After-class Task #4
Future Value Problems
You are saving for a down payment on a house costing $150,000. You believe you will need a 10% down payment. If you put $12,000 in a bank account today earning 5% interest, will you have enough money for the down payment in 5 years?
You are evaluating the Jackson Company’s stock performance. It has shown an average increase of dividends of 4% per year. Last year’s dividend was $5.50. What will the dividend be in 5 years?
You have your eyes on a new Lexus, luxury cars by Toyota which are rated by car magazines as better than Mercedes but which currently sell for only $60,000 (a comparable Mercedes is $80,000). You would like to purchase one, but because you are in school that seems out of the question. To make matters worse, you think that Lexus will increase its price as consumers recognize its quality. If you believe that Lexus will increase its price by 3% per year, how much will the car cost in 10 years when you are ready to buy?
Compounding Period Problems
Your bank offers a 4-year certificate of deposit at a 12% interest rate compounded quarterly. Determine how much additional interest you will earn over 4 years on a $10,000 CD that is compounded quarterly compared with one that compounded annually.
Your bank offers a 2-year certificate of deposit at a 10% interest rate compounded continuously. Determine how much additional interest you will earn over 2 years on a $10,000 CD that is compounded continuously compared with ones that are compounded annually or semiannually.
Solving for i and n
As one of two heirs to an estate, you will collect $20,000 in 5 years. The other heir, Gertrude, offers you $15,000 for your share. If you accept Gertrude’s offer, what effective rate of return would you earn? If you can earn 8% on your investments, should you accept Gertrude’s offer?
You bought a piece of land three years ago for $5,000. If you can sell it now for $7,407.50, what is you annual rate of return? If you can normally earn a return of 20% on this type of investment, did you do well with this one?
Present Value Problems
BLT stock is yielding a 20% return. It is expected to give a dividend of $1 and to sell for $23 at the end of the year. How much should you pay for the stock?
You have won the grand prize in a contest. You have the choice of receiving $10,000 one year from now or $15,000 three years from now. If you can earn 8% interest compounded quarterly on your money, which should you choose?
Your bank is offering you two sets of terms on a loan. You may borrow $10,000 today repayable in 3 years in a lump sum of $20,000. Or you may borrow $10,000 today repayable in 1 year in a lump sum of $14,257. Interest is compounded monthly. Which loan term provides the lower interest cost?
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