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Original Title: Bfc2140 Tutorial Set 02 Solutions_final

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Bfc2140 Tutorial Set 02 Solutions_final

bfc2140 tute 2 solutions

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You are on page 1of 9

CORPORATE FINANCE I

FINANCIAL MATHEMATICS

your own personal calculator (hp10bII+). Assistance will be provided with this

calculator in teaching materials. Do not leave learning how to use the calculator

until the last minute.

Warm up

interest compounding 6 monthly, how much would that investment have

grown to at the end of 10 years?

FV = $200,000(1.03)20 = $361,222.25

Keys Display Description

1.00 Sets the number of

1 payments per year.

20.00 Enters the number of

20

payments.

3.00 Enters interest per year.

3

-200,000.00 Enters the present value.

-200,000 Note that money paid out

is entered as a negative.

361,222.25 Calculates the future value

if paid at end of the period.

the effective annual interest rate?

12

0.08

EAR offered by the bank 1 1 8.30 % (2 decimal places)

12

Using hp10bII+ calculator

Keys Display Description

8.00 Enters the nominal rate

8

12.00 Enters payments per year

12

8.29995 Calculates the annual

effective interest rate

2-3 Fancy Nancy has to borrow funds at 10 percent to purchase a necklace. She

has a contract to sell the necklace for $70,000. Payment is to be received in

two years’ time. The necklace cost $60,000 today and could be sold for this

amount. Nancy likes this arrangement as she does not have to give up the

necklace for two years and by then fashions will possibly have changed. What

is the borrowing rate at which she would break even?

FV C (1 r ) n

$70,000 $60,000(1 r) 2

(1 r ) 2 1.166666667

r 8.01 %

Keys Display Description

1.00 Sets the number of

1 payments per year.

2.00 Enters the number of

2

payments.

-60,000.00 Enters the present value if

-60,000 cash flow at end of the

period.

Note that money paid out

is entered as a negative.

70,000.00 Enters the future value.

70,000

8.01 Calculates the interest per

year.

(%)

2,250 30 12 (i) 67409.82

9,310 16 9 (ii) 36,963.55

(iii) 11,877.67 5 4 14,451

(iv) 35,708.65 15 20 550,164

265 3 (v) 5.03 307

360 9 (vi) 8.67 761

(i)

FV C (1 r ) n $2250 (1 0.12 ) 30 $67409.82

Keys Display Description

1.00 Sets the number of

1 payments per year.

30.00 Enters the number of

30

payments.

12.00 Enters interest per year.

12

-2,250.00 Enters the present value.

-2250 Note that money paid out

is entered as a negative.

67,409.82 Calculates the future value

if paid at end of the period.

Using hp10bII+ calculator

Keys Display Description

1.00 Sets the number of

1 payments per year.

16.00 Enters the number of

16

payments.

9.00 Enters interest per year.

9

-9,310.00 Enters the present value.

-9310 Note that money paid out

is entered as a negative.

36,963.55 Calculates the future value

if paid at end of the period.

C $14451

(iii) PV $11,877 .67

(1 r ) n (1 0.04 ) 5

Using hp10bII+ calculator

Keys Display Description

1.00 Sets the number of

1 payments per year.

5.00 Enters the number of

5

payments.

4.00 Enters interest per year.

4

14,451.00 Enters the future value.

14,451

-$11,877.67 Calculates the present

value if cash flow at end of

the period.

Note that money paid out

is entered as a negative.

C $550 ,164

(iv) PV $35708 .65

(1 r ) n (1 0.20 )15

Using hp10bII+ calculator

Keys Display Description

1.00 Sets the number of

1 payments per year.

15.00 Enters the number of

15

payments.

20.00 Enters interest per year.

20

550,164.00 Enters the future value.

550,164

-$35,708.65 Calculates the present

value if cash flow at end of

the period.

Note that money paid out

is entered as a negative.

(v)

FV C (1 r ) n

FV

(1 r ) n

C

1/ n

FV

(1 r )

C

1/ n 1/ 3

FV 307

r 1 1 0.0503 or 5.03%

C 265

Using hp10bII+ calculator

Keys Display Description

1.00 Sets the number of

1 payments per year.

3.00 Enters the number of

3

payments.

-265.00 Enters the present value if

-265 cash flow at end of the

period.

Note that money paid out

is entered as a negative.

307.00 Enters the future value.

307

5.03 Calculates the interest per

year.

(vi)

FV C (1 r ) n

FV

(1 r ) n

C

1/ n

FV

(1 r )

C

1/ n 1/ 9

FV 761

r 1 1 0.0867 or 8.67% (nearest integer)

C 360

Using hp10bII+ calculator

Keys Display Description

1.00 Sets the number of

1 payments per year.

