FINC302 – Francisco

Exam #4 – Part C

OPEN BOOK, Essay Problems

Essay problems to be completed in Excel and turned in via Moodle.
4 Questions; 5 points each
Due: November 17 at Midnight
1. You wish to retire in 14 years, at which time you want to have accumulated enough money
to receive an annual annuity of $17,000 for 19 years after retirement. During the period
before retirement you can earn 8 percent annually, while after retirement you can earn 10
percent on your money.
What annual contributions to the retirement fund will allow you to receive the $17,000
annuity?

2. Les Moore retired as president of Goodman Snack Foods Company but is currently on a
consulting contract for $35,000 per year for the next 10 years.
a. If Mr. Moore’s opportunity cost (potential return) is 10 percent, what is the present
value of his consulting contract?
b. Assuming Mr. Moore will not retire for two more years and will not start to receive
his 10 payments until the end of the third year, what would be the value of his
deferred annuity?

3. Del Monty will receive the following payments at the end of the next three years: $2,000,
$3,500, and $4,500. Then, from the end of the 4th through the end of the 10th year, he will
receive an annuity of $5,000 per year. At a discount rate of 9 percent, what is the present
value of all three future benefits?

4. Katie Pairy Fruits Inc. has a $1,000, 20-year bond outstanding with a nominal yield of 15
percent (coupon equals 15% × $1,000 = $150 per year). Assume that the current market-
required interest rate on similar bonds is now only 12 percent.
a. Compute the current price of the bond.
b. Find the present value of 3 percent × $1,000 (or $30) for 20 years at 12 percent. The
$30 is assumed to be an annual payment. Add this value to $1,000.
c. Explain why the answers in parts a and b are basically the same. (There is a slight
difference due to rounding in the tables.)