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Questions and Answers of
Corporate Finance
By calculating the maturity value of $100 invested for one year at each rate, determine which rate of return an investor would prefer. a. 8.0% compounded monthly b. 8.1% compounded quarterly c. 8.2%
If money can be invested to earn 6.5% compounded annually, how much would have to be invested today to grow to $10,000 after: a. 10 years? b. 20 years? c. 30 years?
Ross has just been notified that the combined principal and interest on an amount that he borrowed 27 months ago at 11% compounded quarterly is now $2297.78. How much of this amount is principal and
Your client has a choice of either receiving $5000 two years from now or receiving a lump payment today. If your client can earn 5.4% compounded semiannually, what amount received today is equivalent
You owe $6000 payable three years from now. What alternative amount should your creditor be willing to accept today if she can earn 4.2% compounded monthly on a low-risk investment?
What amount, 1 ½ years from now, is equivalent to $7000 due in 8 years, if money can earn 6.2% compounded semiannually?
A payment of $1300 is scheduled for a date 3 ½ years from now. What would be an equivalent payment 9 months from now, if money is worth 5.5% compounded quarterly?
What amount 15 months ago is equivalent to $2600, 1 ½ years from now? Assume money can earn 5.4% compounded monthly.
Mustafa can receive a $77 discount if he pays his property taxes early. Alternatively, he can pay the full amount of $2250 when payment is due in nine months. Which alternative is to his advantage if
What single amount, paid three years from now, would be economically equivalent to the combination of $1400 due today and $1800 due in five years, if funds can be invested to earn 6% compounded
Ramon wishes to replace payments of $900 due today and $500 due in 22 months by a single equivalent payment 18 months from now. If money is worth 5% compounded monthly, what should that payment be?
Mohinder has financial obligations of $1000 due in 3 1/2 years and $2000 due in 5 ½ years. 22 He wishes to settle the obligations sooner with a single payment one year from now. If money is worth
What amount would have to be invested today for the future value to be $10,000 after 20 years if the rate of return is: a. 5% compounded quarterly? b. 7% compounded quarterly? c. 9% compounded
What payment 2 ¼ years from now would be a fair substitute for the combination of 4 $1500 due (but not paid) 9 months ago and $2500 due in 4 1/2 years, if money can earn 2 9% compounded quarterly?
What single payment six months from now would be equivalent to payments of $500 due (but not paid) four months ago, and $800 due in 12 months? Assume money can earn 7.5% compounded monthly.
What single payment one year from now would be equivalent to $2500 due in three months, and another $2500 due in two years? Money is worth 7% compounded quarterly.
A scheduled payment stream consisted of three payments: $2100 due (but not paid) 1 ½ years ago, $1300 due today, and $800 due in 2 years. What single payment, 6 months from now, would be
A debtor owing payments of $750 due today, $1000 due in 2 years, and $1250 due in 4 years requests a payout figure to settle all three obligations by means of a single economically equivalent payment
Alicia is considering two offers-to-purchase that she has received on a residential building lot she wishes to sell. One is a cash offer of $145,000. The other offer consists of three payments of
A bond pays $1000 interest at the end of every year for the next 30 years. What is the current economic value of each of the 15th and 30th payments if we discount the payments at: a. 5% compounded
Joe Superstar has just signed a “four-year, $68-million deal” with the Toronto Blue Jays. The terms of the contract include a signing bonus of $4.8 million and salaries of $10 million, $17.2
To motivate individuals to start saving at an early age, financial planners will sometimes present the results of the following type of calculation. How much must a 25-year-old individual invest five
Michelle has just received an inheritance from her grandfather’s estate. She will be entering college in 3 1/2 years, and wants to immediately purchase three compound- 2 interest investment
What amount invested today would grow to $10,000 after 25 years, if the investment earns: a. 8% compounded annually? b. 8% compounded semiannually? c. 8% compounded quarterly? d. 8% compounded
Daniel makes annual payments of $2000 to the former owner of a residential lot that he purchased a few years ago. At the time of the fourth from last payment, Daniel asks for a payout figure that
Commercial Finance Co. buys conditional sale contracts from furniture retailers at discounts that provide a 16.5% compounded monthly rate of return on the purchase price. What total price should
Teresita has three financial obligations to the same person: $2700 due in 1 year, $1900 due in 1 ½ years, and $1100 due in 3 years. She wishes to settle the obligations 2 with a single payment in 2
A $15,000 loan at 11.5% compounded semiannually is advanced today. Two payments of $4000 are to be made one year and three years from now. The balance is to be paid in five years. What will the third
A $4000 loan at 10% compounded monthly is to be repaid by three equal payments due 5, 10, and 15 months from the date of the loan. What is the size of the payments?
A $10,000 loan at 8% compounded semiannually is to be repaid by three equal payments due 2 ½ , 4, and 7 years after the date of the loan. What is the size of each payment?
