The work below is not the work of a tutor. I am submitting these problems for the first time. The work is my own. It is just me, the problems, and my text book. The work that I have completed is in bold. This is to help the tutor distinguish between the problems (not in bold) and my work to solve the problems (in bold). What I need is assurance that I solved these problems correctly in order to assure me that I am understanding this concepts correctly. If I have not solved them correctly, I request help from a tutor because I am unsure if I solved these problems (#1-8) correctly. If I did not, I request a tutor to show me why I am wrong, to show me my error, and to help me learn from that error and solve the problem correctly. I figure if I solve the problem on my own that I would learn instead of simply posting the problem and having a tutor solve it for me. This way of me solving the problem first and having a tutor check my work, the tutor can show me my error and I can better understand the problem, my error, and solve for the correct answer. This enables me to learn and to help me understand if I am actually understanding the concept correctly. If I have mislead with my initial question below, I apologize. Again, this to help me better understand the concepts so that I can learn. Please help. Did I solve the problems correctly?

Subject: Corporate Finance

Topics: #1-7 Interest Rates

#8 Investor Behavior

1.You have found three investment choices for a one-year deposit: 11% APR compounded monthly, 11% APR compounded annually, and 9% APR compounded daily. Assuming there are 365 days in the year:

EAR = [(1 + APR/k)^k]-1

EAR = [(1 + 0.11/12)^12]-1 = .1157188

a.The EAR for the first investment choice is __11.572________%. (Round to three decimal places.)

EAR = [(1 + 0.11/1)^1]-1 = .11000

b.The EAR for the second investment choice is _11.000_________%. (Round to three decimal places.)

EAR = [(1 + 0.09/365)^365]-1 = 0.0941621449

c.The EAR for the third investment choice is __9.4162________%. (Round to three decimal places.)

2.Your son has been accepted into college. This college guarantees that your son's tuition will not increase for the four years he attends college. The first $9,000 tuition payment is due in six months. After that, the same payment is due every six months until you have made a total of eight payments. The college offers a bank account that allows you to withdraw money every six months and has a fixed APR of 9% (semiannual) guaranteed to remain the same over the next four years.

EAR = [(1 + APR/k)^k]-1

EAR = [(1 + .09/2)^2]-1 = 0.092025 = 9.203 %

Equivalent (n)-Period Discount Rate = [(1+r)^(n)]-1

= [(1+0.092025)^(1/2)]-1= 0.045 = 4.5%

0 1 2 3 4 5 6 7 8

9K9K 9K 9K9K 9K 9K 9K

(BAII Plus Texas Instrument) N = 8; I/Y= 4.5%; PV = ? ; PMT = -9,000; FV = 0

PV = $59,362.97

If you intend to make no further deposits and would like to make all of the tuition payments from this account, leaving this account empty when the last payment is made, the amount you need to deposit today is $_59,362.97___. (Round to the nearest cent.)

3.Capital One is advertising a 60-month, 5.99% APR motorcycle loan. If you need to borrow $11,000 to purchase your dream Harley Davidson, your monthly payment would be $__212.61________. (Round to two decimal places.)

Interest Rate per Compounding Period = APR/ (k periods/year)

Interest Rate per Compounding Period = .0599 / 12 months = 0.0049916667 = .49916667%

(BAII Plus Texas Instrument) N = 60; I/Y= .49916667%; PV = $11,000 ; PMT = ?; FV = 0

PMT = -212.61

4.If the rate of inflation is 4.9%, the nominal rate necessary for you to earn a 3.4% real interest rate on your investment is __8.5________%. (Round to one decimal place.)

Rr=real interest rate (3.4%); r = nominal interest rate (?); i = inflation rate (4.9%)

Rr = (r - i) / (1 + i);.034 = (r - .049) / (1 + .049);

.034 = (r - .049) / (1.049)

0.035666 = r - .049

0.084666 = r ;r = 8.4666%

5.Consider a project that requires an initial investment of $96,000 and will produce a single cash flow of $147,000 in 5 years.

