Marko, Inc. is considering the purchase of ABC Co. Marko believes that ABC Co. c
ID: 2640320 • Letter: M
Question
Marko, Inc. is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,900, $10,900, and $17,100 over the next three years, respectively. After that time, they feel the business will be worthless. Marko has determined that a rate of return of 13 percent is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.? You are paying an effective annual rate of 14.10 percent on your credit card. The interest is compounded monthly. What is the annual percentage rate on your account? The Good Life Insurance Co. wants to sell you an annuity which will pay you $730 per quarter for 25 years. You want to earn a minimum rate of return of 5.8 percent. What is the most you are willing to pay as a lump sum today to buy this annuity? Mr. Miser loans money at an annual rate of 18 percent. Interest is compounded daily. What is the actual rate Mr. Miser is charging on his loans?Explanation / Answer
1) PV = (5900/1.13)+(10900/1.13^2)+(17100/1.13^3) = $25,608.7
2) EAR = (1+APR/n)^n-1
1.141 = (1+APR/12)^12
1.141^(1/12) = (1+APR/12)
1.0110527-1 = APR/12
APR = 13.26%
3) Quarterly rate = 5.8/4 = 1.45%
PV = 730*PVIFA(1.45%,25*4) = 730*52.6189 = $38411.83
4) 1+EAR = (1+.18/365)^365 = 1.19716
EAR = 19.72%