Westminster International University in Tashkent
Corporate Finance 4ECON009C-n, 2021/2022, Semester 2
Seminar 2
1. Q1. Explain why this statement is true: “A dollar in hand today is worth more than a
dollar to be received next year”
2. Q2. Define the following terms: present value, future value, compounding interest and
discounting. What is meant by "the present value of a future amount"?
3. Q3. A client has a $5 mln portfolio and invests 5% of it in a money market fund
projected to earn 3% annually. Estimate the value of this portion of his portfolio after
seven years.
4. Q.4. A client invests $500,000 in a bond fund projected to earn 7% annually. Estimate
the value of her investment after 10 years.
5. Q.5. A couple plans to set aside $20,000 per year in a conservative portfolio projected
to earn 7% a year. If they make their first saving contribution now (at the beginning of
the year), how much will they have at the end of 20 years?
6. Q.6. To cover the first year’s total college tuition payments for his two children, a father
will make a $75,000 payment five years from now. How much will he need to invest
today to meet his first tuition goal if the investment earns 6% annually?
7. Q.7. A perpetual preferred stock position pays quarterly dividends of $1,000 indefinitely
(forever). If an investor has a required rate of return of 12% per year compounded
quarterly on this type of investment, how much should he be willing to pay for this
dividend stream?
8. Q.8. At retirement, a client has two payment options: a 20-year annuity at $50,000 per
year starting after one year or a lump sum of $500,000 today. If the client’s required
rate of return on retirement fund investments is 6% per year, which plan has the higher
present value and by how much?
9. Q9. Anvar wishes to determine the future value at the end of 2 years of a $15000
deposit made today into an account paying a nominal annual rate of 12%. find the
future value of Anvar’s deposit, assuming that interest is compounded (1) annually, (2)
semi-annually , (3) quarterly, and (4) monthly.
10. Q10. What is annuity? What is the difference between ordinary annuity and an annuity
due? Which always has greater future value and present value for identical annuities
and interest rates? Why?
11. Q11. What is accumulated sum of each of the following streams of payments?
(Compound annuity)
$500 a year for 10 years compounded annually at 5% (by using formula)
$100 a year for 5 years compounded annually at 10% (by using financial table)
$35 a year for 7 years compounded annually at 7% (by using formula)
$25 a year for 3 years compounded annually at 2% (by using financial table)
12. Q12. What is the present value of the following annuities?
$2500 a year for 10 years discounted back to the present at 7% (by using formula)
$70 a year for 3 years discounted back to the present at 3% (by using financial table)
$280 a year for 7 years discounted back to the present at 6% (by using formula)
$500 a year for 10 years discounted back to the present at 10% (by using financial
table)
13. Q13. What is the present value of a 10-year annuity due of $1000 annually given a
10% discount rate?
14. Q14. Find the future value at the end of year 10 of an annuity due of $1000 per year for
10 years compounded annually at 10%. What would be the future value of this annuity
if it were compounded annually at 15%?
15. Q15. What is perpetuity?
16. Q16. What is the present value of the following? (Perpetuities)
A $300 perpetuity discounted back to the present at 8%
A $1000 perpetuity discounted back to the present at 12% (H)
A $100 perpetuity discounted back to the present at 9%
A $95 perpetuity discounted back to the present at 5% (H)
Homework
Q1. Suppose a U.S. government bond promises to pay $2249.73 three years from now. If the
going interest rate on 3-year government bonds is 4%, how much is the bond worth today?
How would your answer change if the bond matured in 5 rather than 3 years? What if the
interest rate on the 5-year bond were 6% rather than 4%?
Q2. What would the future value of $100 be after 5 years at 10 % compound interest?
Q3. Malika intends to deposit $300 per year in a credit union for the next 10 years, and the
credit union pays an annual interest rate of 8%.
Determine the future value that Malika will have at the end of 10 years, given that end -of-
period deposits are made and no interest is withdrawn, if
$300 is deposited annually and the credit union pays interest annually.
$150 is deposited semiannually and the credit union pays interest semiannually.
$75 is deposited quarterly and the credit union pays interest quarterly.
b. Use your finding in part a to discuss the effect of more frequent deposits and
compounding of interest on the future value of an annuity.
Q4. Future values of annuities Jakhongir wishes to choose the better of two equally costly
cash flow streams: annuity X and annuity Y. X is an annuity due with a cash inflow of $9,000
for each of 6 years. Y is an ordinary annuity with a cash inflow of $10,000 for each of 6 years.
Assume that Jakhongir can earn 15% on his investments.
a. On a purely subjective basis, which annuity do you think is more attractive? Why?
b. Find the future value at the end of year 6, FVA6, for both annuity X and annuity Y.
c. Use your finding in part b to indicate which annuity is more attractive. Why? Compare your
finding to your subjective response in part a.
Q5. Madina wishes to accumulate$8,000 by the end of 5 years by making equal annual end-
of-year deposits over the next 5 years. If Madina can earn 7% on her investments, how much
must she deposit at the end of each year to meet this goal?
Q6. You can deposit $10,000 into an account paying 9% annual interest either today or
exactly 10 years from today. How much better ff will you be at the end of 40 years if you
decide to make the initial deposit today rather than 10 years from today?