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Chapter 4: Q6DQ. (page 279)
If, as an investor, you had a choice of daily, monthly, or quarterly compounding, which would you choose? Why?
An investor with a choice of daily, monthly or quarterly compounding would choose daily compounding because this will result in the maximum returns for the investor.
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Question: Morgan Jennings, a geography professor, invests $50,000 in a parcel of land that is expected to increase in value by 12 percent per year for the next five years. He will take the proceeds and provide himself with a 10-year annuity. Assuming a 12 percent interest rate, how much will this annuity be?
Question: You will receive \(6,800 three years from now. The discount rate is 10 percent. d. Use the formula PV 5 FV 3 _____ 1 (1 1 i) n to find the present value of \)6,600 received three years from now at 10 percent interest.
Question: Franklin Templeton has just invested \(9,260 for his son (age one). This money will be used for his son’s education 18 years from now. He calculates that he will need \)71,231 by the time the boy goes to school. What rate of return will Mr. Templeton need in order to achieve this goal?
What approaches can be taken in valuing a firm’s stock when there is no cash dividend payment?
Question: As stated in the chapter, annuity payments are assumed to come at the end of each payment period (termed an ordinary annuity). However, an exception occurs when the annuity payments come at the beginning of each period (termed an annuity due). To find the present value of an annuity due, the annuity formula must be adjusted as to the following: PVAD 5 A 3 ( 12 1 ________ (11i) n 21 ___________ i 11) The Capital Budgeting Process blo7716x_ch09_255-294.indd 284. Likewise, the formula for the future value of an annuity due requires a modification: FVAD 5 A 3 ( (11i) n11 21 ___________ i 21). What is the future value of a 15-year annuity of $1,800 per period where payments come at the beginning of each period? The interest rate is 12 percent.
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