Black & Gold Candy Company is being offered a 2/10, net 30 cash discount. The firm will have to borrow the funds at 12 percent to take the discount. Should it proceed with the discount? A company plans to borrow $2,000,000 for a year. The stated interest rate is 12 percent. Compute the effective interest rate under each of the following assumptions. Each part stands alone. Effective rate on discounted loan Effective rate on an installment loan Simmons Corporation can borrow from its bank at 17 percent to take a cash discount. The terms of the cash discount are 1.5/10, net 45. Should the firm borrow the funds? A pawnshop will lend $5,000 for one year at 13 percent interest What is the effective rate of interest An amount of money to be received In the future Is worth less today than the stated amount True/False Discounting refers to the growth process that turns $1 today into a greater value several periods in the future True/False Compounding refers to the growth process that turns $1 today into a greater value several periods in the future. True/False Under what conditions must a distinction be made between money to be received today and money t be received in the future? A period of recession When idle money can earn a positive return When there Is no risk of nonpayment in the future When current interest rates are different from expected future rates As the compounding rate becomes lower and lower, the future value of inflows approaches 0. the present value of the inflows infinity. More information is needed. In determining the future value of a single amount, one measures the future value of periodic payments at a given merest rate. the present value of an amount discounted at a given interest rate the future value of an amount allowed to grow at a given interest rate the present value of periodic payments at a given interest rate Time Value of Money You invest $48, 000 today at 9 percent per year. How much will you have after 20 years? (Future Value) What is the current value of $400, 000 after 5 years if the discount rate is 9 percent? (Present Value) You invest $10,000 for 15 year at 13 percent. How much will you have after 10 years? (Future Value) Solving for an Annuity How much must John Locus set aside each year to accumulate $1,500,000 after 15 years? The interest rate is 10 percent. How much must Jason Bridge repay each year for 10 years to pay off a $25,000 loan that he just took out? The interest rate is 12 percent future Value) You Invest a single amount of $15,000 for 5 years at 15 percent. At the end of the 5 years, you take the proceeds and invest them for 10 years at 17 percent. How much will you have after 15 years? (Present Value) You're going to receive $1,500,000 in 20 years. What is the difference between using a discount rate of IS percent vs. 10 percent? The valuation of a financial asset is based on the concept of determining the present value of future cash flows. True/False The prices of financial assets are based on the expected value of future cash flows, the discount rate, and past dividends. True/False The market-determined required rate of return is the appropriate discount rate used in valuation calculations. True/False Valuation of financial assets requires knowledge of future cash flows. an appropriate discount rate. past asset performance future cash flows and an appropriate discount rate. The market allocates capital to companies based on risk. efficiency. expected returns. All of these options in a general sense, the value of any asset is the value of the dividends received from the asset. present value of the cash flows expected to be received from the asset. value of past dividends and price increases for the asset. future value of the expected earnings discounted by the asset s cost of capital The Baby Milk Company issued a $5,000 par value bond paying 12 percent interest with 20 years to maturity. Assume the current yield to maturity on such bonds is 8 percent. What is the price of the bond? Do annual analysis. Turn Down for What Corporation will pay a $3.60 dividend (Dl) in the next year. The required rate of return (Ke) is 15 percent and the constant growth rate (g) is 7 percent. Compute the stock price (PO). If Ke goes up to 17 percent, and all else remains the same, what will be the stock price (Po)? Now assume in the next year, Dl = $3.75, Ke = 18 percent, and g is equal to 9 percent. What is the price of the stock? The Big Texan Company has $1,000 par value bonds outstanding at 10 percent interest. The bonds will mature m 20 years Compute the current price of the bonds if the present yield to maturity is: 6 percent 9 percent 13 percent Greezy Jeezy Oil has $1,000 par value bonds outstanding at 8 percent interest. The bonds will mature in 25 years. Compute the current price of the bonds if the present yield to maturity Is: 7 percent 10 percent 13 percent