Subject: Corporate Finance

Supervisor seminar: PhD, Lecturer Meral KAGITCI

REI, 2nd year, 2013-2014

SEMINAR NO. 10 TIME VALUE OF MONEY

1. Ion Popescu is trying to sell a piece of land in Romania. Yesterday he has offered
RON 40,000 for the property. He has about ready to accept the offer when another
individual offered him RON 45,696. However, the second offer was to be paid a year
from now. Keith has satisfied himself that both buyers are honest and financially
solvent, so he has no fear that the offer he selects will fall through.

2. For the above problem, discuss which will be the best choice in the situations:

a) the guaranteed interest rate that a bank could give Mr. Popescu is 12%, while the
inflation rate for the next year will be 0%

Subject: Corporate Finance

Supervisor seminar: PhD, Lecturer Meral KAGITCI
REI, 2nd year, 2013-2014
b) the guaranteed interest rate that a bank could give Mr. Popescu is 12% while the
inflation rate for the next year will be 10%

c) the guaranteed interest rate that a bank could give Mr. Popescu is 5%, while the
inflation rate for the next year will be 0%

d) the guaranteed interest rate that a bank could give Mr. Popescu is 5% while the
inflation rate for the next year will be 10%

3. Mr. Georgescu has put RON 1,000 in a savings account at the Commercial Bank of
Romania. The account earns 5.25%, compounded annually. How much will Mr.
Georgescu have at the end of the three years? Taking into account a inflation rate of
2% annually, what will be the real earnings of Mr. Georgescu.

Subject: Corporate Finance

Supervisor seminar: PhD, Lecturer Meral KAGITCI
REI, 2nd year, 2013-2014

4. Mr. Ionescu recently won in the lottery 10,000 and he wants to buy a car in five
years. Mr. Ionescu estimates that the car will cost 16,105 at that time. What
interest rate must he earn to be able to afford the car?

5. Mr. Tudose has 50,000 and he wants to invest it in a bank deposit. He knows
that over the next three years the interest rates offered by the bank are: 7%, 5%,
3%. What sum will Mr. Tudose have at the end of the three years?

Subject: Corporate Finance

Supervisor seminar: PhD, Lecturer Meral KAGITCI
REI, 2nd year, 2013-2014
6. What is the end-year wealth if Ioana receives a stated annual interest rate of 24
percent compounded monthly on a 1 investment?

7. Mihai is investing 5,000 at a stated annual interest rate of 12 percent per year,
compounded quarterly, for five years. What is his wealth at the end of five years?

8. Andreea has just won the state lottery, paying $ 50,000 a year for 20 years. She
is to receive the first payment a year from now. The state advertise this as the
Million Dollar Lottery because $ 1,000,000 = $ 50,000 x 20. If the interest rate is 8
percent what is the true value of the lottery?

Subject: Corporate Finance

Supervisor seminar: PhD, Lecturer Meral KAGITCI
REI, 2nd year, 2013-2014

9. Gabriel, a second-year MBA student, has just been offered a job at 40,000 a
year. He anticipates his salary increasing by 9 percent a year until his retirement in
40 years. Given an interest rate of 20 percent, what is the present value of his
lifetime salary? (We assume that the salary is paid once a year at the end of the
year. The first payment will be made a year from now)

10. Consider that Mihais mother made an investment on his name which pays him
1000 a year for ever (to him, then his children, his grandchildren and so on). If the
relevant interest rate is 8 percent, what is the equivalent sum that Mihais mom
should have given to him today?

Subject: Corporate Finance

Supervisor seminar: PhD, Lecturer Meral KAGITCI
REI, 2nd year, 2013-2014
11. What if the sum that Mihai gets annually will rise by 3 percent per year forever?
What sum will be today equivalent to these payments, considering the annually
interest rate of 8%.