FINANCE-FIN310: Principles of Financial Management

College of Business and
Public Administration

FIN310: Principles of Financial Management
HOMEWORK1 – Valuation Problems
Due: Thursday September 20th, 2012 (by
midnight)

Instructions
The assignment should be
completed individually. Each student should upload to the Blackboard/
Assignments/HW1 submission a word file that report your calculations
to the questions below. Please show your work clearly.
You mustshow your work to receive
credit for correct responses (show details of the formulas and figures and/or
financial calculator inputs you used), with brief verbal explanations where
appropriate. When doing multi-step calculations, use 6 decimal places for per
cent or interest rate figures and 4 decimal places for dollar figures for all
intermediate calculations(example: .082635875 = .082636 = 8.2636%;
$12.368654 = $12.3687). For final answers, round dollar figures to two decimal
places (from previous example: $12.37) and round per cent figures to four
decimal places (from previous example: .0826 or 8.26%).
Blackboard will automatically record your
submission time. A 10% reduction from
full credit per day will be imposed if the assignment is submitted late after
the due date. I plan to post the solutions on Blackboard on Sunday September 23rd
5:00pm to help you prepare for the upcoming exam; so submission after that will not be accepted.

The Problems [Total 8 pts]
1. [0.5
pt.]What
is the present value of the following set of cash flows at an interest rate of
6%; $100 now, $600 three years from now, $500 five years from now, and $300 ten
years from now.

2. [0.5pt] You win the lottery and are told you won $20 million. You
actually won payments of $1 million every year for the next 20 years. If your
opportunity cost (discount rate) is 10%, how much would you accept today in
exchange for those 20 payments?

3. [1.5 pts.] You are saving for
your child’s college education. You will need tuition which will be $30,000
each year for four years with the first tuition payment due 18 years from
today. How much do you need to deposit today in a bank account that earnings 6%
today so that you will have enough money to meet all the tuition payments?

4. [1 pt.] Alicia wants to have $1,000,000
twenty-five years from now. To achieve it she plans to deposit equal amount of
money each month for twenty-five years starting from next month. She believes
the rate of interest she can earn is 8% APR. What should be the amount of her
monthly deposit?

5. [2 pts] You decide to buy a car for $11,000. Since you do not have
the money, you take a loan from the bank for this amount. You are going to pay monthly
payments for 4 years. The bank charges 4.8% APR with monthly compounding.
a) What is your monthly payment?

b) What is the EAR

c) What is the remaining balance of the loan at the end of month 3?

6. [2.5 pts.] You are considering
a new kind of lease. The lease requires a down payment of $3,000 (made today)
and is followed by 40 monthly payments of $450, however you don’t make the
first payment until 6 months from today. The day you make the last of the 40
payments the lease forces you to buy the car for $10,000. If you can borrow the
money to purchase the car at an APR of 9% with monthly compounding, what price
would make you indifferent between buying the car and leasing it?