Financial Institutions
What are financial intermediaries?
Financial intermediaries are business organizations that receive funds in one form and repackage them for use by those who need funds.
What is an annuity?
A series of equal ammounts paid at equal intervals
What is a perpetuity?
Streams of equal payments that are expected to go on forever.
What is the Effective Annual Rate (EAR)?
Rate of return that inlcues the effects of compunded interest
What does it mean if a financial market is economically efficient and what does it mean if it is informationally efficient?
Economically Efficient - funds allocated to resources that would be the most productive
Informationally Efficient - stock prices reflect the most recent information
What is the difference between an Annuity and an Annuity due?
The payments occur at the beginning of the period instead of the end
You are offered an investment that pays $2,400 per year forever. The required rate of return is 6%. What is the present value of this perpetuity?
$40,000
Ten years ago, you purchased an investment for $20,000. If the investment earned 6 percent interest each year, how much is it worth today?
$35,816
Chairs Inc. has to raise $200 million to expand. The investment banker's underwriting fee is 4% of the total amount issued. How much does the company have to raise?
$208,333,333.33
If you invest $500 at the end of each of the next eight years and your opportunity cost rate is 8 percent compounded annually, how much will your investment be worth after the last payment is made?
$5,318
$600,000
What is the present value of $50,000 to be received in 15 years at a 7.8 percent interest rate?
$16,205.50
Company B has to raise $800,500 to expand. The investment banker's underwriting fee is 8% of the total amount issued and has issuing costs of $2,500. How much does the company have to raise?
$872,826.09
At the beginning of each of the past 10 years, you deposited $230 in an account that earned 7.5 percent compounded annually. How much is in the account today?
$3,501
A university wants to fund a scholarship that pays $30,000 per year forever, with the first payment today. If the endowment earns 5%, how much must be donated today?
$630,000
You invest $10,000 at the beginning of each year for 5 years. At the end of the 5th year, the account is worth $60,000. What annual interest rate is being earned?
9.3%
Chocolates Inc. has hired you, an experienced investment banker, to raise $180 million to build a new manufacturing facility and expand its business. It would like to raise funds through a common stock issue. Your underwriting fee is 7% of the total amount issues, there are additional legal and registration costs of $300,000, and the stock can be issued at $60 per share at the current market conditions. How many shares does Chocolate Inc. need to issue?
3,000,000 shares
A small business is expected to generate $60,000 per year for 10 years, with payments received at the end of each year. If the required return is 9%, what is the present value of the business? What would be the difference if the rate of return was 12%?
$385,062; $46,062
Compute the difference between the present values (PV) of perpetuities that both pay $500, but one has a rate of 7.5 percent and the other 10 percent.
$1,666.67
You invest $15,000 today at an annual interest rate of 9%, compounded annually. The investment grows to $35,000. How many years will it take for the investment to reach $35,000?
Almost 10 years