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You are on page 1of 7

PRESENT VALUE

3-1

a. Current Savings Needed = $500,000/1.110 = $192,772

b. Annuity Needed = $500,000 (APV,10%,10 years) = $31,373

3-2

Present Value of $1,500 growing at 5% a year for next 15 years = $18,093

Future Value = $18,093 (1.0815) = $57,394

3-3

Annual Percentage Rate = 8%

Monthly Rate = 8%/12 = 0.67%

Monthly Payment needed for 30 years = $200,000(APV,0.67%,360) = $1,473

3-4

a. Discounted Price Deal

Monthly Cost of borrowing $18,000 at 9% APR = $373.65

[A monthly rate of 0.75% is used]

b. Special Financing Deal

Monthly Cost of borrowing $ 20,000 at 3% APR = $359.37

[A monthly rate of 0.25% is used]

The second deal is the better one.

3-5

a. Year-end Annuity Needed to have $100 million available in 10 years = $6.58

[FV = $ 100, r = 9%, n = 10 years]

b. Year-beginning Annuity Needed to have $100 million in 10 years = $6.04

3-6

Value of 15-year corporate bond; 9% coupon rate; 8 % market interest rate

Assuming coupons are paid semi-annually,

Value of Bond = 45*(1-1.04-30)/.04+1,000/1.0430 = $1,086.46

If market interest rates increase to 10%,

The bonds will trade at par only if the market interest rate = coupon rate.

3-7

Value of Stock = 1.50 (1.06)/ (.13 - .06) = $22.71

3-8

Value of Dividends during high growth period = $ 1.00 (1.15)(1-1.155/1.1255)/(.125-.15) = $5.34

Expected Dividends in year 6 = $1.00 (1.15)5*1.06*2 = $4.26 (Payout doubles in year 6)

Expected Terminal Price = $4.26/(.125-.06) = $65.54

Value of Stock = $5.34 + $65.54/1.125^5 = $41.70

3-9

Expected Rate of Return = (1,000/300)(1/10) - 1 = 12.79%

3-10

Effective Annualized Interest Rate = (1+.09/52)^52 - 1 = 9.41%

3-11

Annuity given current savings of $250,000 and n=25 = $17,738.11

3-12

PV of first annuity - $20,000 a year for next 10 years = $128,353.15

PV of second annuity discounted back 10 years = $81,326.64

Sum of the present values of the annuities = $209,679.79

If annuities are paid at the start of each period,

PV of first annuity - $20,000 at beginning of each year = $139.904.94

PV of second annuity discounted back 10 years = $88,646.04

Sum of the present values of the annuities = $228,550.97

3-13

PV of deficit reduction can be computed as follows

Year

Deficit

PV

Reduction

1

2

3

4

5

6

2

$25.00

$30.00

$35.00

$40.00

$45.00

$55.00

$23.15

$25.72

$27.78

$ 29.40

$30.63

$34.66

7

8

9

10

$60.00

$65.00

$70.00

$75.00

$35.01

$35.12

$35.02

$34.74

Sum

$500.00

$311.22

The true deficit reduction is $ 311.22 million.

3-14

a. Annuity needed at 6% = 1.8967 billions

b. Annuity needed at 8% = 1.7257 billions

Savings = 0.1710 billions

This cannot be viewed as real savings, since there will be greater risk associated with the higherreturn investments.

3-15

a.

Year

Nominal

PV

0

1

2

3

4

5

$5.50

$4.00

$4.00

$4.00

$4.00

$7.00

$5.50

$3.74

$3.49

$3.27

$3.05

$4.99

Sum

$28.50

$24.04

Then the cash flow in year 5 will have to be raised by X + 1.5 million to get the nominal value of

the contract to be equal to $30 million. Since the present value cannot change,

X - (X+1.5)/1.075 = 0

X (1.075 - 1) = 1.5

X = 1.5/ (1.075 -1) = $3.73 million

The sign up bonus has to be reduced by $3.73 million and the final year's cash flow has to be

increased by $5.23 million, to arrive at a contract with a nominal value of $30 million and a present

value of $24.04 million.

3-16

a.

Mortgage:

Monthly Payment.

Annual Payments

Property Tax

Total Payment

b.

Chatham

$300,000

$2,201

$26,416

$6,000

$32,416

South Orange

$200,000

$1,468

$17,610

$12,000

$29,610

Mortgage payments will end after 30 years. Property taxes are not only a perpetuity; they are a

growing perpetuity. Therefore, they are likely to be more onerous.

PV of property taxes = Property tax * (1 +g) / (r -g)

For Chatham, PV of property tax = $6,000 *1.03/(.08-.03) = $123,600

For South Orange, PV of property tax = $12,000 *1.03/(.08-.03) = $247,200

To make the comparison, add these to the house prices,

Cost of the Chatham house = $400,000 + $123,600 = $523,600

Cost of the South Orange house = $300,000 + $247,200 = $547,200

The Chatham house is cheaper.

3-17

a. Monthly Payments at 10% on current loan = $1,755.14 (Monthly rate used=(10/12)%)

b. Monthly Payments at 9% on refinanced mortgage = $1,609.25 (Monthly rate=0.75%)

Monthly Savings from refinancing = $145.90

c. Present Value of Savings at 8% for 60 months = $7,195.56 (Monthly rate = (8/12)%)

Refinancing Cost = 3% of $200,000 =$6,000

d. Annual Savings needed to cover $ 6,000 in refinancing cost = $121.66

Monthly Payment with Savings = $1,755.14 - $121.66 = $1,633.48

Interest Rate at which Monthly Payment is $ 1,633.48 = 9.17%

3-18

a. Present Value of Cash Outflows after age 65 = $300,000 + PV of $35,000 each year for 35 years

= $649,637.05

b. FV of Current Savings of $ 50,000 = $503,132.84

Shortfall at the end of the 30th year = $146,504.21

Annuity needed each year for next 30 years for FV of $ 146,504 = $1,293.26

c. Without the current savings,

Annuity needed each year for 25 years for FV of $ 649,637.05 = $8,886.24

4

3-19

a. Estimated Funds at end of 10 years:

FV of $5 million at end of 10th year = $10.79 (in millions)

FV of inflows of $2 million each year for next 5 years = $17.24

FV of outflows of $3million each year for years 6-10 = $17.60

Expected Balance at the end of the tenth year = $ 10.43 million

b. Perpetuity that can be paid out of these funds = $10.43 (.08) = $0.83 million

3-20

a. Amount needed in the bank to withdraw $ 80,000 each year for 25 years = $1,127,516

b. Future Value of Existing Savings in the Bank = $407,224

Shortfall in Savings = $1,127,516 - $407,224 = $720,292

Annual Savings needed to get FV of $720,292 = $57,267

c. If interest rates drop to 4% after the 10th year,

Annuity based upon interest rate of 4% and PV of $1,127,516 = $72,175

The decline in the amount of withdrawal = $80,000 - $72,175 = $ 7825

3-21

Year

Coupon

1

2

3

4

5

6

7

8

9

10

$50.00

$50.00

$50.00

$50.00

$50.00

$60.00

$70.00

$80.00

$90.00

$100.00

Face Value

PV

$1,000.00

$46.30

$42.87

$39.69

$36.75

$34.03

$37.81

$40.84

$43.22

$45.02

$509.51

Sum =

$876.05

3-22

a. Value of Store = $100,000 (1.05)/(.10-.05) = $2,100,000

5

Solving for g,100,000(1+g)/(.10-g) = 2,500,000

G = 5.77%

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