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Calculating Financial Values

07 Mar

Questions to Consider

To deepen your understanding, you are encouraged to consider the questions below and discuss them with a fellow learner, a work associate, an interested friend, or a member of the business community.

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  • What is the importance of time value of money concepts, including compounding (future value), discounting (present value), and annuities? Why do organizational leaders need to understand these concepts?
  • What type of bond interests you? How is it different from other bonds?
  • How are bonds valued? How do interest rates affect the value of bonds? Consider the importance of the yield to maturity (YTM).

Assessment Instructions

Demonstrate your understanding of financial concepts by completing the following problems. Where appropriate, show or explain your work. It is recommended that you use Excel and its built-in formulas to work on the problems.

Problem 1. Calculate the future value of $3,500, compounded annually for each of the following:

  • 10 years at 7 percent.
  • 15 years at 9 percent.
  • 20 years at 5 percent.

Problem 2. Calculate the present value for each of the following:

Problem 2. Calculating Present Values
Present Value Years Interest Rate Future Value
  5 4% $15,250
  8 7% $30,550
  12 10% $850,400
  20 15% $525,125

Problem 3. Calculate the interest rate for each of the following:

Problem 3. Calculating Interest Rates
Present Value Years Interest Rate Future Value
$282 2   $325
$607 6   $891
$32,600 12   $142,385
$57,435 22   $463,200

Problem 4. Calculate the number of years in each of the following:

Problem 4. Calculating the Number of Periods
Present Value Years Interest Rate Future Value
$765   6% $1,385
$845   9% $4,752
$17,200   11% $432,664
$23,700   14% $182,529

Problem 5. Refer to the cash flows listed for the Kelly Company investment projects in the table below. The discount rate is 6 percent. Calculate the present value of these cash flows as well as the present value at 12 percent and at 17 percent.

Problem 5. Present Value and Multiple Cash Flows
Year Cash Flow
1 $750
2 $840
3 $1,230
4 $1,470

Problem 6. Value the bond Midcorp has issued, with the following characteristics:

  • Par: $1,000.
  • Time to maturity: 28 years.
  • Coupon rate: 7.50 percent.
  • Semiannual payments.

Calculate the price of this bond if the yield to maturity (YTM) is each of the following:

  • 7.50 percent.
  • 9 percent.
  • 4 percent.

Problem 7. Calculate the bond yield in the following scenario: Two years ago, Walters Electronics Corporation issued 20-year bonds at a coupon rate of 6.75 percent. The bonds make semiannual payments, and currently sell for 106 percent of par value. Calculate the YTM.

Problem 8. Calculate the stock value in the following scenario: The next dividend payment by RST Incorporated will be $3.45 per share. The dividends are projected to sustain a 6.50 percent growth rate into the future. If RST stock currently sells for $67 per share, what is the required return?

Problem 9. Calculate the stock value in the following scenario: Nickels Corporation will pay a $3.10 per share dividend next year. The company plans to increase its dividend by 4.25 percent per year, indefinitely. How much will you pay for the company’s stock today if you require a 12 percent return on your investment?

Problem 10. Provide a three-column table identifying four key characteristics of stocks (equity) and bonds (debt) and comparing them. Briefly discuss why a firm would prefer one over the other as a method of financing.

 

 
 

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