A $6000 loan at 9% compounded quarterly is to be settled by two payments. The first payment is due after nine months and the second payment, half the amount of the first payment, is due after 1 1/2
A $7500 loan at 9% compounded monthly requires three payments at five-month intervals after the date of the loan. The second payment is to be twice the size of the first payment, and the third
Three equal payments were made two, four, and six years after the date on which a $9000 loan was granted at 10% compounded quarterly. If the balance immediately after the third payment was $5169.81,
Repeat Problem 31 with the change that each contract accrues interest from today at the rate of 12% compounded monthly.
If money is worth 6% compounded annually, what amount today is equivalent to $10,000 paid: a. 12 years from now? b. 24 years from now? c. 36 years from now?
Repeat Problem 32 with the change that each obligation accrues interest at the rate of 9% compounded monthly from a date nine months ago when the obligations were incurred.
If the total interest earned on an investment at 8.2% compounded semiannually for 8 1/2 years was $1175.98, what was the original investment?
Peggy has never made any payments on a five-year-old loan from her mother at 6% compounded annually. The total interest owed is now $845.56. How much did she borrow from her mother?
What amount would have to be invested today for the future value to be $10,000 after 20 years if the rate of return is: a. 5% compounded quarterly? b. 7% compounded quarterly? c. 9% compounded
What is the present value of $10,000 discounted at 4.5% compounded annually over ten years?
If the present value of $100 due eight years from now is $50, what is the present value of $100 due 16 years from now? Answer without using formula
What principal amount will have a maturity value of $5437.52 after 27 months, if it earns 8.5% compounded quarterly?
The maturity value of an investment after 42 months is $9704.61. What was the original investment, if it earned 7.5% compounded semiannually?
What amount today is economically equivalent to $8000 paid 18 months from now, if money is worth 5% compounded monthly?
If your client’s objective is to have $10,000 in four years, how much should he invest today in a product earning 5.5% compounded annually? (Taken from CIFP course materials.)
How, if at all, will the future value of a three- year variable-rate GIC differ if it earns 4%, 5%, and 6% in successive years instead of 6%, 5%, and 4% in successive years?
Stan purchased a $15,000 compound-interest Series 103 Canada Savings Bond on December 1, 2008. The interest rate in the first year was 2.50% and in the second year was 3.00%. What total interest did
What amount did the owner of a $5000 face value compound-interest Series S96 Canada Savings Bond receive when she redeemed the bond on: a. November 1, 2009? b. August21,2010
What amount did the owner of a $10,000 face value compound-interest Series S102 CSB receive when he redeemed the bond on: a. November 1, 2009? b. May19,2010?
What was the redemption value of a $300 face value compound-interest Series S90 CSB on March 8, 2010?
On February 1, 2007, Selma purchased a $50,000 compound-interest CSB. The interest rate on the CSB was 1.55% for each of the first two years and 2.675% for the third year. What was the total interest
Calculate the maturity value of $2000 invested in a five-year compound-interest GIC earning 4.1% compounded annually.
A compound-interest GIC will earn 5% compounded annually for the first two years and 6% compounded annually for the last three years of its five-year term. What will be the maturity value of $3000
$8000 is invested in a five-year compound-interest GIC earning interest rates of 4%, 4.5%, 5%, 5.5%, and 6% in successive years. What amount will the investor receive at maturity?
Western Life’s “Move-Up” compound-interest GIC earns 4.125%, 4.25%, 4.5%, 4.875%, and 5% in successive years. What will be the maturity value of $7500 invested in this GIC?
The BMO Bank of Montreal advertised rates of 1.8%, 2.25%, 2.6%, 3%, and 3.25% for the five successive years of its five-year compound-interest Rate Optimizer GIC. At the same time, the bank was
Why must the Finance Department keep the interest rates o existing CSBs at least as high as the rate on a new CSB issue
On the same date that the CIBC advertised rates of 2%, 2.5%, 3%, 3.25%, and 7% in successive years of its five-year compound-interest Escalating Rate GIC, it offered 2.75% compounded annually on its
Using the information given in Problem 20, calculate the interest earned in the fourth year from a $10,000 investment in each GIC.
Using the information given in Problem 20, how much would have to be initially invested in each GIC to have a maturity value of $20,000?
How much will you need 20 years from now to have the purchasing power of $100 today if the (compound annual) rate of inflation during the period is: a. 2%? b. 3%? c. 4%?
How much money was needed 15 years ago to have the purchasing power of $1000 today if the (compound annual) rate of inflation has been: a. 2%? b. 4%?
If the inflation rate for the next 10 years is 3.5% per year, what hourly rate of pay in 10 years will be equivalent to $15/hour today?
Zimbabwe’s descent into economic chaos during the late 1990s and early 2000s resulted in hyperinflation. By August of 2008, the monthly inflation rate stood at 839%! Retailers were increasing their
Mr. and Mrs. Rasuli would like to retire in 15 years at an annual income level that would be equivalent to $35,000 today. What is their retirement income goal if, in the meantime, the annual rate of
In 2002 the number of workers in the forest industry was forecast to decline by 3% per year, reaching 80,000 in 2012. How many were employed in the industry in 2002?
A pharmaceutical company had sales of $28,600,000 in the year just completed. Sales are expected to decline by 4% per year for the next three years until new drugs, now under development, receive
Should we conclude that the owner of a strip bond earns nothing until the full face value is received at maturity? Explain.
