Question

Financial Markets and Corporate Strategy (assignment template) – 1 of 2

Insights/Instructions: Use this template to complete the assignment. Please do not delete these insights/instructions or inquiries provided herein; rather, save the template, type your response below then, after saving your work, upload the document to the assignment’s drop-box provided in Moodle.

1. Time Value of Money. Access the online Corporate Finance resource and read the section on Time Value of Money (pages 33 thru 69).

1. The “Time Value of Money” chapter offered several concepts and practical examples. Which concept and example did you find most interesting? Explain/elaborate.

Response:

2. Manhattan Island (an example offered within the chapter):
   1. Explain how $24 invested in a savings account offering a compound interest rate, r, of 8% in 1626, would have been worth $75.979 trillion in the year 2000 (374 years).

Response: $24 × (1.08)374 = $75,979,000,000,000 = $75.979 trillion

2. Explain how $24 invested in a savings account offering a compound interest rate, r, of 3.5% in 1626, would have been worth $9,287,569 (or approximately 9.3 million) in the year 2000.

Response: At a 3.5 percent interest rate, more consistent with historical experience, the future value of the $24 would be dramatically lower, only $24 × (1.035)374 = $9,287,569!

3. What accounts for the significant difference in the value of the account in the year 2000?

Response:

3. * Present Values. Compute the present value of a $100 cash flow for the following combinations of discount rates and times. Include the formula used to make the calculations. Note: See page 50 and 51 of the online resource; the general formula is:

Present Value = Future Value after t periods / (1 + r)^t

1. r = 10%; t = 10 years

2. r = 10%; t = 20 years

3. r = 5 percent; t = 10 years

5. r = 5 percent; t = 20 years

4. * Present Values. Would you rather receive $1,000 a year for 10 years or $800 a year for 15 years if:

1. The interest rate is 5 percent?

Response and rationale:

2. The interest rate is 20 percent?

Response and rationale:

3. Why do your answers to “(a)” and “(b”) differ?

Response:

5. * Future Values. Compute the future value of a $100 cash flow for the following combinations of discount rates and times. Include the formula used to make the calculations. The general formula is:

Future Value = Present Value * (1 + r)^t

1. r = 10%; t = 10 years

2. r = 10%; t = 20 years

3. r = 5 percent; t = 10 years

4. r = 5 percent; t = 20 years

6. * Calculating Interest Rate. Showing/explaining all of your work, find the interest rate implied by the following combinations of present and future values:

Scenario	Years	Present Value	Future Value
A	11	$400	$684
B	4	$183	$249
C	7	$300	$300

1. For scenario A, the interest rate is:

Re: show/explain your work

2. For scenario B, the interest rate is:

Re: show/explain your work

3. For scenario C, the interest rate is:

Re: show/explain your work

Corporate Finance this is the hyperlink to the reading material

Answer 1

A. For scenario A, the interest rate is:

Future value = Present value*(1+interest rate)^years

$684 = $400*(1+interest rate)¹¹

($684/$400)^1/11 = (1+interest rate)

(1+interest rate) = 1.71^0.0909 = 1.0499

interest rate = 1.0499 - 1 = 0.0499 or 4.99% round off to 5%

B. For scenario B, the interest rate is:

$249 = $183*(1+interest rate)⁴

($249/$183)^1/4 = (1+interest rate)

(1+interest rate) = 1.3607^0.25 = 1.0800

interest rate = 1.0800 - 1 = 0.0800 or 8%

C. For scenario C, the interest rate is:

$300 = $300*(1+interest rate)⁷

($300/$300)^1/7 = (1+interest rate)

(1+interest rate) = 1^0.1429 = 1

interest rate = 1 - 1 = 0%