1.

Review from sessions from 1 => 5

2. Individual Exercise

1. Calculate and fill in the missing (?):

Present Value ($) Years Interest rate Future Value ($)

? 4 4% 15,451
425 8 ? 761
1,941 ? 9% 3,860

2. A is creating a college investment fund for his daughter. She will put in $850 per year for
the next 15 years and expects to earn a 8% annual rate of return. How much money will
his daughter have when she starts college?

3. Mrs. B borrowed $125,000 to buy a house. Her loan cost was 11% and she promised to
pay the loan in 15 annual equal payments. What is annual payment Mrs. B has to pay for
the loan?

4. Corp.X expects to receive $2,000 per year for 10 years and $3,500 for the next 10 years.
What is the present value of this 20 year cash flows. Use a 11% discount rate

5. Bank A charges 10.2 percent compounded monthly on its business loan. Bank B charges
10.4 percent compounded semi-annually. As a potential borrower, which bank you would
you go to for a new loan?

6. The Perpetual Life Insurance Co, is trying to sell you an investment policy that will pay
you and your heirs $20,000 per year forever. If the required rate of return on this
investment is 10%, how much you will pay for the policy?

7. You intend to purchase a 10-year, $1,000 face value bond that pay interest of $60 every
six months. If your nominal required rate of return is 10 percent with semiannual
compounding, how much should you be willing to pay for this bond?

8. Company X just paid a dividend of $2 per share on its stock (eg. D0). The dividends are
expected to grow at a constant rate of 5 percent per year, indefinitely. If investors require
a 12 percent return on the company X’s stock, what is the current price?

9. Calculate Payback period, NPV and IRR of an investment with the following information

Year 0 $ (35,000)
Year 1 $ 16,000
Year 2 $ 15,500
Year 3 $ 8,800
Required return 12%