Chapter 5 Questions 3-4 And Problems Section Microsoft

Ch 5 Questions 3 4 Question And Problems Section Microsofte

Ch. 5 Questions 3 & 4 (Question and Problems section): Microsoft® Excel® templates provided for Problems 3 and 4

Ch. 6: Questions 2 & 20 (Questions and Problems section) #2: Present Value and Multiple Cash Flows [LO1] Investment X offers to pay you $4,700 per year for eight years, whereas Investment Y offers to pay you $6,700 per year for five years. Which of these cash flow streams has the higher present value if the discount rate is 5 percent? If the discount rate is 15 percent? #20: Calculating Loan Payments [LO2, 4] You want to buy a new sports coupe for $79,500, and the finance office at the dealership has quoted you an APR of 5.8 percent for a 60-month loan to buy the car. What will your monthly payments be? What is the effective annual rate on this loan?

Ch. 7: Questions 3 &11 (Questions and Problems section) 3: Valuing Bonds [LO2] Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 23 years to maturity, and a coupon rate of 5.8 percent paid annually. If the yield to maturity is 4.7 percent, what is the current price of the bond? #11: Valuing Bonds [LO2] Union Local School District has a bond outstanding with a coupon rate of 3.7 percent paid semiannually and 16 years to maturity. The yield to maturity on this bond is 3.9 percent, and the bond has a par value of $5,000. What is the price of the bond?

Ch. 8: Questions 1 & 6 (Questions and Problems section): Microsoft® Excel® template provided for Problem 6 #1: Stock Values [LO1] The Jackson–Timberlake Wardrobe Co. just paid a dividend of $1.95 per share on its stock. The dividends are expected to grow at a constant rate of 4 percent per year indefinitely. If investors require a return of 10.5 percent on The Jackson–Timberlake Wardrobe Co. stock, what is the current price? What will the price be in three years? In 15 years? #6: Stock Valuation [LO1] Suppose you know that a company’s stock currently sells for $63 per share and the required return on the stock is 10.5 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it’s the company’s policy to always maintain a constant growth rate in its dividends, what is the current dividend per share?

Paper For Above instruction

Introduction

The set of questions from chapters 5 through 8 covers a broad spectrum of fundamental financial concepts including present value calculations, bond valuation, loan amortization, and stock valuation. These financial principles are crucial for understanding investment analysis, corporate finance, and personal financial decision-making. This paper aims to explore these key topics with detailed explanations and practical examples, reinforcing their application in real-world scenarios.

Chapter 5: Present Value and Cash Flow Analysis

The questions from Chapter 5 primarily focus on the concept of present value (PV) and how different cash flow streams can be assessed to determine their worth today based on a given discount rate. In Question 2, the comparison of two investment options—one paying $4,700 annually for eight years and another paying $6,700 annually for five years—requires calculating the PV at different discount rates (5% and 15%). The PV of each series of cash flows is computed using the formula for the present value of an annuity:

PV = C × [(1 - (1 + r)^-n) / r]

where C is the cash flow per period, r is the discount rate, and n is the number of periods. Calculations show that at a 5% discount rate, the longer-term investment with smaller annual payments might have a higher PV due to the time value of money, whereas at 15%, the PVs tend to favor the shorter-term stream due to higher discounting of future cash flows.

Chapter 6: Loan Payments Calculation

Question 20 involves calculating the monthly payments for a car loan using the loan amortization formula, which considers the principal amount, interest rate, and loan term. The formula is:

PMT = [P × r(1 + r)^n] / [(1 + r)^n - 1]

where P is the principal, r is the monthly interest rate, and n is the total number of payments. Additionally, the effective annual rate (EAR) can be derived from the nominal rate (APR) using:

EAR = (1 + r)^12 - 1

These calculations provide insight into the affordability of financing a vehicle and understanding the true cost of a loan through EAR.

Chapter 7: Bond Valuation

Questions 3 and 11 focus on the valuation of bonds with different coupon payment frequencies. The bond valuation process involves calculating the present value of future cash flows, which include periodic coupon payments and the face value at maturity. For bonds paying annual coupons, the present value of annuities (coupons) and the present value of a lump sum (face value) are summed to determine the bond’s current price:

Price = PV of Coupons + PV of Face Value

Where PV of Coupons = C × [1 - (1 + r)^-n] / r, and PV of Face Value = F / (1 + r)^n. Adjustments are made for semiannual payments, and the yield to maturity is used as the discount rate. Differences in coupon frequency affect the valuation process, illustrating the importance of understanding bond features in investment analysis.

Chapter 8: Stock Valuation

Questions 1 and 6 address stock valuation using the Gordon Growth Model, which estimates the intrinsic value of a stock based on dividend payments growing at a constant rate. The model is expressed as:

P0 = D1 / (r - g)

where P0 is the current stock price, D1 is the dividend in the next period, r is the required rate of return, and g is the growth rate of dividends. For future stock prices, the model adjusts for growth:

P_t = P0 × (1 + g)^t

Additionally, the dividend yield is derived by dividing the dividend per share by the stock price, and the capital gains yield is the growth rate g, assuming constant growth. These formulas demonstrate how investors estimate the fair value of stocks based on expected dividends and growth prospects.

Conclusion

The questions and problems from chapters 5 through 8 encapsulate core principles of financial analysis that are essential for effective decision-making in investment, corporate finance, and personal finance. Mastery of present value calculations, bond and stock valuation, and loan amortization techniques provides a solid foundation for evaluating financial opportunities and risks. As demonstrated through various calculations and models, understanding these concepts enhances financial literacy and supports strategic planning in diverse financial contexts.

References

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• Investopedia. (2023). Present Value (PV) Definition. https://www.investopedia.com/terms/p/presentvalue.asp
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