FIN310: Principles of Financial ManagementHOMEWORK1 – Valuation ProblemsDue: Thursday September 20th, 2012 (bymidnight)
InstructionsThe assignment should becompleted individually. Each student should upload to the Blackboard/Assignments/HW1 submission a word file that report your calculationsto the questions below. Please show your work clearly.You mustshow your work to receivecredit for correct responses (show details of the formulas and figures and/orfinancial calculator inputs you used), with brief verbal explanations whereappropriate. When doing multi-step calculations, use 6 decimal places for percent or interest rate figures and 4 decimal places for dollar figures for allintermediate calculations(example: .082635875 = .082636 = 8.2636%;$12.368654 = $12.3687). For final answers, round dollar figures to two decimalplaces (from previous example: $12.37) and round per cent figures to fourdecimal places (from previous example: .0826 or 8.26%).Blackboard will automatically record yoursubmission time. A 10% reduction fromfull credit per day will be imposed if the assignment is submitted late afterthe due date. I plan to post the solutions on Blackboard on Sunday September 23rd5:00pm to help you prepare for the upcoming exam; so submission after that will not be accepted.
The Problems 1. Whatis the present value of the following set of cash flows at an interest rate of6%; $100 now, $600 three years from now, $500 five years from now, and $300 tenyears from now.
2. You win the lottery and are told you won $20 million. Youactually won payments of $1 million every year for the next 20 years. If youropportunity cost (discount rate) is 10%, how much would you accept today inexchange for those 20 payments?
3. You are saving foryour child’s college education. You will need tuition which will be $30,000each year for four years with the first tuition payment due 18 years fromtoday. How much do you need to deposit today in a bank account that earnings 6%today so that you will have enough money to meet all the tuition payments?
4. Alicia wants to have $1,000,000twenty-five years from now. To achieve it she plans to deposit equal amount ofmoney each month for twenty-five years starting from next month. She believesthe rate of interest she can earn is 8% APR. What should be the amount of hermonthly deposit?
5. You decide to buy a car for $11,000. Since you do not havethe money, you take a loan from the bank for this amount. You are going to pay monthlypayments for 4 years. The bank charges 4.8% APR with monthly compounding.a) What is your monthly payment?
b) What is the EAR
c) What is the remaining balance of the loan at the end of month 3?
6. You are consideringa new kind of lease. The lease requires a down payment of $3,000 (made today)and is followed by 40 monthly payments of $450, however you don’t make thefirst payment until 6 months from today. The day you make the last of the 40payments the lease forces you to buy the car for $10,000. If you can borrow themoney to purchase the car at an APR of 9% with monthly compounding, what pricewould make you indifferent between buying the car and leasing it?