Time Value of money
Time Value of money
Assume that you are nearing graduation and have applied for a job with a local bank. The bank’s evaluation process requires you to take an examination that covers several financial analysis techniques. The first section of the test addresses discounted cash flow analysis. See how you would do by answering the following questions.
a. Draw time-lines for
(1) a $100 lump sum cash flow at the end of Year 2,
(2) an ordinary annuity of $100 per year for 3 years, and
(3) an uneven cash flow stream of -$50, $100, $75, and $50 at the end of Years 0 through 3.
b. (1) What’s the future value of an initial $100 after 3 years if it is invested in an account paying 10% annual interest?
(2) What’s the present value of $100 to be received in 3 years if the appropriate interest rate is 10%?
c. We sometimes need to find out how long it will take a sum of money (or something else, such as earnings, population, or prices) to grow to some specified amount. For example, if a company’s sales are growing at a rate of 20% per year, how long will it take sales to double?
d. If you want an investment to double in 3 years, what interest rate must it earn?
e. What’s the difference between an ordinary annuity and an annuity due? What type of annuity is shown below? How would you change the time line to show the other type of annuity? 012 3
0 100100 100
f. (1). What’s the future value of a 3-year ordinary annuity of $100 if the appropriate interest rate is 10%?
(2). What’s the present value of the annuity?
(3). What would the future and present values be if the annuity were an annuity due?
g. What is the present value of the following uneven cash flow stream? The appropriate interest rate is 10%, compounded annually.
Period 01234
Cash 0100300300 -50
h. (1) Define the stated (quoted) or nominal rate INOM –50 as well as the periodic rate IPER
(2). Will the future value be larger or smaller if we compound an initial amount more often than annually—for example, every 6 months, or semiannually—holding the stated interest rate constant? Why?
(3). What is the future value of $100 after 5 years under 12% annual compounding? Semiannual compounding? Quarterly compounding? Monthly compounding? Daily compounding?
(4). What is the effective annual rate (EAR or EFF%)? What is the EFF% for a nominal rate of 12%, compounded semiannually? Compounded quarterly? Compounded monthly? Compounded daily?
i. Will the effective annual rate ever be equal to the nominal (quoted) rate?
Question 2: Comprehensive Ratio Analysis
Comprehensive ratio analysis The Jimenez Corporation’s forecasted 2020 financial statements follow, along with some industry average ratios. Calculate Jimenez’s 2020 forecasted ratios, compare them with the industry average data, and comment briefly on Jimenez’s projected strengths and weaknesses. Jimenez Corporation: Forecasted Balance Sheet as of December 31, 2020
Assets
Cash $72000 Accounts receivable 439000
Inventories894000
Total current assets Fixed assets Total assets Liabilities and Equity Accounts payable Notes payable Accruals Total current liabilities Long-term debt Common stock Retained earnings
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