BUSINESS FINANCE教学资料 Chapter 5_Solutions.docxVIP

Chapter 5: Discounted cash flow valuation12Calculating EAR [LO4]?First National Bank charges 14.2 per cent compounded monthly on its business loans. First United Bank charges 14.5 per cent compounded semi-annually. As a potential borrower, which bank would you go to for a new loan?Answer: For discrete compounding, to find the EAR, we use the equation:EAR = [1 + (QR / m)]m – 1So, for each bank, the EAR is:First National: EAR = [1 + (0.1420 / 12)]12 – 1 = 0.1516 or 15.16%First United: EAR = [1 + (0.1450 / 2)]2 – 1 = 0.1503 or 15.03%Notice that the higher QR does not necessarily mean the higher EAR. The number of compounding periods within a year will also affect the EAR.First National bank would be preferred for a new loan because it has the higher EAR.17Calculating Annuity Future Values [LO1]?You are planning to make monthly deposits of ￡400 into a retirement account that pays 7 per cent interest compounded monthly. If your first deposit will be made one month from now, how large will your retirement account be in 40 years? Answer: This problem requires us to find the FVA. The equation to find the FVA is:FVA = C{[(1 + r)t – 1] / r}FVA = ￡400[{[1 + (0.07/12) ]479 – 1} / (0.07/12)] = ￡1,043,438.6318Calculating Annuity Present Values [LO1]?Beginning three months from now, you want to be able to withdraw €1,200 each quarter from your bank account to cover university expenses over the next four years. If the account pays 1 per cent interest per quarter, how much do you need to have in your bank account today to meet your expense needs over the next four years? Assume the money is withdrawn at the beginning of the quarter.Answer: The cash flows are simply an annuity with four payments per year for four years, or 16 payments. We can use the PVA equation:PVA = C({1 – [1/(1 + r)t] } / r )PVA = €1,200{[1 – (1/1.01)16] / 0.01} = €17,661.4521Calculating Future Values [LO1]?You have an investment that will pay you 1.17 per cent per month. How much will you have per euro in