Time Value of Money and Present Value - 1154 Words

Date: 14/11/2012 52. Annuities: 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 $23,000 per year per child, payable at the beginning of each school year. The annual interest rate is 5.5 percent. How much money must you deposit in account each year to fund your children’s education? Your deposits begin one year from today. You will make your last deposit when your oldest child enters college. Assume four years of college Solution: Cost of 1 year at university = 23,000 N=4 I=5.5% PMT=23,000 CPT PV =†¦show more content†¦Solution: The price of a bond is equal to PV of expected future cash flows Bond M: Face value 20,000 Present value of 20,000 = 20,000/ (1.05) ^40 = $2,840.91 First we need to get the present value of the annuity for the 1,500 semiannual PMTs at year 14 Present Value of Annuity = $13,295 $13,295 becomes $3,391 at year 0 We then get the annuity of the 1,200 semiannual PMTs at year 6, and then at Present Value $13,005 at year 6 with a PV of $7,242 at year 0 The sum of the 3 PV’s gives us the value of the bond 2,841 + 3,391 + 7,242 = $13,474 Bond N Face value 20,000 Present value of 20,000 = 20,000/ (1.05) ^40 = $2,840.91 38. Non-constant growth: Storico Co. just paid a dividend of aud 3.5 per share. The company will increase its dividend by 20% next year, and will then reduce its dividend growth rate by 5% per year, until it reaches the industry average of 5% industry average growth, after which the company will keep a constant growth rate forever. If the required return on Storico stock is 13%, what will a share of stock sell for today? Solution : D0 = $3.5 D1= 3.5*1.2= $4.2 D2= 4.2*1.15= $4.83 D3=4.83*1.1= $5.31 D4=5.31*1.05= $5.58 Since the first 4 periods are different we get the PV of each one alone, then as of the 4th year we get the perpetuity of the rest, and sum them up to get the final NPV WeShow MoreRelatedWeek 5 Reflection Essays680 Words   |  3 PagesReflection The concept of time value of money is accounting is the relationship between time and money (Kieso, Wygandt, amp; Warfield, 2007). The common expression is that money today is worth more than the assurance of money received tomorrow. 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