Use four decimal places on time value of money factors unless otherwise specified. Approximations and minor
differences because of rounding are acceptable. Ignore the effect of taxes. Assume that all percentages are
annual rates and that compounding occurs annually unless indicated otherwise.
1. Steve purchases preferred stock in Berklee Corporation, with each share paying a $2.50 dividend. This
dividend will remain constant. If the public’s required rate of return for Berklee stock is 8%, at what price
should this company’s stock sell?
2. Donna enters into an investment contract that will guarantee her 4% per year if she deposits $3,500 each
year for the next 10 years. She must make the first deposit one year from today, the day she signs the
agreement. How much will she have when she makes her last payment 10 years from now?
3. Assume the same facts as in problem 2 above, except that Donna negotiates the chance to make her first
payment now and continue to pay at the beginning of each year for the 10-year period. How much will she
have accumulated?
4. Bill will receive a royalty payment of $18,000 per year for the next 25 years, beginning one year from now,
as a result of a book he has written. If a discount rate of 10 percent is applied, should he be willing to sell
out his future rights now for $160,000? How about $162,500? $165,000?
5. Debbie won the $60 million lottery. She is to receive $1 million a year for the next 50 years beginning one
year from now, plus an additional lump sum payment of $10 million after 50 years. The discount rate is 10
percent. How much cash would she need to be offered today to tempt her to take a lump-sum cash offer
instead, all things equal?
6. Kim started a paper route on January 1, 2016. Every three months, she deposited $300 in her new bank
account, which earned 4 percent annually but was compounded quarterly. On December 31, 2019, she
placed the entire balance in her bank account in an investment that earned 5 percent annually. How much
will she have on December 31, 2022?
7. You hire Thomas to work for you for five years, and you agree to put away enough money as a lump sum
now to fund an annuity for him. At the end of those five years, he will retire and may begin drawing out
$20,000 per year for five years, starting on the last day of each year (in this case, the end of year 6, from
when this arrangement began, through year 10). How much must you invest today if your guaranteed
interest rate is 3% compounded annually for all 10 years?
8. Your new boss doesn’t have a pension or 401(k) plan for your retirement, but she agrees to place aside
$12,000 every year once a year for four years. She gives you the option of either starting immediately on
your first day of work or starting one year from now. That makes this the difference between an ordinary
annuity and an annuity due. If the plan earns 5% per year, compounded annually, what will be the
difference between the two approaches after the four years / four payments?
9. Jada is borrowing $40,000 from you today. She agrees to pay you back in annual installments beginning a
year from now over eight years, with interest at 3%. What would her annual payment amount be, including
both interest and principal?
10. You agree to finance your new SUV with an auto loan of $38,000. This loan will be repaid over three years
with monthly payments (and compounding) at a 4% annual interest rate (0.33% per month). What will
your monthly loan payment be?