Concepts Review and Critical Thinking Questions

1. Annuity Factors There are four pieces to an annuity present value. What are they?

2. Annuity Period As you increase the length of time involved, what happens to the present value of an annuity? What happens to the future value?

3. Interest Rates What happens to the future value of an annuity if you increase the rate r? What happens to the present value?

4. Present Value What do you think about the Tri-State Megabucks lottery discussed in the chapter advertising a $500,000 prize when the lump-sum option is $250,000? Is it deceptive advertising?

5. Present Value If you were an athlete negotiating a contract, would you want a big signing bonus payable immediately and smaller payments in the future, or vice versa? How about looking at it from the team's perspective?

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

III. Valuation of Future Cash Flows

6. Discounted Cash Flow Valuation

© The McGraw-Hill Companies, 2002

CHAPTER 6 Discounted Cash Flow Valuation 191

6. Present Value Suppose two athletes sign 10-year contracts for $80 million. In one case, we're told that the $80 million will be paid in 10 equal installments. In the other case, we're told that the $80 million will be paid in 10 installments, but the installments will increase by 5 percent per year. Who got the better deal?

7. APR and EAR Should lending laws be changed to require lenders to report EARs instead of APRs? Why or why not?

8. Time Value On subsidized Stafford loans, a common source of financial aid for college students, interest does not begin to accrue until repayment begins. Who receives a bigger subsidy, a freshman or a senior? Explain.

9. Time Value In words, how would you go about valuing the subsidy on a subsidized Stafford loan?

10. Time Value Eligibility for a subsidized Stafford loan is based on current financial need. However, both subsidized and unsubsidized Stafford loans are repaid out of future income. Given this, do you see a possible objection to having two types?

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