The late 1970s and early 1980s were years of historically high rates of inflation in Canada. For the years 1978, 1979, 1980, 1981, and 1982 the rates of inflation were 8.8%, 9.2%, 10.9%, 12.6%, and
A $1000 face value strip bond has 22 years remaining until maturity. What is its price if the market rate of return on such bonds is 6.5% compounded semiannually?
What price should be paid for a $5000 face value strip bond with 19.5 years remaining to maturity if it is to yield the buyer 6.1% compounded semiannually?
Wojtek purchased a $10,000 face value strip bond on a date when it had 14 years left until maturity. The purchase price was based on a market yield of 6.2% compounded semiannually. He sold the bond
Consider a $5000 face value Province of Quebec strip bond from the issue in Table 8.3 that matures on December 1, 2018. If the yield does not change as years go by, what will be the bond’s value
Consider a $10,000 face value Government of Canada strip bond from the issue in Table 8.3 that matures on June 1, 2025. Assume the yield does not change as years go by. a. What will be the bond’s
If the current discount rate on 15-year strip bonds is 4.75% compounded semiannually, how many $1000 face value strips can be purchased with $10,000?
Mrs. Janzen wishes to purchase some 13-year-maturity strip bonds with the $12,830 in cash she now has in her RRSP. If these strip bonds are currently priced to yield 5.25% compounded semiannually,
Boris recently turned 30, an event causing him to give thought to some long-range financial planning. He believes that, if he owns a home and is debt-free by age 60, he and his partner can retire and
A four-year $8000 promissory note bearing interest at 13.5% compounded monthly was discounted 21 months after issue to yield 12% compounded quarterly. What were the proceeds from the sale of the note?
Mrs. Sandhu placed $11,500 in a four-year compound-interest GIC earning 6.75% compounded monthly. What is the GIC’s maturity value?
An eight-year note for $3800 with interest at 11% compounded semiannually was sold after three years and three months to yield the buyer 14% compounded quarterly. What price did the buyer pay?
The contract for a $4000 loan at 9% compounded quarterly requires two payments. The first payment of $2000 is required two years after the date of the loan. (It is applied to the balance owed after
A $5000 loan at 10% compounded annually is to be repaid by two payments three and five years from the date of the loan. The first payment of $3000 will be applied to the balance owed after conversion
Krista invested $18,000 in a three-year regular-interest GIC earning 4.2% payable semiannually. What is each semiannual interest payment?
Eric invested $22,000 in a five-year regular-interest GIC earning 4.5% payable monthly. What is each monthly interest payment?
Mr. Dickson purchased a seven-year, $30,000 compound-interest GIC with funds in his RRSP. If the interest rate on the GIC is 5.25% compounded semiannually, what is the GIC’s maturity value?
A trust company offers three-year compound-interest GICs earning 4.8% compounded monthly or 4.9% compounded semiannually. Which rate should an investor choose?
Repeat the calculations with the change that Darren and Cathy are in a higher tax bracket with a marginal tax rate of 43%.
Repeat the calculations with the change that Darren and Cathy are in a lower tax bracket with a marginal tax rate of 26%.
If a quantity declines by x % per-year (compounded) for two years, will the overall percent decrease be more or less than 2x %? Explain.
If an investor has the choice between rates of 5.4% compounded quarterly and 5.5% compounded annually for a six-year GIC, which rate should she choose?
For a given term of compound-interest GIC, the nominal interest rate with annual compounding is typically 0.125% higher than the rate with semiannual compounding and 0.25% higher than the rate with
Sun Life Financial offers a five-year compound-interest GIC earning rates of 2.5%, 3%, 3.5%, 4.25%, and 5% in successive years. Manulife offers a similar GIC paying rates of 2.75%, 3.25%, 3.5%, 4%,
Using the information given in Problem 8, calculate the interest earned in the third year from a $10,000 investment in each GIC.
Scheduled payments of $3000 due today and $2000 due in 15 months are to be replaced by two payments—$1500 due in 15 months and a second payment of undetermined size due in 24 months. What must the
The owner of a residential building lot has received two purchase offers. Mrs. A is offering a $20,000 down payment plus $40,000 payable in one year. Mr. B’s offer is $15,000 down plus two $25,000
During its January Sale, Furniture City is offering terms of 25% down with no further payments and no interest charges for six months, when the balance is due. Furniture City sells the conditional
Henri has decided to purchase a $25,000 car. He can either liquidate some of his investments and pay cash, or accept the dealer’s proposal that Henri pay $5000 down and $8000 at the end of each of
A lottery prize gives the winner a choice between (1) $10,000 now and another $10,000 in 5 years, or (2) four $6700 payments—now and in 5, 10, and 15 years. a. Which alternative should the winner
CompuSystems was supposed to pay a manufacturer $19,000 on a date four months ago and another $14,000 on a date two months from now. Instead, CompuSystems is proposing to pay $10,000 today and the
Payments of $5000 and $7000 are due three and five years, respectively, from today. They are to be replaced by two payments due 1 ½ and four years from today. The first payment is to be half the
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