# PLEASE SHOW ALL WORK

Homework Assignment for Week 2:Chapter 4:For Week 2, please turn in the answers to the following questions:1.

Why is it necessary to know about time value of money concepts? Why

can’t you just make judgments about future cash flows based purely on

the size of the cash flows?2. Define Future Value.3. Define Present Value.4. What are annuities?5.

(calculating future value) You buy an 7 year, 8% CD for $1,000.

Interest is compounded annually. How much is it worth at maturity?6.

(calculating present value) What’s the present value of $10,000 to be

received in 5 years? (Your required rate of return is 8% a year.)7.

(calculating the rate of return) A friend promises to pay you $600

three years from now if you loan her $500 today. What interest rate is

your friend offering you?8. (calculating the future

value of an annuity) If you invest $100 a year for 20 years at 5%

annual interest, how much will you have at the end of the 20th year?9.

(calculating the present value of an annuity) How much would you be

willing to pay today for an investment that pays $700 a year at the end

of the next 5 years? (Your required rate of return is 8% a year.)10.

(Rate of return of an annuity) You would like to have $1,000,000 40

years from now, but the most you can afford to invest each year is

$1,200. What annual rate of return will you have to earn to reach your

goal?11. (Monthly compounding) If you bought a $1,000

face value CD that matured in nine months, and which was advertised as

paying 6% annual interest, compounded monthly, how much would you receive when you cashed in your CD at maturity?12.

(Annualizing a monthly rate) Your credit card statement says that you

will be charged 1.02% interest a month on unpaid balances. What is the

Effective Annual Rate (EAR) being charged?13. (Monthly loan

payment) Best Buy has a flat-screen HDTV on sale for $1,699. If you

could borrow that amount from Carl’s Credit Union at 6% for 1 year, what

would be your monthly loan payments?14. (PV of a

perpetuity) If your required rate of return was 12% a year, how much

would you pay today for $100 a month forever? (that is, the stream of

$100 monthly payments goes on forever, continuing to be paid to your

heirs after your death)15. (PV of an uneven cash flow stream) what is the PV of the following project? (Assume r = 8%) Year Cash Flow 1 Year Cash Flow 1 $1,000 2 $2,000 3 $3,000 4 $4,00016. (FV of an uneven cash flow stream) what is the FV at the end of year 4 of the following project? (Assume r = 8%) Year Cash Flow 1 $1,000 2 $2,000 3 $3,000 4 $4,000Chapter 6:17. Define the Capital Asset Pricing Model (CAPM).18. Define “beta” as it applies to common stocks.19.

You have two stocks in your portfolio. $30,000 is invested in a stock

with a beta of 0.6 and $50,000 is invested in a stock with a beta of

1.4. What is the beta of your portfolio?20. If the

risk-free rate is 1% and the expected rate of return on the stock market

is 7%, what is the required rate of return on a stock with a beta of

1.3 according to the CAPM?