9.00 Enters the number of

9

payments.

-360.00 Enters the present value if

-360 cash flow at end of the

period.

Note that money paid out

is entered as a negative.

761.00 Enters the future value.

761

8.67 Calculates the interest per

year.

quadruple it?

FV C (1 r ) n

FV

(1 r ) n

C

FV

n log( 1 r ) log

C

FV

n log log( 1 r ) log 2 log( 1 0.06 ) 11 .90

C

By the rule of 72, 72/r 72/6 12 years.

Using hp10bII+ calculator

Keys Display Description

1.00 Sets the number of

1 payments per year.

6.00 Enters the interest per

6

year.

-1.00 Enters the present value if

-1 cash flow at end of the

period.

Note that money paid out

is entered as a negative.

2.00 Enters the future value.

2

11.90 Calculates the number of

payments.

FV C (1 r ) n

FV

(1 r ) n

C

FV

n log( 1 r ) log

C

FV

n log log( 1 r ) log 4 / log( 1 0.06 ) 23 .79

C

Using hp10bII+ calculator

Keys Display Description

1.00 Sets the number of

1 payments per year.

6.00 Enters the interest per

6

year.

-1.00 Enters the present value if

-1 cash flow at end of the

period.

Note that money paid out

is entered as a negative.

4.00 Enters the future value.

4

23.79 Calculates the number of

payments.

3. A) You are offered an investment that requires you to put up $3,000 today in

exchange for $10,000 15 years from now. What is the annual rate of return on

this investment?

FV C (1 r ) n

$10000 $3000 (1 r )15

10000

(1 r )15

3000

1 / 15

10000

r 1 8.36 %

3000

Using hp10bII+ calculator

Keys Display Description

1.00 Sets the number of

1 payments per year.

15.00 Enters the number of

15

payments.

-3000.00 Enters the present value if

-3000 cash flow at end of the

period.

Note that money paid out

is entered as a negative.

10000.00 Enters the future value.

10000

8.36 Calculates the interest per

year.

Which one will you choose (taking the above investment opportunity or

investing at this bank)?

4

0.08

EAR offeredby the bank 1 1 8.24% (2 decimal places)

4

Therefore, you should take the investment opportunity (a) as it has a higher

rate of return.

Using hp10bII+ calculator

Keys Display Description

8.00 Enters the nominal rate

8

4.00 Enters payments per year

4

8.24 Calculates the annual

effective interest rate

4. An investment has the following cash flows. If the discount rate is 8 per cent;

what is the present value of these flows at t=0? What is the net future value

of these flows at t=3?

1 $300

2 $600

3 $900

PV $1506 .63

1.08 1.08 2 1.08 3

Keys Display Description

CFLO CLR Clears the cash flow

Note: The message flashes memory

and then disappears

1.00 Sets the number of

1 payments per year.

8.00 Enters the interest per

8

year.

0.00 Enters cash flow at t=0

0

(CF0 flashes and then

disappears)

300.00 Enters cash flow at t=1

300

(CF1 flashes and then

disappears)

600.00 Enters cash flow at t=2

600

(CF2 flashes and then

disappears)

900.00 Enters cash flow at t=3

900

(CF3 flashes and then

disappears)

1,506.63 Calculate the PV at t=0

1,897.92 Calculate the Net Future

Value at t=3

5. It is presently July 1, 2016, and you need to raise $10,000 by July 1, 2021.

You can invest money in your bank to earn an 8% return compounded

annually.

of $10,000 on July 1, 2021.

SOLUTION

Timeline

n=0 n=1 n=2 n=3 n=4 n=5

PV =?

FV5=$10,000

FV $10,000

PV $6,805 .83

(1 r ) n (1.08) 5

Keys Display Description

1.00 Sets the number of

1 payments per year.

5.00 Enters the number of

5

payments.

8.00 Enters interest per year.

8

10,000.00 Enters the future value.

10,000

-$6,805.83 Calculates the present

value if cash flow at end of

the period.

Note that money paid out

is entered as a negative.

B) Independent of A), if you receive $7,500 from your father on July 1 2017,

calculate the rate of return you must earn to reach the $10,000 required

by July 1, 2021.

SOLUTION

FV = C(1+r)n

$10,000 = $7,500(1+r)4

1

$10 ,000 4

r = 1 = 7.46%

$7,500

Keys Display Description

1.00 Sets the number of

1 payments per year.

4.00 Enters the number of

4

payments.

-7,500.00 Enters the present value if

-7500 cash flow at end of the

period.

Note that money paid out

is entered as a negative.

10,000.00 Enters the future value.

10000

7.46 Calculates the interest per

year.

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