Chapter 6 Question 6 Deferred payment terms are equivalent to a cash discount. Discuss and Explain this idea. Question 13Discuss the idea of capitalizing a stream of earnings in perpectuity. Where is...

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Answer To: Chapter 6 Question 6 Deferred payment terms are equivalent to a cash discount. Discuss and Explain...

Akshay Kumar answered on Sep 18 2021
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Chapter 6
    Question 6     Deferred payment terms are equivalent to a cash discount. Discuss and Explain this idea.
    Question 13    Discuss the idea of capitalizing a stream of earnings in perpectuity. Where is this idea useful? Is there a financial asset that makes use of this idea
    Question 14    When an annuity begins several time periods into the future, how do we calculate its present value today? Describee the procedure in a few words.
    Problems
    Problem 23    Charlie owes Joe $8,000 on a note that is due in five years with accumulated interest at 6%. Joe has an investment oppor
tunity now that he thinks will earn 8%. There's a chance however that it will earn as little as 4%. A bank has offered to discount the note at 14% and give Joe cash that he can invest today.
        a. How much ahead will Joe be if he takes the bank's offer and the investment does turn out to yield 18%.
        b. How much behind will he be if the investment turns out to yield only 4%?
    Problem 24    John Cleaver's grandfather died in 2015 and left him a trunk that had been locked in his attic for years. At the bottom of the trunk, John found a packet of 50 U.S. Savings Bonds that had never been cashed in. The bonds were purchased for $11.50 each in 1923 and pay 3% interest as long as they're held.
        a. How much were the bonds worth in 2015?
        b. How much would they have been worth if they paid interest at a rate more like that paid during the 1970s and 80s, say 7%?
        c. Comment on the difference between the answers to parts (a) and (b).
    Problem 26    The Wintergreens are planning ahead for their son's education. He's eight now and will start college in 10 years. How much will they have to set aside each year to have $65,000 when he starts if the interest rate is 7%.
    Problem 29    Blanchard Inc. would like to borrow $12 million for 20 years through a bond issue but has been having difficulty finding lenders willing to advance that much.The firm's investment banker has advised the CFO that potential bond buyers are not worried about Blanchard's ability to make the periodic interest payments on such a loan. However, they are concerned that it will have enough cash on hand to repay the loan when the principal is due in 20 years. The banker has suggested that a sinking fund might allay their fears; he also said funds deposited in such accounts can be expected to earn about 6% annually.
        How much would Blanchard have to deposit each year if the fund is started
        a. When the bonds are issued
        b. 5 years after the bonds are issued
        c. 10 years after the bonds are issued
        d. 15 years after the bonds are issued
    Problem 37    Ryan and Laurie Middleton just purchased their first home with a traditional 6%, 30-year mortgage loan of $178,000
        a. How much is their monthly payment
        b. How much interest will they pay in their first month
        c.If they make all their payments on time over the 30-year period, how much interest will they have paid ?
        d. If Ryan and Laurie decide to move after 7 years, what will the balance of their loan be at that time?
    Problem 44     Joe Ferro's uncle is going to give him $250 a month for the next two years starting today. If Joe banks every payment in an account paying 6% compounded monthly, how much will he have at the end of three years?
    Problem 52    Janet Elliott just turned 20 and received a gift of $20,000 from her rich uncle. Janet plans ahead and would like to retire on her 55th Birthday. She thinks she'll need to have about $2 million saved by that time in order to maintain her lavish lifestyle.
        She wants to make a payment at the end of each year until it reaches $2 million when she turns 55. Assume she can invest at 7% compounded annually, ignore the effect of taxes?
        a. How much will she have invest each year in order to achieve her objective?
        b. What percent of the $2 million will have been contributed by Janet (including the $20,000 she got from her uncle.)
    Problem 53    Merritt Manufacturing needs to accumulate $20 million to retire a bond issue that matures in 13 years. The firm's manufacturing division can contribute $100,000 per quarter to an account that will pay 8%, compounded quartlerly. How much will the remaining have to contribute every month to a seconf account that pays 6% compounded monthly in order to reach the $20 million goal?
    Problem 54    Carol Pasca just had her fifth birthday. As a birthday present, her uncle promised to contribute $300 per month to heer education fund until she turns 18 and starts college. Carol's parents estimate college will cost $2,500 per month for four years, but they don't think they will be able to save anything toward it for 8 years. How much will Carol's parents need to contribute to the fund each month starting on her 13th birthday to pay for her college education? Assume the fund earns 6% compounded monthly.
        Question 6
        Deferred payment term means that the situation where Seller/Service provider accepts the part payments in future rather than having the whole amount paid now. When we calculate the present value of the amount to be paid in future at a discounted rate then that paid amount will be less than the amount which will be paid today. So, it is more or less equivalent to a cash discount in which the seller allows a certain discount on the value of sales price.
        Question 13
        Capitalisation of the stream of earning in perpetuity will mean that the company is working upon the assumption that the company will be having the similar for cash flows and the company is also considering that it will have the similar growth rate and the cash flows because the company will be able to maintain higher stability in the overall performance so it is dependent upon The assumption of the company that company will not be getting affected by the economic scenario and it will be...
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