NPV = $-96,000 + [147,000 / (1.052^5)]

NPV = $-96,000 + 114,087.65029

NPV = 18,087.65029

a.If the 5-year interest rate is 5.2% (EAR), the NPV in this case is $_18,088__. (Round to the nearest dollar.)

NPV = $-96,000 + [147,000 / (1.102^5)]

NPV = $-96,000 + 90,450.1647

NPV = -5,549.8352

b.If the 5-year interest rate is 10.2% (EAR), the NPV in this case is $_-5,550_. (Round to the nearest dollar.)

NPV = $-96,000 + [147,000 / (1 + r)^5]

96,000 = [147,000 / (1 + r)^5]

[(1 + r)^5]*96,000 = 147,000

[(1 + r)^5] = 147,000 / 96,000

(1 + r)^5 = 1.53125

1+r = 1.53125 ^ (1/5)

r = 1.0889532 - 1;r = 0.0889532;r = 8.895

c.The highest 5-year interest rate (EAR) such that this project is still profitable is ____8.9______%. (Round to one decimal place.)

6.Wal-Mart's five-year borrowing rate is 3.23% and GE Capital's is 9.81%. Which would you prefer? $500 from Wal-Mart paid today or a promise that the firm will pay you $700 in five years? Which would you choose if GE offered you the same alternative?

PV = C(n) / (1 + r(n))^(n);n = number of years; C= risk-free cash flow in (n) years

PV = 700 / (1 + .0981)^(5)

PV = 700 / 1.0981^5

PV = 438.4182

The PV of the loan from GE Capital is $_438.42__. (Round to the nearest cent.)

PV = C(n) / (1 + r(n))^(n);n = number of years; C= risk-free cash flow in (n) years

PV = 700 / (1 + .0323)^(5)

PV = 700 / 1.0323^5

PV = 597.1293

The PV of the loan from Wal-Mart is $_597.13__. (Round to the nearest cent.)

You would prefer:

A.$700 from GE Capital in 5 years and $500 from Wal-Mart today.

B.$500 from GE Capital today and $500 from Wal-Mart today.

C.$500 from GE Capital today and $700 from Wal-Mart in 5 years.

D.$700 from GE Capital in 5 years and $700 from Wal-Mart in five years.

7.Your best taxable investment opportunity has an EAR of 5.8%. Your best tax-free investment opportunity has an EAR of 2.5%. If your tax rate is 32%, the taxable / tax-free (select one) investment opportunity has the higher interest rate with __Taxable_3.9_%. (Round to one decimal place.)

After-Tax Interest Rate; r=interest rate; T = tax rate

r - (T*r) = r(1-T)

Taxable:.058(1-.32) = 0.03944;= 3.944%

Tax-Free:2.5%

8.Consider the price paths of the following two stocks over six time periods:

Time123456

Stock 1131517151619

Stock 21396141316

Neither stock pays dividends. Assume you are an investor with the disposition effect and you bought at time 1 and right now, it is time 3. Assume throughout this question that you do no trading (other than what is specified) in these stocks.

Disposition Effect:Investors tend to HOLD on to stocks that lost value while other investors SELL stocks that rise in value.

a.Which stock(s) would you be inclined to sell? Which would you be inclined to buy? Which would you be inclined to hold onto? You would sell / buy/ hold stock 1 and sell / buy / hold stock 2. (Select one for each stock.)

b.How would your answer change if right now is time 6? You would sell / buy/ hold stock 1 and sell / buy / hold stock 2. (Select one for each stock.)

c.What if you bought at time 3 instead of time 1 and today is time 6? You would sell / buy/ hold stock 1 and sell / buy / hold stock 2. (Select one for each stock.)

d.What if you bought at time 3 instead of time 1 and today is time 5? You would sell / buy/ hold stock 1 and sell / buy / hold stock 2. (Select one for each stock.)