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Present Value
Future Value
Time Period
Inflation Cost Of
WACC
Rate Capital
Cost of Opportunity
Equity Cost
]
Time 0 Today
ù
a
a
a
a
a
a
±
FVn = PV (1+r/n)m*n
Doubling Period
=
(± /r) + .35
Rule of
Doubling Period
=
72/r
Example
In how much period your Rs. 10,000 becomes
Rs. 20,000 at 15% rate of interest, using
(a) Rule of 72
(b) Rule of ± .
Ans :(a) 4.8 years
(b) 4. 5 years
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TRUE
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TRUE
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TRUE
]
TRUE
]
FALSE
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TRUE
]
FALSE
]
TRUE
]
FALSE
]
FALSE
]
re= (1+r/m)n -1
FALSE
]
TRUE
]
TRUE
]
TRUE
]
TRUE
]
TRUE
]
FALSE
]
TRUE
]
FALSE
]
TRUE
]
TRUE
]
TRUE
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TRUE
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Less
]
equal
]
re = (1 + r/m)m -1
]
FVn= (1 + r/m)mn
]
divide, r
]
poney has time value because:
a. Individuals prefer future consumption to present
consumption.
b. poney today is more certain than money tomorrow
c. poney today is wroth more than money tomorrow in
terms of purchasing power.
d. There is a possibility of earning risk free return on money
invested today.
e. (b), (c) and (d) above.
e
]
fiven an investment of Rs. 10,000 to be invested for
one year;
c
]
fiven an investment of Rs. 10,000 for a period of one
year, it is better to invest in a scheme that pays:
d
]
fiven an investment of Rs. 10,000 over a period of
two years, it is better to invest in a scheme that pays;
c
Practice Problem -1
A.$100,000.
B.$117,45 .
C. $148,±44.
D. $1±1,50±
Solution-1
This is a single payment to be turned into
a set future value FV=$1,000,000 in N=20
years time invested at r=10% interest rate.
PV =[ 1/(1+r) ]N FV
PV10 = [0.14864]($1,000,000)
PV10 = $148,644
Practice Problem -2
A deposit of $1300 N=3
Y
earns $33 .45 interest PV = 1300
in 3 years. If interest is PpT = 0
FV = -1±3 .45
compounded monthly, P/Y = 1
what is the effective C/Y = 12
Nominal Rate = 7.7±%
rate? C/Y = 12
?
Practice Problem-3
A deposit of $1500 N=7
Y
grows to $42±2.04 in 7 PV = 1500
years. If the interest is PpT = 0
FV = -42±4.04
compounded quarterly, P/Y = 1
what is the effective C/Y = 4
Nominal Rate = 15.2%
rate? C/Y = 4
?
ù
Practice Problem-4
% compounded Nominal = %
C/Y = 4
quarterly is equivalent ?
!"
to what effective rate? ù#
Practice Problem-5
7.5% compounded Nominal = 7.5%
C/Y = 1
annually is equivalent to ?
!"
what effective rate? $%
Practice Problem-±
10% compounded semi- Nominal = 10%
C/Y = 2
annually is equivalent to ?
!"
what effective rate? &%
Practice Problem-7
At what nominal rate N = ± years
compounded monthly Y
will money double in ± PV = 1
years? PpT = 0
FV = 2
P/Y = 1
C/Y = 12 (compounded
monthly)
' ()Y
Practice Problem-8
At what nominal rate N = ± years
compounded monthly Y
will money double in ± PV = 1
years? PpT = 0
FV = 2
P/Y = 1
C/Y = 12 (compounded
monthly)
' ()Y
Practice Problem-
A present value of N = (7 Years * 12) + 7
months = 1 months
$1301.± has a future Y
PV = 1301.±0
value of $25± .2± in 7
PpT = 0
years and 7 months. FV = - 25± .2±
P/Y = 12
What is the nominal C/Y = 12
rate compounded ' ()Y ù
monthly?
Practice Problem-10
A principal of $7100 has N = 10
Y
a maturity value of PV = 7100
PpT = 0
$13, ±±.77 in 10 years.
FV = -13 ±±.77
If the interest rate is P/Y = 1
C/Y = 1
compounded annually , ' ()Y $
what is the nominal
rate?
Practice Problem-11
A deposit of $1500 N = 7.5
Y
earned $±72.45 interest PV = 1500
PpT = 0
over 7.5 years. What
FV = - 2172.45
nominal interest rate P/Y = 1
C/Y = 2
compounded semi- ' ()Y %
annually was paid on *
the deposit?
Practice Problem-12
A person opens a bank N = 3 years
account with a deposit Y
of $150. At the end of 3 PV = 150
years there is $17 .34 PpT = 0
in the account. What FV = -17 .34
nominal interset rate 2nd I/Y
compounded quarterly P/Y = 1
was earned on the C/Y = 4
account? ' ()Y
Practice Problem- 13
A present value of N = (7 Years * 12) + 7
months = 1 months
$1301.± has a future Y
PV = 1301.±0
value of $25± .2± in 7
PpT = 0
years and 7 months. FV = - 25± .2±
P/Y = 12
What is the nominal C/Y = 12
rate compounded ' ()Y ù
monthly?
Practice Problem-14
A company͛s 2005 sales a
' ()
were $100 million. If N
sales grow at 8% per I/YR
year, how large will they PV !+
PpT +
be 10 years later, in
a
+&%ù
2015, in millions?
Practice Problem-15
Suppose a U.S. 2
government bond will ' ()
pay $1,000 three years N#
from now. If the going I/YR
interest rate on 3-year
government bonds is 2
+ù
4%, how much is the PpT +
bond worth today? FV !+,
Practice Problem-1±
The U.S. Treasury offers to Y
sell you a bond for
$±13.81. No payments N
will be made until the Y %
bond matures 10 years
from now, at which time PV !+ #
it will be redeemed for PpT +
$1,000. What interest FV +,
rate would you earn if
you bought this bond at
the offer price?
Practice Problem-13
Addico Corp's 2005 *-
earnings per share were *
$2, and its growth rate I/YR
during the prior 5 years
was 11.0% per year. If PV !+&
that growth rate were PpT +
maintained, how long FV +
would it take for
Addico͛s EPS to double?