Corporate Finance
Practice Problem Set – 1 ( The following problems are from Corporate Finance by Ross, Westerfield, and Jaffe – Tenth edition, McGraw-Hill / Irwin – ISBN 978-0-07-803477-0 ) 1. Audrey Sanborn has just arranged to purchase a $ 550,000 vacation home in the Bahamas with a 20 percent down payment. The mortgage has a 6.1 percent stated annual interest rate, compounded monthly, and calls for equal monthly payments over the next 30 years. Her first payment will be due one month from now. However, the mortgage has an eight-year balloon payment, meaning that the balance of the loan must be paid off at the end of year 8. There were no other transaction costs or finance charges. How much will Audrey’s balloon payment be in eight years ? Your job pays you only once a year for all the work you did over the previous 12 months. Today, December 31, you just received your salary of $ 65,000, and you plan to spend all of it. However, you want to start saving for retirement beginning next year. You have decided that one year from today you will begin depositing 5 percent of your annual salary in an account that will earn 10 percent per year. Your salary will increase at 4 percent per year throughout your career. How much money will you have on the date of your retirement 40 years from today ? A 15-year annuity pays $ 1,500 per month, and payments are made at the end of each month. If the interest rate is 12 percent compounded monthly for the first seven years, and 6 percent compounded monthly thereafter, what is the present value of the annuity ? You are saving for the college education of your two children. They are two years apart in age; one will begin college 15 years from today and the other will begin 17 years from today. You estimate your children’s college expenses to be $ 45,000 per year per child, payable at the beginning of each school year. The annual interest rate is 7.5 percent. How much money must you deposit in an account each year to fund your children’s education ?