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how much will your collection be worth when you retire in 2067, assuming they appreciate at a 4 percent annual rate?

Calculating Interest Rates and Future Values In 1895, the first U.S. Open Golf Championship was held. The winner's prize money was $150. In 2001, the winner's check was $900,000. What was the percentage increase in the winner's check over this period? If the winner's prize increases at the same rate, what will it be in 2040?

Calculating Present Values In 2001, a mechanized toy robot from the television series Lost in Space sold for $750. This represented a 13.86 percent annual return. For this to be true, what must the robot have sold for new in 1965? Calculating Rates of Return Although appealing to more refined tastes, art as a collectible has not always performed so profitably. During 1995, Christie's auctioned the William de Kooning painting Untitled. The highest bid of $2.2 million was rejected by the owner, who had purchased the painting at the height of the art market in 1989 for $3.52 million. Had the seller accepted the bid, what would his annual rate of return have been?

Calculating Rates of Return Referring to the GMAC security we discussed at the very beginning of the chapter:

a. Based upon the $500 price, what rate was GMAC paying to borrow money?

b. Suppose that, on December 1, 2002, this security's price was $4,800. If an investor had purchased it for $500 at the offering and sold it on this day, what annual rate of return would she have earned?

c. If an investor had purchased the security at market on December 1, 2002, and held it until it matured, what annual rate of return would she have earned?

Calculating Present Values Suppose you are still committed to owning a $120,000 Ferrari (see Question 9). If you believe your mutual fund can achieve an 11 percent annual rate of return and you want to buy the car in 10 years on the day you turn 30, how much must you invest today?

Calculating Future Values You have just made your first $2,000 contribution to your individual retirement account. Assuming you earn a 9 percent rate of return and make no additional contributions, what will your account be worth when you retire in 45 years? What if you wait 10 years before contributing? (Does this suggest an investment strategy?)

Calculating Future Values You are scheduled to receive $30,000 in two years. When you receive it, you will invest it for six more years at 5.5 percent per year. How much will you have in eight years?

Calculating the Number of Periods You expect to receive $10,000 at graduation in two years. You plan on investing it at 12 percent until you have $120,000. How long will you wait from now?

Calculating Future Values Find the monthly adjusted prices for Tyco International LTD (TYC). If the stock appreciates 11 percent per year, what stock price do you expect to see in five years? In 10 years? Ignore dividends in your calculations.

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

III. Valuation of Future Cash Flows

5. Introduction to Valuation: The Time Value of Money

© The McGraw-Hill Companies, 2002

CHAPTER 5 Introduction to Valuation: The Time Value of Money

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