1.

Growth rates

Shalit Corporation's 2011 sales were $7 million. Its 2006 sales were $3.5 million.

a. At what rate have sales been growing? Round your answer to two decimal places. _____%

b. Suppose someone made this statement: "Sales doubled in 5 years. This represents a growth of 100% in 5 years, so, dividing 100% by 5, we find the growth rate to be 20% per year." Is that statement correct? (Select)

(The statement is correct because 100% divided by 5 equals 20%.)

(The statement is incorrect because there are 6 years of sales growth between 2005 and 2010.)

(The statement is incorrect because a company's sales cannot double in such a short time span.)

(The statement is incorrect since the effect of compounding is not considered.)

(The statement is correct since the effect of discounting is considered.)

Effective versus nominal interest rates

Bank A pays 5.5% interest compounded annually on deposits, while Bank B pays 4.5% compounded daily.

c. Based on the EAR (or EFF%), which bank should you use?

I You would choose Bank A because its EAR is higher.

II You would choose Bank B because its EAR is higher.

III You would choose Bank A because its nominal interest rate is higher.

IV You would choose Bank B because its nominal interest rate is higher.

V You are indifferent between the banks and your decision will be based upon which one offers you a gift for opening an account.

d. Could your choice of banks be influenced by the fact that you might want to withdraw your funds during the year as opposed to at the end of the year? Assume that your funds must be left on deposit during an entire compounding period in order to receive any interest.

I If funds must be left on deposit until the end of the compounding period (1 year for Bank A and 1 day for Bank B), and you think there is a high probability that you will make a withdrawal during the year, then Bank A might be preferable.

II If funds must be left on deposit until the end of the compounding period (1 year for Bank A and 1 day for Bank B), and you have no intentions of making a withdrawal during the year, then Bank B might be preferable.

III If funds must be left on deposit until the end of the compounding period (1 day for Bank A and 1 year for Bank B), and you think there is a high probability that you will make a withdrawal during the year, then Bank B might be preferable.

IV If funds must be left on deposit until the end of the compounding period (1 year for Bank A and 1 day for Bank B), and you think there is a high probability that you will make a withdrawal during the year, then Bank B might be preferable.

V If funds must be left on deposit until the end of the compounding period (1 day for Bank A and 1 year for Bank B), and you think there is a high probability that you will make a withdrawal during the year, then Bank A might be preferable.

e. Time to reach a financial goal

You have $19,863.53 in a brokerage account, and you plan to deposit an additional $6,000 at the end of every future year until your account totals $240,000. You expect to earn 13% annually on the account. How many years will it take to reach your goal? Round your answer to two decimal places at the end of the calculations.

_______years

Effective rate of interest

Find the interest rates earned on each of the following. Round each answer to two decimal places.

f. You borrow $700 and promise to pay back $763 at the end of 1 year. _____%

g. You lend $700 and the borrower promises to pay you $763 at the end of 1 year. _____ %

h. You borrow $59,000 and promise to pay back $350,226 at the end of 12 years. _____ %

i. You borrow $12,000 and promise to make payments of $2,771.70 at the end of each year for 5 years. _____ %

j. Future value

If you deposit $8,000 in a bank account that pays 5% interest annually, how much would be in your account after 5 years? Round your answer to the nearest cent.

_____$

Loan amortization and EAR

You want to buy a car, and a local bank will lend you $15,000. The loan will be fully amortized over 5 years (60 months), and the nominal interest rate will be 8% with interest paid monthly.

k. What will be the monthly loan payment? Round your answer to the nearest cent. $ ______

l. What will be the loan's EAR? Round your answer to two decimal places. _____%