Concept Questions and Exercises CORPORATE FINANCE 11e by Ross, Westerfield, Jaffe

CHAPTER 2
TIME VALUE OF MONEY
Exercises
1. Simple Interest versus Compound Interest First City Bank pays 7.5 percent simple
interest (Lãi đơn) on its savings account balances, whereas Second City Bank pays 7.5 percent
interest compounded ( Lãi kép )annually. If you made a $7,000 deposit in each bank, how
much more money would you earn from your Second City Bank account at the end of 10
years?
First City Bank: FV= 7000x(1+7,5%x10)=12250
Second City Bank: FV= 7000x(1+7,5%) ^10 =14427.2209
 Second – First =

2. Calculating Future Values Compute the future value of $1,000 compounded annually for
a. 10 years at 6 percent.
- FV= 1000x(1+6%)^10=
b. 10 years at 12 percent.
- FV =1000x( 1+12%)^10=
c. 20 years at 6 percent.
- FV= 1000x(1+6%)^20=
d. Why is the interest earned in part (c) not twice the amount earned in part (a)?
P(1+r%)^n
P(1+r%)^2n
(1+r)^2n/ (1+r)^n <2 ( Chứng minh rằng bpt luôn đúng với mọi r,n)
3. Calculating Present Values Imprudential, Inc., has an unfunded pension liability of $550
million that must be paid in 20 years. To assess the value of the firm’s stock, financial analysts
want to discount this liability back to the present. If the relevant discount rate is 6.4 percent,
what is the present value of this liability?
- PV= 550/ (1+6,4%)^20 =
Concept Questions and Exercises CORPORATE FINANCE 11e by Ross, Westerfield, Jaffe

4. Calculating Rates of Return Although appealing to more refined tastes, art as a collectible
has not always performed so profitably. During 2010, Deutscher-Menzies sold Arkie under the
Shower, a painting by renowned Australian painter Brett Whiteley, at auction for a price of
$1,100,000. Unfortunately for the previous owner, he had purchased it three years earlier at a
price of $1,680,000. What was his annual rate of return on this painting?

FV= 1,100,000
PV= 1,680,000
1,680,000x(1+r%)^3 = 1,100,000
=> r= -13,16%/year
5. Perpetuities An investor purchasing a British consol is entitled to receive annual payments
from the British government forever. What is the price of a consol that pays $125 annually if
the next payment occurs one year from today? The market interest rate is 3.9 percent.

= PV/r= 125/3,9% =

6. Simple Interest versus Compound Interest First Simple Bank pays 4.1 percent simple
interest on its investment accounts. If First Complex Bank pays interest on its accounts
compounded annually, what rate should the bank set if it wants to match First Simple Bank
over an investment horizon of 10 years?
First Simple Bank: P(1+4,1%x10)
First Complex Bank: P(1+r%)^10
R bằng bao nhiêu để cho 2 khoản đầu tư sau 10 năm là bằng nhau
(1+r%)^10 = 1+4,1%x10
r= 3,49%
7. Calculating Annuities You are planning to save for retirement over the next 30 years. To
do this, you will invest $750 per month in a stock account and $250 per month in a bond
Concept Questions and Exercises CORPORATE FINANCE 11e by Ross, Westerfield, Jaffe

account. The return of the stock account is expected to be 11 percent per year, and the bond
account will earn 6 percent per year. When you retire, you will combine your money into an
account with an annual return of 8 percent. How much can you withdraw each month from
your account assuming a 25-year withdrawal period?

Trước hết, ta phải tình FV của 2 khoản đầu tư từ trái phiếu và cổ phiếu
FV of stocks account= $2103389
FV of bonds account= $251128,76
=> total investment + return = $2354518,563 ( Tổng tiền từ việc đầu tư trái phiếu và cổ phiếu )

2354518,563
Giả sử, mỗi tháng ta rút ra 1 khoản = nhau là C
=> PV= 2354518,563( tổng tiền sau 30 năm đầu tư) = C/0,67% x [1- 1/(1+0,67%)^300]
=> C= $15696,79

7*. Calculating Annuities You are planning to save for retirement over the next 30 years. To
do this, you will invest $750 per month in a stock account and $250 per month in a bond
account. The return of the stock account is expected to be 11 percent per year, and the bond
account will earn 6 percent per year. When you retire, you will combine your money into an
account with an annual return of 8 percent How much can you withdraw each month from
your account assuming a 25-year withdrawal period ( Biết rằng ông í để lại cho con cháu $1
triệu đô tại tháng cuối -t660) ?
- Sau khi rút ra 1 khoản tiền C hàng tháng thì đến cuối kì, ông í vẫn để lại cho con cháu 1
triệu đô => Chiết khấu 1 triệu đô về thời t360
- PV of 1 million = 1,000,000/(1+0,67%)^300=136236,516
Concept Questions and Exercises CORPORATE FINANCE 11e by Ross, Westerfield, Jaffe

 Remaining of the investment ( khoản đầu tư trái phiếu và cổ phiếu ) = 2354518,563 -

136236,516 = 2218282,047
 PV = 2218282,047 = C/0,67% x [1- 1/(1+0,67%)^300]
 C=
7**. Calculating Annuities You are planning to save for retirement over the next 30 years.
To do this, you will invest $750 per month in a stock account and $250 per month in a
bond account. The return of the stock account is expected to be 11 percent per year, and
the bond account will earn 6 percent per year. When you retire, you will combine your
money into an account with an annual return of 8 percent How much can you withdraw
each month from your account assuming a 25-year withdrawal period ( Biết rằng ông í để
lại cho con cháu $1 triệu đô tại thời điểm gửi tiền ngân hàng - t360) ?

1. Assume the total cost of a college education will be $325,000 when your child enters college
in 18 years. You presently have $85,000 to invest. What annual rate of interest must you earn
on your investment to cover the cost of your child's college education?

$85,000 $325,000

FV= 325,000
PV= 85,000
 325,000=85,000(1+r%)^18
 r= 7,74%

2. According to the Census Bureau, in October 2019, the average house price in the United
States was $368,600. In October 2000, the average price was $197,700. What was the annual
increase in the price of the average house sold?

$197,700 $368,600

2000 2001 $2019

Concept Questions and Exercises CORPORATE FINANCE 11e by Ross, Westerfield, Jaffe

FV= 368,600
PV= 197,700
 368,600= 197,700( 1+ r%)^19
 R= 3,3%
 Giá nhà mỗi năm tăng: PVxr%= 197,700x3,3%= $6524,1

3. The "Brasher doubloon," which was featured in the plot of the Raymond Chandler novel, The
High Window, was sold at auction in 2018 for a reported $5.5 million. The coin had a face
value of $15 when it was first issued in 1787 and had been previously sold for $430,000 in
1979. At what annual rate did the coin appreciate from its minting to the 1979 sale? At what
annual rate did the coin appreciate from 1979 until 2018? At what annual rate did the coin
appreciate from its minting to the 2018 sale?

4. An investment offers $3,850 per year for 15 years, with the first payment occurring one year
from now. If the required return is 6 percent, what is the value of the investment? What
would the value be if the payments occurred for 40 years? For 75 years? Forever?

FV= 3,850/ 6% x [(1+6%)^15-1] =

FV= 3,850/ 6% x [(1+6%)^40-1] =
FV= 3,850/ 6% x [(1+6%)^75-1] =

5. You want to have $75,000 in your savings account 12 years from now, and you're prepared
to. make equal annual deposits ( giả sử gọi khoản tiền nhét vào TKNH hàng năm là C ) into
the account at the end of each year. If the account pays 6.4 percent interest, what amount
must you deposit each year?
FV=75,000 = C/ 6,4% x [( 1+6,4%)^12-1]
 C=
Concept Questions and Exercises CORPORATE FINANCE 11e by Ross, Westerfield, Jaffe

6. You just won the TVM Lottery. You will receive $1 million today plus another 10 annual
payments that increase by $450,000 per year. Thus, in one year, you receive $1.45 million. In two
years, you get $1.9 million, and so on. If the appropriate interest rate is 6.2 percent, what is the
value of your winnings today?
$1 million $ 1,45 $1,9 $5,5

PV= 1 + 1,45/(1+6,2%) + 1,9/(1+6,2%)^2 +……….+ 5,5/(1+6,2%)^10

=> PV=
8. Growing Perpetuities Mark Weinstein has been working on an advanced technology in
laser eye surgery. His technology will be available in the near term. He anticipates his first
annual cash flow from the technology to be $215,000, received two years from today.
Subsequent annual cash flows will grow at 3.8 percent in perpetuity. What is the present value
of the technology if the discount rate is 10 percent?
9. Perpetuities A prestigious investment bank designed a new security that pays a quarterly
dividend of $2.75 in perpetuity. The first dividend occurs one quarter from today. What is the
price of the security if the APR is 5.3 percent, compounded quarterly?
10. Growing Annuity Southern California Publishing Company is trying to decide whether to
revise its popular textbook, Financial Psychoanalysis Made Simple. The company has estimated
that the revision will cost $135,000. Cash flows from increased sales will be $48,000 the first
year. These cash flows will increase by 4 percent per year. The book will go out of print five
years from now. Assume that the initial cost is paid now and revenues are received at the end
of each year. If the company requires a return of 10 percent for such an investment, should it
undertake the revision?

11. Calculating Loan Payments You need a 30-year, fixed-rate mortgage to buy a new home
for $250,000. Your mortgage bank will lend you the money at an APR of 4.5 percent for this
360-month loan. However, you can only afford monthly payments of $950, so you offer to pay
off any remaining loan balance at the end of the loan in the form of a single balloon payment.
Concept Questions and Exercises CORPORATE FINANCE 11e by Ross, Westerfield, Jaffe

How large will this balloon payment have to be for you to keep your monthly payments at
$950?
Single balloon payment: Sau khi trả góp $950 trong 360 tháng thì trả nốt số tiền còn lại trong 1 lần.
PV of a 360-month loan =950/0,375% x[1-1/(1+0,375%)^360]=$187493
=> Remaining loan at t0 = 250000-187493=

12. EAR versus APR You have just purchased a new warehouse. To finance the purchase,
you’ve arranged for a 30-year mortgage for 80 percent of the $5,200,000 purchase price. The
monthly payment on this loan will be $27,500. What is the APR on this loan? The EAR?

13. Interest Rates Well-known financial writer Andrew Tobias argues that he can earn
177 percent per year buying wine by the case. Specifically, he assumes that he will
consume one $10 bottle of fine Bordeaux per week for the next 12 weeks. He can either pay
$10 per week or buy a case of 12 bottles today. If he buys the case, he receives a 10 percent
discount and, by doing so, earns the 177 percent. Assume he buys the wine and consumes the
first bottle today. Do you agree with his analysis? Do you see a problem with his
numbers?
14. Calculating Annuities Due Suppose you are going to receive $16,250 per year for five
years. The appropriate interest rate is 7.5 percent.
a. What is the present value of the payments if they are in the form of an ordinary
annuity? What is the present value if the payments are an annuity due?

b. Suppose you plan to invest the payments for five years. What is the future value if the
payments are an ordinary annuity? What if the payments are an annuity due?
c. Which has the highest present value, the ordinary annuity or annuity due? Which has the
highest future value? Will this always be true?
15. Calculating Annuity Values After deciding to buy a new car, you can either lease the car
or purchase it with a three-year loan. The car you wish to buy costs $28,000. The dealer has a
leasing arrangement where you pay $2,400 today and $380 per month for the next three
years. If you purchase the car, you will pay it off in monthly payments over the next three
years at an APR of 6 percent. You believe that you will be able to sell the car for $17,000 in
Concept Questions and Exercises CORPORATE FINANCE 11e by Ross, Westerfield, Jaffe

three years. Should you buy or lease the car? What break-even resale price in three years
would make you indifferent between buying and leasing?
16. Calculating Annuity Values You are serving on a jury. A plaintiff is suing the city for
injuries sustained after a freak street sweeper accident. In the trial, doctors testified that it will
be five years before the plaintiff is able to return to work. The jury has already decided in
favor of the plaintiff. You are the foreperson of the jury and propose that the jury give the
plaintiff an award to cover the following: (1) The present value of two years’ back pay. The
plaintiff’s annual salary for the last two years would have been $37,000 and $39,000,
respectively. (2) The present value of five years’ future salary. You assume the salary will
be $43,000 per year. (3) $150,000 for pain and suffering. (4) $25,000 for court costs. Assume
that the salary payments are equal amounts paid at the end of each month. If the interest rate
you choose is an EAR of 7.8 percent, what is the size of the settlement? If you were the
plaintiff, would you like to see a higher or lower interest rate?
17. Valuing Bonds What is the price of a 15-year, zero coupon bond paying $1,000 at
maturity, assuming semiannual compounding, if the YTM is:
a. 6 percent?
b. 8 percent?
c. 10 percent?
18. Nonconstant Growth Metallica Bearings, Inc., is a young start-up company. No dividends
will be paid on the stock over the next nine years, because the firm needs to plow back its
earnings to fuel growth. The company will pay a dividend of $17.50 per share in 10 years and
will increase the dividend by 5.5 percent per year thereafter. If the required return on this
stock is 12 percent, what is the current share price?