FIN 534 HOMEWORK

FIN 534 HOMEWORK

Assume that you are nearing graduation and that you have applied for a job with a local bank. As part of the bank’sĀ evaluation process, you have been asked to take an examination which 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.

1. Present value of an uneven cash flow stream of -$50, $100, $75, and $50 at the end of years 0 through 3

2.We sometimes need to find how long it will take a sum of money (or anything else) to grow to some specified amount. For example, if a company’s sales are growing at a rate of 20 percent per year, how long will it take sales to double?

3.Will the future value be larger or smaller if we compound an initial amount more often than annually, for example, every 6 months, or semiannually, holding the stated interest rate constant? Why?

4.What is the effective annual rate (EAR)? What is the ear for a nominal rate of 12 percent, compounded semiannually? Compounded quarterly? Compounded monthly? Compounded daily?

5.Suppose on January 1 you deposit $100 in an account that pays a nominal, or quoted, interest rate of 11.33463 percent, with interest added (compounded) daily. How much will you have in your account on October 1, or after 9 months?

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