn 4% annually on their investment, how much money must they set aside today for your car? 9) You intend to buy a vacation home in seven years and plan to have saved $50,000 for a down payment. How much money would you have to place today into an investment that earns 8% per year to have...

...Prof. Ramakar Jha/Financial Management/Time Value of Money/Exercise # 1
Financial Management: Prof Ramakar Jha
1
Exercise 1: Time Value of Money
Set 1
1. You are planning to retire in twenty years. You'll live ten years after retirement.
You want to be able to draw out of your savings at the rate of Rs.10,000 per year. How
much would you have to pay in equal annual deposits until retirement to meet your
objectives? Assumeinterest remains at 9%. [Rs.1254]
2. You can deposit Rs.4000 per year into an account that pays 12% interest. If you
deposit such amounts for 15 years and start drawing money out of the account in
equal annual installments, how much could you draw out each year for 20 years?
[Rs.19964.12]
3. What is the value of a Rs.100 perpetuity if interest is 7%? [Rs.1428.57]
4. You deposit Rs.13,000 at the beginning of every year for 10 years. If interest is
being paid at 8%, how much will you have in 10 years? [Rs.203391.33]
5. You are getting payments of Rs.8000 at the beginning of every year and they are
to last another five years. At 6%, what is the value of this annuity? [35720.84]
6. How much would you have to deposit today to have Rs.10,000 in five years at
6% interest compounded semiannually? [Rs.7440.94]
7. Construct an amortization schedule for a 3-year loan of Rs.20,000 if...

...Why is there a difference between the interestrates on AAA corporate bonds and
U.S. Treasury notes?
3. Your father is about to retire. His firm has given him the option of retiring with a
lump sum of $50,000 in ten years or an annuity of $8,000 for ten years. Which is
worth more now, if the discount rate is (a) 6% (b) 19%?
4. Suppose you open a saving account with $1,800 earned in a summer job. The
account's stated interestrate is 11%. Calculate effective annualrate (EAR) if interest
is paid (a) semiannually, (b) quarterly, (c) monthly and (d) daily.
5. You can buy a security at a price of $10,250. If you buy the security, you will
receive five annual payments of $2,500, the first payment to be made one year from
today. What rate of return, or yield, does the security offer?
6. A bank agrees to lend you $1,000 today in return for your promise to pay the bank
$1,419 six years from today. What rate of interest is the bank charging you?
7. How long will it take to double your money with a growth rate of (a) 10 percent?
(b) 20 percent? (c) 40 percent? (d) What about tenfold increase in your money with
a growth rate of 50 percent?
8. Suppose you assume a mortgage of $300,000. The terms of the mortgage are the
following: thirty year...

...Which one of the following statements is correct concerning annual percentages rates (APRs)?
Answer: The APR is equal to the monthly interestrate multiplied by 12
Give an interestrate of zero percent, the future value of a lump sum invested today will always:
Answer: remain constant
Answer: II and IV
A firm created as a separate and distinct legal entity that may be owned by one or more individuals or entities is called a: corporation
The capital structure of a firm refers to the firm’s: Long-term debt and equity
The Anderson Co. wants to borrow 5000 at the beginning of each year for six years at 7 percentage interest. The firm will repay this money in one lump sum at the end of year 6. How much of the firm’s loan repayment id due to the 5000 it received in year 4? Answer: 6125.22
Tayor has just received an insurance settlement of 58400. She want to save this money until her oldest daughter goes to college. Tayor can earn of 8.5 percent, compound annually, on this monty. How much will she saved for her daugther’s college education if her enters college 14 years from now? 182990.77
Warren’s diner needed a new location. This establishment spent 65000 to refurbish an old shop and create the current facility. The firm borrowed 75 percent of the refurbishment cost at 8 percent interest for 11 years. What is the...

...Understanding InterestRates
4.1 Measuring InterestRates
1) The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today.
A) present value
B) future value
C) interest
D) deflation
Answer: A
2) The present value of an expected future payment ________ as the interestrate increases.
A) falls
B) rises
C) is constant
D) is unaffected
Answer: A
3) An increase in the time to the promised future payment ________ the present value of the payment.
A) decreases
B) increases
C) has no effect on
D) is irrelevant to
Answer: A
4) With an interestrate of 6 percent, the present value of $100 next year is approximately
A) $106.
B) $100.
C) $94.
D) $92.
Answer: C
5) What is the present value of $500.00 to be paid in two years if the interestrate is 5 percent?
A) $453.51
B) $500.00
C) $476.25
D) $550.00
Answer: A
6) If a security pays $55 in one year and $133 in three years, its present value is $150 if the interestrate is
A) 5 percent.
B) 10 percent.
C) 12.5 percent.
D) 15 percent.
Answer: B
7) To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20 million ignores the process of
A) face value.
B) par value.
C)...

