Chapter 4: Q7BP. (page 282)
Your uncle offers you a choice of \(105,000 in 10 years or \)47,000 today. If money is discounted at 9 percent, which should you choose?
The choice of $47,000 today should be preferred over $105,000 in 10 years.
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If your uncle borrows $60,000 from the bank at 10 percent interest over the seven-year life of the loan, what equal annual payments must be made to discharge the loan, plus pay the bank its required rate of interest (round to the nearest dollar)? How much of his first payment will be applied to interest? To principal? How much of his second payment will be applied to each?
Question:Surgical Supplies Corporation paid a dividend of $1.12 per share over the last 12 months. The dividend is expected to grow at a rate of 2.5 percent over the next three years (supernormal growth). It will then grow at a normal, constant rate of 7 percent for the foreseeable future. The required rate of return is 12 percent (this will also serve as the discount rate).
a. Compute the anticipated value of the dividends for the next three years (D1, D2, and D3).
b. Discount each of these dividends back to the present at a discount rate of 12 percent and then sum them.
c. Compute the price of the stock at the end of the third year (P3).
P3 = D4/ (Ke - g)
d. After you have computed P3, discount it back to the present at a discount rate of 12 percent for three years.
e. Add together the answers in part b and part d to get the current value of the stock. (This answer represents the present value of the first three periods of dividends plus the present value of the price of the stock after three periods.)
What is the present value of
c. $26,000 in 14 years at 6 percent
Carrie Tune will receive \(19,500 for the next 20 years as a payment for a new song she has written. If a 10 percent rate is applied, should she be willing to sell out her future rights now for \)160,000?
List five different financial applications of the time value of money.
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