Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
expand_more
expand_more
format_list_bulleted
Question
Chapter 10, Problem 2MC
Summary Introduction
To Determine: The EAR that is earned from the match and the conclusion about matching the plan.
Introduction: Annualized Percentage Rate (APR) is defined as the total interest rate that is paid in a year which replicates all the costs of a loan for the duration of one year. Effective Annual Rate (EAR) is defined as the interest rate an investor earns in a current year after book-keeping for the results of compounding.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Suppose that we can describe the world using two states and that two assets are available, asset K an asset L. We assume the asset’s future prices have the following distribution
State
Future Price Asset K
Future Price Asset L
1
$55
$60
2
$45
$30
The current price of asset K is $50, and the current price of asset L is $50.
5. You plan to buy a home for $100,000 in the future. You want to guarantee that you will have the money.What would you buy/sell today to accomplish this, and what would it cost today?
Suppose that we can describe the world using two states and that two assets are available, asset K an asset L. We assume the asset’s future prices have the following distribution
State
Future Price Asset K
Future Price Asset L
1
$55
$60
2
$45
$30
The current price of asset K is $50, and the current price of asset L is $50.
You plan to buy a home for $100,000 in the future. You want to guarantee that you will have the money. What would you buy/sell today to accomplish this, and what would it cost today?
3. Which lottery payout scheme is better?
Suppose you win a small lottery and have the choice of two ways to be paid: You can accept the money in a lump sum or in a series of payments over time. If you pick the lump sum, you get $2,950 today. If you pick payments over time, you get three payments: $1,000 today, $1,000 1 year from today, and $1,000 2 years from today.
At an interest rate of 8% per year, the winner would be better off accepting the , since that choice has the greater present value.
At an interest rate of 10% per year, the winner would be better off accepting , since it has the greater present value.
Years after you win the lottery, a friend in another country calls to ask your advice. By wild coincidence, she has just won another lottery with the same payout schemes. She must make a quick decision about whether to collect her money under the lump sum or the payments over time. What is the best advice to give your friend?
The lump sum is…
Chapter 10 Solutions
Corporate Finance
Ch. 10 - Investment Selection Given that Madrigal...Ch. 10 - Investment Selection Given that Sears was down by...Ch. 10 - Risk and Return We have seen that over long...Ch. 10 - Prob. 4CQCh. 10 - Effects of Inflation Look at Table 10.1 and Figure...Ch. 10 - Risk Premiums Is it possible for the risk premium...Ch. 10 - Prob. 7CQCh. 10 - Returns Two years ago, the Lake Minerals and Small...Ch. 10 - Prob. 9CQCh. 10 - Historical Returns The historical asset class...
Ch. 10 - Prob. 1QAPCh. 10 - Calculating Yields In Problem 1, what was the...Ch. 10 - Calculating Returns Rework Problems 1 and 2...Ch. 10 - Prob. 4QAPCh. 10 - Prob. 5QAPCh. 10 - Prob. 6QAPCh. 10 - Prob. 7QAPCh. 10 - Prob. 8QAPCh. 10 - Prob. 9QAPCh. 10 - Calculating Real Returns and Risk Premiums In...Ch. 10 - Prob. 11QAPCh. 10 - Prob. 12QAPCh. 10 - Prob. 13QAPCh. 10 - Prob. 14QAPCh. 10 - Calculating Returns You bought a stock three...Ch. 10 - Prob. 16QAPCh. 10 - Prob. 17QAPCh. 10 - Prob. 18QAPCh. 10 - Prob. 19QAPCh. 10 - Prob. 20QAPCh. 10 - Prob. 21QAPCh. 10 - Prob. 22QAPCh. 10 - Prob. 23QAPCh. 10 - Using Return Distributions Suppose the returns on...Ch. 10 - Prob. 25QAPCh. 10 - Prob. 26QAPCh. 10 - Using Probability Distributions Suppose the...Ch. 10 - Prob. 28QAPCh. 10 - Prob. 1MCCh. 10 - Prob. 2MCCh. 10 - Assume you decide you should invest at least part...Ch. 10 - Prob. 4MCCh. 10 - Prob. 5MCCh. 10 - What portfolio allocation would you choose? Why?...
