If you o 3. If you open an individual retirement account (IRA) at a commercial b

Question

If you o

3.        If you open an individual retirement account (IRA) at a commercial bank and deposit $1,000 in the account per year, how much will be in the account after 20 years if the funds earn 7% annually?

4.        If you invest $ 10,000 today at 6.25% interest compounded annually, how much is your investment worth in 35 years?

5.        You borrow $100,000 to buy a house; if the annual interest rate is 6% and the term of the loan is 20 years.

                  a) What is the annual payment required to retire the mortgage loan?

                  b) What is the monthly payment assuming interest is computing using monthly

                       compounding?

                  c) How much less interest will you pay by making monthly payments over annual

                       payments?

6.       The Big-Sox currently have 30,000 spectators per game and anticipate annual growth in attendance of 9%. If the Big Stadium holds 65,000 people, how long will it take for the team reach capacity?

7.       You bought a Picasso for $50,000 and sold it after 5 years for $88,000. What was the annual return on the investment?

8.     What is the expected return on a stock if the firm will earn 24% during a period of economic boom, 14% during normal economic periods, and 2% during a period of recession if the probabilities of these economic environments are 20%, 65%, and 15%, respectively?

Expected return=

9.        What is the required return using the capital asset pricing model if a stock's beta is 1.2 and the individual, who expects the market to rise by 11.2%, can earn 4.4% invested in a risk-free Treasury bill?

Required rate of return

10.        Your broker recommends that you purchase Good Mills at $30. The stock pays a $2.20 annual dividend, which (like its per share earnings) is expected to grow annually at 8 percent. If you want to earn 15 percent on your funds, is this stock a good buy?

This should be listed like the bottom for each question. #1-7 #8 should be expected return and #9 should be required rate of return Rr=

Rate          Nper          Pmt         PV         FV

Explanation / Answer

3) PV = 1000, r = 7%, N= 20, PMT =0

1000*(1+0.07)^20 = 3869.68

4) PV = 10000, r =6.25% , N= 35 ,PMT =0 ,

10000*(1+ 0.0625)^35 = 83466.62

5) a)PMT = 8718.45

b) using financial calculator put

N = 20* 12 = 240 , i = 6/12 = 0.5% , PV = 100000 , FV = 0 ,

so monthly payment = 716.43

C) excess paymeny = 8718.45 * 20 - 716.43 * 240 = 2425.8

6) PV = 30000, r = 9% ,PMT =0 , FV= 65000

30000(1+0.09)^N = 65000

N = 8.97 so approx 9 years

7) PV = 50000, N = 5 ,PMT =0 , FV= 88000

50000(1 + r)^5 = 88000

r = 11.97 which is 12% approx

8) expected returm = 24*0.2 + 14*0.65+ 2*0.15 = 14.2 %

9) using CAPM

r = 4.4 + 1.2*(11.2-4.4) = 12.56%

10) p = 2.2*(1.08)/0.15 = 15.84

since price is less by intrinsic value than market price so not a good choice to buy

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