Black & Gold Candy Company is being offered a 2/10, net 30 cash discount. The firm will have to borrow the funds at 12 percent to take the discount. Should it proceed with the discount? A company plans to borrow $2,000,000 for a year. The stated interest rate is 12 percent. Compute the effective interest rate under each of the following assumptions. Each part stands alone. Effective rate on discounted loan Effective rate on an installment loan Simmons Corporation can borrow from its bank at 17 percent to take a cash discount. The terms of the cash discount are 1.5/10, net 45. Should the firm borrow the funds? A pawnshop will lend $5,000 for one year at 13 percent interest What is the effective rate of interest An amount of money to be received In the future Is worth less today than the stated amount True/False Discounting refers to the growth process that turns $1 today into a greater value several periods in the future True/False Compounding refers to the growth process that turns $1 today into a greater value several periods in the future. True/False Under what conditions must a distinction be made between money to be received today and money t be received in the future? A period of recession When idle money can earn a positive return When there Is no risk of nonpayment in the future When current interest rates are different from expected future rates As the compounding rate becomes lower and lower, the future value of inflows approaches 0. the present value of the inflows infinity. More information is needed. In determining the future value of a single amount, one measures the future value of periodic payments at a given merest rate. the present value of an amount discounted at a given interest rate the future value of an amount allowed to grow at a given interest rate the present value of periodic payments at a given interest rate Time Value of Money You invest $48, 000 today at 9 percent per year. How much will you have after 20 years? (Future Value) What is the current value of $400, 000 after 5 years if the discount rate is 9 percent? (Present Value) You invest $10,000 for 15 year at 13 percent. How much will you have after 10 years? (Future Value) Solving for an Annuity How much must John Locus set aside each year to accumulate $1,500,000 after 15 years? The interest rate is 10 percent. How much must Jason Bridge repay each year for 10 years to pay off a $25,000 loan that he just took out? The interest rate is 12 percent future Value) You Invest a single amount of $15,000 for 5 years at 15 percent. At the end of the 5 years, you take the proceeds and invest them for 10 years at 17 percent. How much will you have after 15 years? (Present Value) You're going to receive $1,500,000 in 20 years. What is the difference between using a discount rate of IS percent vs. 10 percent? The valuation of a financial asset is based on the concept of determining the present value of future cash flows. True/False The prices of financial assets are based on the expected value of future cash flows, the discount rate, and past dividends. True/False The market-determined required rate of return is the appropriate discount rate used in valuation calculations. True/False Valuation of financial assets requires knowledge of future cash flows. an appropriate discount rate. past asset performance future cash flows and an appropriate discount rate. The market allocates capital to companies based on risk. efficiency. expected returns. All of these options in a general sense, the value of any asset is the value of the dividends received from the asset. present value of the cash flows expected to be received from the asset. value of past dividends and price increases for the asset. future value of the expected earnings discounted by the asset s cost of capital The Baby Milk Company issued a $5,000 par value bond paying 12 percent interest with 20 years to maturity. Assume the current yield to maturity on such bonds is 8 percent. What is the price of the bond? Do annual analysis. Turn Down for What Corporation will pay a $3.60 dividend (Dl) in the next year. The required rate of return (Ke) is 15 percent and the constant growth rate (g) is 7 percent. Compute the stock price (PO). If Ke goes up to 17 percent, and all else remains the same, what will be the stock price (Po)? Now assume in the next year, Dl = $3.75, Ke = 18 percent, and g is equal to 9 percent. What is the price of the stock? The Big Texan Company has $1,000 par value bonds outstanding at 10 percent interest. The bonds will mature m 20 years Compute the current price of the bonds if the present yield to maturity is: 6 percent 9 percent 13 percent Greezy Jeezy Oil has $1,000 par value bonds outstanding at 8 percent interest. The bonds will mature in 25 years. Compute the current price of the bonds if the present yield to maturity Is: 7 percent 10 percent 13 percent