...
Raising the InterestRate
Principles of Finance
Introduction
After years of declining interestrates, we are facing a dilemma; should the Federal government increase rates to contain inflation, or keep rates low to boost the US economy? Increases in consumption of oil, metals, materials, and food, both foreign and domestic, are increasing demand. Prices are rising on a global scale as demand increases. Additionally, the US is experiencing rising costs for healthcare and education. Yet, the US economy is suffering through declining home values, a banking crisis, and an uncertain stock market. So, what would an increase in the interestrate mean for consumer financing for big-ticket items, the present and future values of annuities; net present values, weighted average costs of capital, and corporate earnings?
Cost of Capital
The cost of capital can be measured in a variety of ways. One may look at short- and long-term debt where payments will rise as interestrates rise, increasing capital costs. Or, one might consider that shifting interestrates create difficulties in predicting future capital costs, so some organizations may find themselves incurring greater costs than expected. Also, with increased interestrates, money becomes more valuable...

...%, commas, etc.). Enter all dollars without decimals and all interestrates in percentage with up to two decimals. Read the syllabus for examples.The points for each question are listed in parentheses at the start of the question, and the total points for the entire assignment adds up to 100.
In accordance with the Coursera Honor Code, I (Shravan Vepa) certify that the answers here are my own work. Thank you!
Question 1
(5 points) In a world with no frictions (i.e., taxes, etc.), having debt is always better because it increases the value of the firm/project.
False.
True.
Question 2
(5 points) The return on equity is equal to the return on assets of a project/firm.
Always true.
Never true.
Sometimes true.
Question 3
(10 points) Moogle, Inc. is in the same business as Google, Inc., but has recently retired all its debt to become an all-equity firm. Its return on equity has dropped from 12.25% to 10.60% as a result of this. Google, Inc. continues to have debt in its capital structure, and its debt-to-equity ratio is 30%. What is the return on assets of Google, Inc.(No more than two decimals in the percentage interestrate, but do not enter the % sign.)
Answer for Question 3
Question 4
(10 points) Suppose CAPM holds, and the beta of the equity of your company is 2.00. The expected market risk premium (the difference between the expected market return and the risk-free rate) is 4.5% and the...

...of $100 be after 5 years at 10% compound interest?
a. $161.05
b. $134.54
c. $127.84
d. $151.29
e. $143.65
2. Suppose a U.S. government bond promises to pay $2,249.73 three years from now. If the going interestrate
on 3-year government bonds is 6%, how much is the bond worth today?
a. $2,011.87
b. $2,591.45
c. $2,324.89
d. $1,888.92
e. $2,854.13
3. Sims Inc. earned $1.00 per share in 2000. Five years later, in 2005, it earned $2.00. What was the growth rate
in Sims' earnings per share (EPS) over the 5-year period?
a. 10.82%
b. 14.87%
c. 13.61%
d. 14.28%
e. 12.17%
4. Addico Corp's 2005 earnings per share were $2, and its growth rate during the prior 5 years was 11.0% per
year. If that growth rate were maintained, how long would it take for Addico's EPS to double?
a. 6.64 years
b. 6.81 years
c. 6.99 years
d. 7.13 years
e. 7.28 years
5. What is the PV of an annuity due with 5 payments of $1,000 at an interestrate of 5%?
a. $11,110.34
b. $13,637.85
c. $12,513.68
d. $14,976.84
e. $15,349.15
6. Your father has $500,000 invested at 8%, and he now wants to retire. He wants to withdraw $50,000 at the
beginning of each year, beginning immediately. How many years will it take to exhaust his funds, i.e., run the
account down to zero?
a. 11.34 years
b. 18.49 years
c. 17.54 years
d. 13.91 years
e. 15.27 years
7. What's the present value of a 6-year ordinary annuity of $1,000...

...
Money Banking and financial Markets,
InterestRates
An interestrate is the rate at which interest is paid by borrowers for the use of money that they borrow from a lender. Specifically, the interestrate is a percent of principal paid a certain amount of times per period. Small companies often borrow capital from banks to buy new assets for its business, and in return the lender receives interest at a predetermined interestrate for deferring the use of funds and instead lending it to the borrower. Interestrates are normally expressed as a percentage of the principal for a period of one year.
Interest-rate targets are a vital tool of monetary policy and are taken into account when dealing with variables like investment, inflation, and unemployment. The central banks of countries generally tend to reduce interestrates when they wish to increase investment and consumption in the country's economy. However, a low interestrate as a macro-economic policy can be risky and may lead to the creation of an economic bubble, in which large amounts of investments are poured into the real-estate market and stock market. In Japan, late 1980s and early...