HW2

Intermediate Corporate Finance 3023 Homework 2 1) What is the value of receiving $5,000/year forever starting in one year

if the discount rate is 6%? What if the cash flows start today? What if the cash flows start in 13 years?

2) If you put $100,000 in to a bank account earning 4% interest, how much will you have in 5 years if the 4% is an annually compounded APR? What if it is a semiannually compounded APR? What if it is a monthly compounded APR? What if it is a continuously compounded APR?

3) What is the value of receiving $4,000 per month forever, the first cash flow starting in one month, if the discount rate is a 4% monthly compounded APR? What if the discount rate is an annually compounded 4%?

4) What is the value of receiving $5,000 per year starting in one year for 10 years assuming a 4% interest rate? What if the $5,000 per year cash flows start in 7 years and continue for 12 years?

5) You take out a 30-year $200,000 mortgage loan with an APR (monthly) of 4.5% and monthly payments. In 12 years you decide to sell your house and pay off the mortgage. What is the principal balance on the loan?

6) a) You plan on retiring in 35 years and want to accumulate enough by then to spend $50,000 per year for 20 years. If the interest rate is 5%, how much must you accumulate by the time you retire? b) How much must you save each year until retirement in order to finance your retirement consumption?

c) Now you remember that the annual inflation rate is 2%. If a loaf of bread costs $3 today, what will it cost when you retire? d) You want to consume $50,000 in real dollars when you retire and wish to save an equal real amount each year until then. What is the real amount of savings you need to accumulate at retirement? e) Calculate the required preretirement real annual savings necessary to meet your consumption goals. Compare your answer to (b). Why is there a difference? What is the nominal value of the amount you need to save in the first year? In the 35th year?

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