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1、Corporate Finance: The Core (Berk/DeMarzo)Chapter 4 - The Time Value of MoneyUse the table for the question(s) below.YearAB0-$150-$2251401752801253100-506) Draw a timeline detailing the cash flows from investment A. Answer: Diff: 1 Topic: 4.1 The Timeline Skill: Conceptual 7) Draw a timeline detaili
2、ng the cash flows from investment B. Answer: Diff: 1 Topic: 4.1 The Timeline Skill: Conceptual Use the information for the question(s) below.Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their childs college education
3、. Currently, college tuition, books, fees, and other costs, average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year. 8) Assume that college costs continue to increase an average of 4% per year and that all her college savings are invested in
4、 an account paying 7% interest. Draw a timeline that details the amount of money she will need to have in the future four each of her four years of her undergraduate education. Answer: $25,322.71$25,322.71(1.04)1$25,322.71(1.04)2$25,322.71(1.04)318192021Note that the tuition for the first year is ca
5、lculated as: $12,5000(1.04)18 = $25,322.71 Diff: 2 Topic: 4.1 The Timeline Skill: Conceptual 9) Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their childs college education. They decide to make deposits into an educat
6、ional savings account on each of their daughters birthdays, starting with her first birthday. Assume that the educational savings account will return a constant 7%. The parents deposit $2000 on their daughters first birthday and plan to increase the size of their deposits by 5% each year. Draw a tim
7、eline that details the amount that would be available for the daughters college expenses on her 18th birthday. Answer: Diff: 2 Topic: 4.1 The Timeline Skill: Analytical 3) Which of the following statements is false? A) The process of moving a value or cash flow backward in time is known as discounti
8、ng. B) FV = C) The process of moving a value or cash flow forward in time is known as compounding. D) The value of a cash flow that is moved forward in time is known as its future value. Answer: B Explanation: A) B) FV = C(1 + r)n C) D) Diff: 1 Topic: 4.2 The Three Rules of Time Travel Skill: Concep
9、tual 5) Consider the following timeline:If the current market rate of interest is 10%, then the future value of this timeline is closest to: A) $666 B) $500 C) $605 D) $650 Answer: A Explanation: A) FV = PV(1 + r)n = 500(1.10)3 = 665.50 which is approximately $666 B) C) D) Diff: 1 Topic: 4.2 The Thr
10、ee Rules of Time Travel Skill: Analytical 7) Consider the following timeline:If the current market rate of interest is 7%, then the future value of this timeline as of year 3 is closest to: A) $1720 B) $1500 C) $1404 D) $1717 Answer: A Explanation: A) FV = PV(1 + r)nFV = 500(1.07)3 + 500(1.07)2 + 50
11、0(1.07)1 = $1719.97 or approximately $1720 B) C) D) Diff: 3 Topic: 4.2 The Three Rules of Time Travel Skill: Analytical 8) Consider the following timeline:If the current market rate of interest is 9%, then the present value of this timeline as of year 0 is closest to: A) $492 B) $637 C) $600 D) $400
12、 Answer: A Explanation: A) PV = FV(1 + r)n100 / (1.09)1 = 91.74200 / (1.09)2 = 168.34300 / (1.09)3 = 231.66Sum = 491.74 which is approximately $492 B) C) D) Diff: 3 Topic: 4.2 The Three Rules of Time Travel Skill: Analytical 9) Consider the following timeline:If the current market rate of interest i
13、s 8%, then the value as of year 1 is closest to: A) $0 B) $1003 C) $540 D) $77 Answer: D Explanation: A) B) C) D) Two part problem:FV = PV(1 + r)n = 500(1.08)1 = $540PV = FV/(1 + r)n = -500 / (1.08)1 = -$463So the answer is $540 + -$463 = $77 Diff: 2 Topic: 4.2 The Three Rules of Time Travel Skill:
14、Analytical 4.3 The Power of Compounding: An Application 2) It has long been told that the Dutch purchased Manhattan island in 1626 for the value of 60 guilders ($24). Assuming that the Dutch invested this money into an account earning 5%, approximately how much would their investment be worth 380 years later in 2006? A) $2.7 billion B) $3.1 billion C) $4.5 billion D) $1.9 trillion Answer: A Explanation: A) FV = 24(1.05)380 = 2,704,860,6
