HW I: Show your approach to each problem (formulas, variables, etc.) You can use Excel sheet formulas to show the work or use the Finance calculator terms. For the ABC answers: choose the correct answer and delete the rest.
1. (a) How large a retirement "nest egg" will I need at retirement to provide a $60,000 per year income for 30 years? Assume a onceperyear, endofyear withdrawal, and a 6% annual return on the invested funds; further assume that the nest egg would be fully exhausted at the end of the 30^{th} year. (This last point is not a "special wrinkle" in this problem; that is what our normal techniques normally provide for.)
(b) Recalculate for part (a), based on monthly withdrawals totaling $60,000 per year (i.e. $5,000 per month) with the same annual rateofreturn, how large your nest egg must be. (If you are not comfortable with the use of a calculator, just show the setup of the problem including the formula you would use; define the knowns and unknowns in the context of this formula.)
2. How long will it take me to pay off a $100,000 loan carrying an 8% interest rate if I make annual, endofyear payments of $13,270. (Round to nearest whole year.)
3. How much will be owed as a lumpsum payoff on a 30year, 6% mortgage with an initial principal of $200,000 after you have made 10 years of payments? Hint: First, calculate your monthly payment for this loan. (Again, just show a detailed problem setup as described for Problem 1(b) if you are not comfortable using the calculator.)
4. A firm had the following accounts and financial data for 2010. (All amounts in $ Thous.)
Sales Revenue

$3,060

Cost of goods sold

$1,800

Accounts Receivable

500

Preferred stock dividends

18

Interest expense

126

Tax rate

40%

Total oper. expenses

600

Number of shares of common

1,000

Accounts payable

240

stocks outstanding


Note: Total Operating Expenses do not include COGS.
The firm's earnings available to common shareholders for 2010 (rounded to nearest thousand $) were _________.
(a) $224
(b) $195
(c) $302
(d) $516
5. $100 is received at the beginning of year 1, $200 is received at the beginning of year 2, and $300 is received at the beginning of year 3. If these cash flows are deposited at 12 percent, their combined future value at the end of year 3 is _________.
6. (a) If I have $100,000 in my IRA on 1 January 2011 that will remain invested and want to have $1,000,000 invested by 31 December 2030, how much do I have to make as an annual, endofyear contribution through 2030 beginning on 12/31/2011? I am assuming a conservative 6% return on invested funds. (note that the value of n here = 20)
(b) Recalculate the required calculation from Part (a) if you make monthly contributions over the same period. (Again, just show the set up if you are not comfortable with the calculator approach.)
7. A balloon mortgage is a loan which is repaid via a combination of monthly payments and a single, large lumpsum payment of the remaining amount due along with the last monthly payment. What would the balloon payment be in five years to satisfy a 10%, $100,000 equipment loan if I have made 60 monthly payments of $1,500 each? (At least show the stepbystep approach to solve this problem even if you can't use the calculator for the solution.)
8. What is the yield to maturity, to the nearest percent, for the following bond: current price is $950, coupon rate is 11 percent, $1,000 par value, interest paid annually, eight years to maturity?
(a) 11 percent
(b) 12 percent
(c) 13 percent
(d) 14 percent
9. What is the current price of a $1,000 par value bond maturing in 12 years with a coupon rate of 9 percent, paid annually, that has a YTM of 11 percent? (choose the closest value; you may have some small rounding error.)
(a) $604
(b) $870
(c) $1,000
(d) $1,073
10. Lincoln Corp. has two bonds outstanding. One (Bond A) is a 10year original term bond with five years to maturity and a 7% annual coupon rate. The second (Bond B) is a fiveyear original term with two years remaining and also pays a 7% annual coupon. These bonds both carry the same credit rating and each have a par value of $1,000. The market's required rateofreturn for these bonds is currently 8%. Which of the following should be true:
(a) Bond A's premium will be greater than Bond B's premium;
(b) Bond A and B should carry the same premium;
(c) Bond A's discount should be greater than Bond B's discount;
(d) Bond A's discount should be less than Bond B's discount.
11. The _________ summarizes the firm's funds flow over a given period of time.
(a) income statement
(b) balance sheet
(c) statement of cash flows
(d) statement of retained earnings