Knowledge Booster
Similar questions
- Terri Allessandro has an opportunity to make any of the following investments: E. The purchase price, the lump-sum future value, and the year of receipt are given below for each investment. Terri can earn a rate of return of 13% on investments similar to those currently under consideration. Evaluate each investment to determine whether it is satisfactory, and make an investment recommendation to Terri. The present value, PV, at 13% required return of the income from Investment A is S . (Round to the nearest cent.) - X Data table Purchase Price Future Value Year of Receipt Investment $8.674 $21,000 $2.000 15 $429 $2.282 $57 11 $10,000 54 $14,000 (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet) Clear all Check answer Heln me BCDSarrow_forwardExplain to a friend or relative how you would use the TVM concept to achieve their desired retirement amount. How much would they need to retire? How would you develop a savings plan using that number? Use Excel to calculate and explain the numbers when posting to the forum. Include the interest rate and investment. Starting amount is 45,000 at age 30 with the retirement age of 67arrow_forwardIf an investor invests her money in a project with a 10% annual return. What is her nominal rate of return after two years. What is her effective rate of return after two years.1) Do the calculations manually then check them using an online financial calculator. You may also use financial software. 2) In your deliverable, you need to describe the tool you usedarrow_forward
- Assume that Aliza has a winning lottery ticket and she are the given the option of accepting the value of P1,000,000 paying interest three years from now or taking the present value of the P1,000,000 now. The sponsor of the prize is using a 6% interest and discount rate. a. If she choose to receive the present value of the prize now, how much will she receive? b. If she choose to receive the value 3 years from now, how much will she receive? c. Which of the options will give her higher amount?arrow_forwardMr. New Retiree is about to retire after an illustrious career in the Zambian civil service. He is expecting to receive a net of K2.5 million in retirement benefits. As an Investment Advisor, you have been approached by Mr. New Retiree to advise on the options available for him to consider. Advise on the main asset classes available in Zambia clearly showing the common investment time horizon for each. What is the most money you could make over the next year?arrow_forwardSuppose a husband wants to take his wife on a trip three years from now to Europe to celebrate their 40th anniversary. He has just received a $20,000 inheritance from an uncle and intends to invest it for the trip. The husband estimates the trip will cost $26,600. What interest rate, compounded annually, must be earned to accumulate enough to pay for the trip? Note: Use tables, Excel, or a financial calculatorarrow_forward
- Suppose your first job pays you Php 300,000 annually. Answer the following questions assuming (a) you are unmarried, and (b) you are married with two young children. Let see how your allocation change. 1. What percentage should your cash reserve contain? 2. What are the insurances you will carry and how much? 3. What are the other allotments do you plan to carry?arrow_forwardYour financial advisor from Bluerock recommends you to invest in one of the plan. You want to compare and verify which of the following is the best investment option. Investment Plan A: Deposit $125,000 at the beginning and obtain $175,318.97 after 5 years.Investment Plan B: Deposit $243,000 at the beginning and obtain $319,771.42 after 7 years.Investment Plan C: Deposit $314,000 at the beginning and obtain $530,496.39 after 9 years. 1. Compute interest rate for all 3 plans. Which investment plan provides you the highest rate? 2. Your advisor updated the investment plan information yesterday. While the interest rate did not change for all 3 plans, future values of each investment are 210382.76, 415702.85, 742694.95, respectively. What would be the investment period for each plan? 3. Your advisor thinks it would be a good investment if you make an investment portfolio using all 3 investment plans suggested. He recommends investing in all 3 plans at year 0 and reinvest the money to…arrow_forwardAssume that you were given $100,000 to invest in financial assets, discuss the following: Explain what your investment portfolio would look like. Share what you believe is your risk tolerancearrow_forward
- In the following exercises and problems you will be able to:• model investment and annuity problems;• explain the difference between sequences and series;• solve exercises applying concepts of the sum of sets of terms of a sequence, and• solve problems related to annuities using sequences or seriesIn the case that the result is decimal, you will round it to two decimal places. 3. The new parents decide to invest $ 100 a month in an annuity for their young daughter. The account will pay 5% interest per year, which is compounded monthly. How much will be in the child's account when he turns eighteen?arrow_forwardAn individual is investing in a market where spot rates and forward rates apply. In this market, if at time t=0 he agrees to invest £5.0 for two years, he will receive £7.1 at time t3D2 years. Alternatively, if at time t=0 he agrees to invest £4.4 at time t=1 for either one year or two years, he will receive £7.6 or £8.0 at times t=2 and t=3, respectively. Calculate the price per £5,000 nominal that the individual should pay for a fixed-interest bond bearing annual interest of 6.5% and is redeemable after 3 years at 105%. State your answer at 2 decimal places. Answer: Checkarrow_forwardYou have been hired as a financial advisor to Michael Jordan. He has received two offers forplaying professional basketball and wants to select the best offer, based on considerations ofmoney only. Offer A is a $10m offer for $2m a year for 5 years. Offer B is a $11m offer of $1ma year for four years and $7m in year 5. What is your advice? (Hint: compare the present value ofeach contract by assuming a range of interest rate, say 8% - 14%)arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education