Code

FINA 3332
Take Home Exam 1
Instructions:
1. Do Not ask friends/family/classmates for help on the exam. This is a major Honor Code
violation and will result in immediate referral as an honor code violation, this can result in failing
the exam, failing the course, and carries scholarship(economic) impacts.
2. The exam is open book, open note, you may use whatever other resources you need, with the
exception of other people as listed in #1.
3. Use the rounding and formatting rules as specified in the course.
a. Include $ & %
b. Round Percent values to the nearest tenth
c. Round Dollars to the nearest penny
d. Avoid internal rounding to the problem where possible
e. Use ESA (Equation, Substitution, Answer)
f. Show your timeline
4. Submit your Excel spreadsheet and PDF document to blackboard.
I have read and understand these rules and will obey the Honor Code.
Name: ______________________________
Signature: ___________________________
Date: _______________________________
1. Essay Question: What are the core rules to valuing cashflows? What is the problem with
ignoring these rules? What happens when the rules are ignored? Are any of the rules
“unnecessary? What are the implication of the rules on timelines?
2. You have ownership of an annuity that pays $113 per month for the next 42 months and a
perpetuity that pays $831 per month. The monthly discount rate is .83%. How much would you
have to be paid to sell the combined cashflow to someone else?
3. Given an EAR of 9.8%. Value the combined cashflow of receiving $3,839 in 5 years and paying
$2,970 in 225 months.
4. How much is the monthly payment for an auto loan with a down payment of $13,406 and an
APR of 10.5%. The value of the car being purchased is $23,267. The loan term is 5 years.
5. Given a quarterly compounding interest rate of 2.825%. What is the value of the following
annual cashflow stream at year 7?
0 1 2 3 4 5 6 7 8 9
-55 -81 -6 31 14 -98 8 42 -57 16
6. You won the lottery and now have to choose between a $684,876 annuity that lasts for 25 years
and a lump sum payment of $14,050,871 that you would receive next year. Your discount rate
is 10.7% EAR. You can pass the winnings through a S-Corp or a C-corp. The individual tax rate
for gambling winnings is 60%, the corporate tax rate is 35% and the individual capital gains tax
rate is 15%. What is the best combination?
7. You are trying to buy a car and can afford a monthly payment of $532. The bank has offered
you a loan of $31,247 at a APR of 8.4%. They will charge you monthly and the loan term is 5
years. The dealership is charging you $20,500 for the car that you want. How much is your
monthly payment? Can you afford the car that you want?
8. In 20 years you want to have an annuity that pays $31,421 per quarter for 20 years out of your
retirement account. Your monthly salary is $9,264 and you plan to deposit 59% of it into your
retirement account. What would the required rate of return be on the retirement account in
order for you to reach your goal?
9. Your start-up has the following cashflow stream:
0 2 3 6 9 10 13 15 19 20
7,870 794 7,971 4,516 835 7,159 -4,169 5,689 1,380 2,100
Additionally, starting in 3 months you are expecting to pay an annuity that will last for 16 years.
The annuity pays out $23,047 at a semi-annual rate. Finally, your company has a perpetuity of
$257,766 that is paid to it. This perpetuity started 3 years ago.
You value all of these cashflows at a value of $4,334,869 one year from today. What is your
discount rate?
10. You have access to a daily compounding interest rate of 0.035% or a monthly compounding
interest rate of 1.04%. Which of the following has a greater value 3 years ago?
• A quarterly perpetuity that starts three years from now and pays $372 combined with a
$79,325 lump sum payment that you owe in 6 years
• Or an annuity that started last year, pays $218 semiannually for 55 years and a $30,250
lump sum payment that was paid by you 9 years ago?