Concept explainers
a)
To calculate: The
Introduction:
Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.
a)
Answer to Problem 16QP
A bond with a face value of $50 would double its value in 20 years if the rate of return is 3.53%.
Explanation of Solution
Given information:
Person X purchased a bond worth $50. He plans to hold it for 20 years until the value of the bond doubles.
The formula to calculate the rate of return:
Where,
“P” refers to the principal amount invested
“r” refers to the simple rate of interest
“t” refers to the number of years or periods of investment
“FV” refers to the
Compute the rate of return:
The present value of the bond is $50. He plans to invest for 20 years until the value of the bond doubles. Hence, the future value of the bond will be $100
Hence, the rate of return is 3.53% per year.
b)
To calculate: The future value of the bond.
Introduction:
The future value of money refers to the amount of dollars that an investment grows over a definite period at a particular rate of interest rate. In other words, it refers to the future value of present cash investments.
b)
Answer to Problem 16QP
The value of the bond in 2025 will be $50.5.
Explanation of Solution
Given information:
Person X will purchase a bond worth $50 in 2015. He plans to hold it until 2025 or for 10 years. The rate of interest on the bond is 0.10 percent per year.
The formula to calculate the future value:
Where,
“FV” refers to the future value or the current market value
“PV” refers to the present value
“r” refers to the simple rate of interest
“t” refers to the number of years or periods of investment
Compute the future value:
Hence, the future value of investment after 10 years is $50.5.
c)
To calculate: The rate of return.
Introduction:
Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.
c)
Answer to Problem 16QP
The bond has to fetch a return of 7.18% per year to double its value in 2035.
Explanation of Solution
Given information:
Person X purchased a bond worth $50 in 2015. He plans to hold it until 2025 or for 10 years. The rate of interest on the bond is 0.10 percent per year. The future value of this bond in 2025 will be $50.50 (Refer to Part (b) of the solution). Instead of cashing the bond at $50.50, he plans to reinvest the
The formula to calculate the rate of return:
Where,
“P” refers to the principal amount invested
“r” refers to the simple rate of interest
“t” refers to the number of years or periods of investment
“FV” refers to the future value or the current market value
Compute the rate of return:
The present value of the bond is $50.50 in 2025. He plans to invest for 10 years until the value of the bond doubles in 2035. Hence, the future value of the bond will be $101
Hence, the bond has to fetch a return of 7.18% per year to double its value in 2033.
Want to see more full solutions like this?
Chapter 4 Solutions
ESSENTIALS CORPORATE FINANCE + CNCT A.
- 3-7. (Working with an income statement and balance sheet) Prepare a balance sheet and income statement for Kronlokken Company from the following scrambled list of items. a. Prepare a common-sized income statement and a common-sized balance sheet. Interpret your findings. Depreciation expense $66,000 Cash 225,000 Long-term debt 334,000 Sales 573,000 Accounts payable 102,000 General and administrative expense 79,000 Buildings and equipment 895,000 Notes payable 75,000 Accounts receivable 153,000 Interest expense 4,750 Accrued expenses 7,900 Common stock 289,000 Cost of goods sold 297,000 Inventory 99,300 Taxes 50,500 Accumulated depreciation 263,000 Prepaid expenses 14,500 Taxes payable 53,000 Retained earnings 262,900 ||arrow_forwardx3-3. (Preparing an income statement) Prepare an income statement and a common- sized income statement from the following information. MyLab Sales Cost of goods sold General and administrative expenses Depreciation expenses Interest expense Income taxes $525,000 200,000 62,000 8,000 12,000 97,200arrow_forward3-9. (Working with a statement of cash flows) Given the following information, prepare LO3 a statement of cash flows. Increase in accounts receivable Increase in inventories Operating income Interest expense Increase in accounts payable Dividends $25 30 75 25 25 15 20 Increase in net fixed assets 23 Depreciation expense Income taxes 12 17 Beginning cash 20 Increase in common stockarrow_forward
- 3-4. (Preparing a balance sheet) Prepare a balance sheet from the following informa- LO2 tion. What is the net working capital and debt ratio? Cash $50,000 Account receivables 42,700 Accounts payable 23,000 Short-term notes payable 10,500 Inventories 40,000 Gross fixed assets 1,280,000 Other current assets 5,000 Long-term debt 200,000 Common stock 490,000 Other assets 15,000 Accumulated depreciation 312,000 Retained earnings ? MyLabarrow_forwardPlease help with questions.arrow_forwardWhat is the research design? How does it work? What are the differences between Research design and Case Study research?arrow_forward
- How to judge the quality of research designs? Could you help explain and give examples?arrow_forwardConsider a situation involving determining right and wrong. Do you believe utilitarianism provides a more objective viewpoint than moral rights in this context? Why or why not? How about when comparing utilitarianism to principles of justice? Share your thoughts. Reflect on this statement: "Every principle of distributive justice, whether that of the egalitarian, the capitalist, the socialist, the libertarian, or Rawls, in the end is illegitimately advocating some type of equality." Do you agree or disagree with this assertion? Why might someone claim this, and how would you respond?arrow_forwardI need help checking my spreadsheet. Q: Assume that Temp Force’s dividend is expected to experience supernormal growth of 73%from Year 0 to Year 1, 47% from Year 1 to Year 2, 32% from Year 2 to Year 3 and 21% from year3 to year 4. After Year 4, dividends will grow at a constant rate of 2.75%. What is the stock’sintrinsic value under these conditions? What are the expected dividend yield and capital gainsyield during the first year? What are the expected dividend yield and capital gains yield duringthe fifth year (from Year 4 to Year 5)?arrow_forward
- what are the five components of case study design? Please help explain with examplesarrow_forwardCommissions are usually charged when a right is exercised. a warrant is exercised. a right is sold. all of the above will have commissions A and B are correct, C is not correctarrow_forwardWhat is Exploratory Research Case Study? What is the main purpose of Exploratory Research?arrow_forward
Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT