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(Solved): Textbook Chapter 4: Mini-case questions a. through h. only (p. 187) Assume that you are nearing gr ...



Textbook Chapter 4: Mini-case questions a. through h. only (p. 187) Assume that you are nearing graduation and have applied for a job at a prestigious company. The company's evaluation process requires you to take an examination that covers several financial analysis techniques. The first section of the test addresses discounted cash flow analysis. See how you would do by answering the following questions. a. Draw time lines for (1) a \( \$ 100 \) lump sum cash flow at the end of Year 2, (2) an ordinary annuity of \( \$ 100 \) per year for 3 years, and (3) an uneven cash flow stream of \( -\$ 50, \$ 100, \$ 75 \), and \( \$ 50 \) at the end of Years 0 through 3. b. (1) What's the future value of an initial \( \$ 100 \) after 3 years if it is invested in an account paying \( 10 \% \) annual interest? (2) What's the present value of \( \$ 100 \) to be received in 3 years if the appropriate interest rate is \( 10 \% \) ? c. We sometimes need to find out how long it will take a sum of money (or something else, such as earnings, population, or prices) to grow to some specified amount. For example, if a company's sales are growing at a rate of \( 20 \% \) per year, how long will it take sales to double? d. If you want an investment to double in 3 years, what interest rate must it earn? e. What's the difference between an ordinary annuity and an annuity due? What type of annuity is shown below? How would you change the time line to show the other type of annuity? f. (1) What's the future value of a 3-year ordinary annuity of \( \$ 100 \) if the appropriate interest rate is \( 10 \% \) ? (2) What's the present value of the annuity? (3) What would the future and present values be if the annuity were an annuity due? g. What is the present value of the following uneven cash flow stream? The appropriate interest rate is \( 10 \% \), compounded annually. h. (1) Define the nominal rate ( \( \mathrm{I}_{\text {NOM }} \) ), which also is called the stated rate and the quoted rate. Also define the periodic rate \( \left(\mathrm{I}_{\text {PERR }}\right) \). If the nominal rate is \( 6 \% \) and is compounded quarterly, what is the periodic rate ( \( \mathrm{I}_{P E R} \) )? If it is compounded monthly? (2) If the stated interest rate is constant, will the future value be larger or smaller if we compound an initial amount more often than annually (for example, semiannually)? Why? (3) What is the future value of \( \$ 100 \) after 5 years under \( 12 \% \) annual compounding? Semiannual compounding? Quarterly compounding? Monthly compounding? Daily compounding? (4) What is the effective annual rate (EFF\%), also called the annual equivalent rate (AER)? What is the EFF\% for a nominal rate of \( 12 \% \), compounded semiannually? Compounded quarterly? Compounded monthly? Compounded daily? (5) Can the effective annual rate ever be equal to the nominal (quoted) rate?



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