Fundamentals of Corporate Finance (3rd Edition) (Pearson Series in Finance)
Fundamentals of Corporate Finance (3rd Edition) (Pearson Series in Finance)
3rd Edition
ISBN: 9780133507676
Author: Jonathan Berk, Peter DeMarzo, Jarrad Harford
Publisher: PEARSON
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Chapter 4, Problem 21P
Summary Introduction

a.

To determine:

The true promised payment under contract including the deferred payments with interest.

Explanation:

The true promised payment under the contract including the deferred payment for 20 years is computed below:

Year Amount ($ in millions)
1 18
2 19
3 19
4 19
5 21
6 19
7 23
8 27
9 27
10 27
11 6.71958
12 5.37567
13 4.03175
14 4.03175
15 4.03175
16 4.03175
17 4.03175
18 4.03175
19 4.03175
20 4.03175
Total 263.3488

Working note:

Computation of amount including bonus.

The amount including bonus amount is computed as below:

Year
1 2 3 4 5 6 7 8 9 10
Amount ($ in millions) Bonus ($ in millions) Total ($ in millions Fundamentals of Corporate Finance (3rd Edition) (Pearson Series in Finance), Chapter 4, Problem 21P , additional homework tip  1
16 2 18
17 2 19
17 2 19
17 2 19
19 2 21
19 19
23 23
27 27
27 27
27 27

Computation of amount including interest

The amount without interest and with interest is given below:

Year Amount without interest ($ in millions) Amount with 3% interest ($ in millions)
11 5 Fundamentals of Corporate Finance (3rd Edition) (Pearson Series in Finance), Chapter 4, Problem 21P , additional homework tip  2
12 4 Fundamentals of Corporate Finance (3rd Edition) (Pearson Series in Finance), Chapter 4, Problem 21P , additional homework tip  3
13 3 Fundamentals of Corporate Finance (3rd Edition) (Pearson Series in Finance), Chapter 4, Problem 21P , additional homework tip  4
14 3 Fundamentals of Corporate Finance (3rd Edition) (Pearson Series in Finance), Chapter 4, Problem 21P , additional homework tip  5
15 3 Fundamentals of Corporate Finance (3rd Edition) (Pearson Series in Finance), Chapter 4, Problem 21P , additional homework tip  6
16 3 Fundamentals of Corporate Finance (3rd Edition) (Pearson Series in Finance), Chapter 4, Problem 21P , additional homework tip  7
17 3 Fundamentals of Corporate Finance (3rd Edition) (Pearson Series in Finance), Chapter 4, Problem 21P , additional homework tip  8
18 3 Fundamentals of Corporate Finance (3rd Edition) (Pearson Series in Finance), Chapter 4, Problem 21P , additional homework tip  9
19 3 Fundamentals of Corporate Finance (3rd Edition) (Pearson Series in Finance), Chapter 4, Problem 21P , additional homework tip  10
20 3 Fundamentals of Corporate Finance (3rd Edition) (Pearson Series in Finance), Chapter 4, Problem 21P , additional homework tip  11

Conclusion:

Therefore, the total promised amount under the contract is $263.3488.

b.

Summary Introduction

To prepare: The timeline of all the payments.

c.

Summary Introduction

To determine:

The present value of the contract.

d.

Summary Introduction

To determine:

The difference after comparing present value of contract with quoted value.

Blurred answer

Chapter 4 Solutions

Fundamentals of Corporate Finance (3rd Edition) (Pearson Series in Finance)

Ch. 4 - Prob. 11CCCh. 4 - Whencashflowsoccur at anon-annual interval, what...Ch. 4 - What is the intuition behind the fact that the...Ch. 4 - What must be true about a cash flow stream in...Ch. 4 - Prob. 3CTCh. 4 - Prob. 4CTCh. 4 - Prob. 5CTCh. 4 - Prob. 6CTCh. 4 - What must be true about the growth rate in order...Ch. 4 - In what types of situations would it be useful to...Ch. 4 - Prob. 1DCCh. 4 - Prob. 2DCCh. 4 - Prob. 3DCCh. 4 - Calculate the present value of the salary...Ch. 4 - Prob. 5DCCh. 4 - Prob. 1PCh. 4 - What is the present value of the following set of...Ch. 4 - You want to borrow $10,000. You figure that you...Ch. 4 - Prob. 4PCh. 4 - You have just taken out a five-year loan from a...Ch. 4 - Prob. 6PCh. 4 - Prob. 7PCh. 4 - Prob. 8PCh. 4 - Prob. 9PCh. 4 - Prob. 10PCh. 4 - 11. Assume you can earn 9% per year on your...Ch. 4 - Prob. 12PCh. 4 - Prob. 13PCh. 4 - 14. The British government has a consol bond...Ch. 4 - Prob. 15PCh. 4 - 19. Your grandmother has been putting $1000 into a...Ch. 4 - 20. Assume that your parents wanted to have...Ch. 4 - Prob. 18PCh. 4 - Prob. 19PCh. 4 - 23. Assume that Social Security promises you...Ch. 4 - 24. When Alex Rodriguez moved to the Texas...Ch. 4 - Prob. 22PCh. 4 - A rich relative has bequeathed you a growing...Ch. 4 - Prob. 24PCh. 4 - Prob. 25PCh. 4 - Prob. 26PCh. 4 - 30. A rich aunt has promised you $5000 one year...Ch. 4 - Prob. 28PCh. 4 - Prob. 29PCh. 4 - Prob. 30PCh. 4 - 34. You have decided to buy a perpetual bond. The...Ch. 4 - Prob. 32PCh. 4 - 36. You are thinking about buying a piece oi art...Ch. 4 - 35. You are thinking of purchasing a house. The...Ch. 4 - Prob. 35PCh. 4 - Prob. 36PCh. 4 - 40. A local bank is running the following...Ch. 4 - Prob. 38PCh. 4 - Prob. 39PCh. 4 - 43. Suppose you currently have $5000 in your...Ch. 4 - 44. Your firm spends $5000 every month on printing...Ch. 4 - 45. You are looking to buy a car and can afford to...Ch. 4 - Prob. 43P
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