##### Question

In: Finance

Your parents have come to you for financial advice because you have told them about this incredible finance course you are taking and they are paying for. Your parents have been offered an investment that will pay $100 per year forever and the first cash flow will occur 11 years from today. If interest rates are expected to be 6.125% forever; a. What is this investment worth today? HINT: be sure to include a timeline in your explanation to your parents. Show your work and explain your answer, not done in excel. b. Your parents have been offered another investment that will pay$90 per year forever and the first cash flow will occur 11 years from today; however, the cash flow amounts are expected to grow at 1% forever. If interest rates are expected to be 6.125% forever, what is this investment worth today and which investment should they take? HINT: be sure to include a time line in your explanation to your parents. Show your work and formulas, timeline, not done in excel.

## Solutions

##### Expert Solution

Part (a):

Cash flow is as follows:

$100$100

↑                    ↑

Year 0-------……..----------10-------------11---------------12------…….

Value of investment (perpetuity) one year before commencement (Pn)= C/r

Present worth =Pn/(1+r)^n

Where

C= yearly payment (given as $100) r= interest rate (given as 6.125%) and n= Period till commencement, less 1 = 10 years Plugging the values, Present worth= (100/0.06125)/(1+0.06125)^10 = 1632.65306/ 1.8335358 =$890.44

Part (b):

Cash flows will increase at 1% per year

Cash flow is as follows:

$90$90.90         $91.81 ↑ ↑ ↑ Year 0-------……..----------10-------------11---------------12-------------13……. Value of investment (growing perpetuity) one year before commencement (Pn)= C/(r-g) Present worth =Pn/(1+r)^n Where C= First payment (given as$90)

r= interest rate (given as 6.125%)

g= Growth rate after first payment (given as 1%) and

n= Period till commencement, less 1 = 10 years

Plugging the values,

Present worth= (90/(0.06125-0.01))/(1+0.06125)^10

##### Time value of money You are giving personal financial planning advice to your parents. Both of...
Time value of money You are giving personal financial planning advice to your parents. Both of your parents have worked for Air New Zealand for 15 years. They have savings of $100,000 invested in Air New Zealand’s ordinary shares. They expect to be able to earn 6% compounded monthly on any investments or savings. Your parents wish to retire in 20 years. In retirement, they desire to have$5000 of monthly income for 25 years. At this point, they expect...
45. Your younger brother has come to you for advice. He is about to enter college and has two options open to him. His first option is to study engineering. If he does this, his undergraduate degree would cost him $30,000 a year for four years. Having obtained this, he would need to gain two years of practical experience: in the first year he would earn$35,000, in the second year he would earn $40,000. He would then need to... ##### You have borrowed$1,554 from your parents. You will pay them back what your borrowed plus...
You have borrowed $1,554 from your parents. You will pay them back what your borrowed plus$263 in 3 years. What is the implied interest rate? Answer as a percent
##### The investment committee of your church has come to you for advice one of the stocks...
The investment committee of your church has come to you for advice one of the stocks held by the church has paid cash dividends for years. This year the company issues a stock dividend so that the church received additional shares rather than cash. The committee is concerned about whether this stock dividend is really worth anything. One committee member argues the stock dividend is as good as cash; another argues that the dividend is worthless. Write a brief report...
##### Suppose you are a health fitness consultant. Your clients come to you for advice ranging from...
Suppose you are a health fitness consultant. Your clients come to you for advice ranging from diet and nutrition to exercise. One of your clients is Dustin Winthrop. He is relatively healthy but has an underlying health condition that puts him in the vulnerable category for COVID-19. He is worried about going back to the gym to workout if Monterey County lifts the shelter-in-place order by May 1. He wants you to help him evaluate two options: Option A: Go...
##### Assume that you provide financial advice to Minelli Enterprises Limited. The company’s management has come to...
Assume that you provide financial advice to Minelli Enterprises Limited. The company’s management has come to you for guidance over a foreign exchange transaction. The company, based in New Zealand, has sold GBP\$ 4,500,000 worth of equipment to a customer in Great Britain. The payment has been deferred for six (06) months. The following information has been provided: Spot exchange rate = NZD 1.9639/GBP Six-month forward rate = NZD 1.9613/GBP New Zealand lending rate = 3.12% p.a. New Zealand deposit...
##### Consider the following scenario: Your boss has come to you for advice on the current finances...
Consider the following scenario: Your boss has come to you for advice on the current finances of the company and needs you to create an extended DuPont analysis, common size analysis, and percentage change analysis. Your boss wants you to fill out the attached Excel file because he/she has no idea what she is talking about and is going to use your report as her work. Remember to answer all the questions in the attached document. Has J&W's liquidity position...
##### Your client, Richie Rich, as come to you for advice. Richie is interested in many social...
Your client, Richie Rich, as come to you for advice. Richie is interested in many social welfare issues, such as welfare reform, abortion rights, and access to higher education. He wants to use his great wealth to educate the general public on these issues, and to influence related legislation, including helping finance the campaigns of political candidates who reflect his views. Richie’s butler, Stu, suggested that he organize a §501(c)(4) organization, because such organizations are not only tax-exempt, but they...