Homework1 Parsons
Homework 1
Parsons
Core Finance
Homework 1
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Question 1
You are head of a Family Endowment for the Arts. You have decided to fund a music school in
San Diego in perpetuity. You will give the school $1 million immediately, and subsequent annual $1 million dollar payments growing at the rate of inflation, which you estimate to be 3% per year (i.e., you will contribute $1,000,000 plus inflation next year (one year from today), the year after, the year after, etc.,). If the interest rate is 8% per year, what is the present value of your gift?
Question 2
Your friend has a business she wants you to value. The business will not generate any money for the next three years, but in the fourth year it will start turning a profit and will make a payment (the first payment) of $150,000 to the owners at the end of the fourth year. Your friend expects to be able to grow the business, and the payments made to the owners, by 4% per year forever, and the owners will receive their payments at year end. If the appropriate discount rate is 14%, what is the value of the business today?
Question 3
Pauli found a book on Finance in a garbage can. After reading it, he tells Silvio that if Silvio will give him $10,000/year for five years with the first payment at the end of this year, then he will give Silvio $10,000/year forever with the first payment occurring at the end of year 6.
Silvio’s next-best alternative (i.e., what he would do with his money if he didn’t take Pauli’s offer) is to loan the money to Christopher at 12%
a. What NPV does Silvio get if he takes Pauli’s offer?
b. Should Silvio take Pauli’s offer?
c. Why or why not?
Question 4
Congratulations! You have won the Powerball! The Lottery Commission informs you that
Chris Parsons page 2 you have won a million dollars, and that your million dollar prize will be paid to you in 20 equal installments of $50,000 to arrive every
Parsons
Core Finance
Homework 1
___________________________________________________________________________
Question 1
You are head of a Family Endowment for the Arts. You have decided to fund a music school in
San Diego in perpetuity. You will give the school $1 million immediately, and subsequent annual $1 million dollar payments growing at the rate of inflation, which you estimate to be 3% per year (i.e., you will contribute $1,000,000 plus inflation next year (one year from today), the year after, the year after, etc.,). If the interest rate is 8% per year, what is the present value of your gift?
Question 2
Your friend has a business she wants you to value. The business will not generate any money for the next three years, but in the fourth year it will start turning a profit and will make a payment (the first payment) of $150,000 to the owners at the end of the fourth year. Your friend expects to be able to grow the business, and the payments made to the owners, by 4% per year forever, and the owners will receive their payments at year end. If the appropriate discount rate is 14%, what is the value of the business today?
Question 3
Pauli found a book on Finance in a garbage can. After reading it, he tells Silvio that if Silvio will give him $10,000/year for five years with the first payment at the end of this year, then he will give Silvio $10,000/year forever with the first payment occurring at the end of year 6.
Silvio’s next-best alternative (i.e., what he would do with his money if he didn’t take Pauli’s offer) is to loan the money to Christopher at 12%
a. What NPV does Silvio get if he takes Pauli’s offer?
b. Should Silvio take Pauli’s offer?
c. Why or why not?
Question 4
Congratulations! You have won the Powerball! The Lottery Commission informs you that
Chris Parsons page 2 you have won a million dollars, and that your million dollar prize will be paid to you in 20 equal installments of $50,000 to arrive every