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Answer the following questions as detailed as possible: Question #1 – Time Value of Money Please...

Answer the following questions as detailed as possible:

Question #1 – Time Value of Money

Please give an example from your own personal or professional experiences (life/career) that involves the Time Value of Money.

The Time Value of Money defined as in Chapter 4 as: Present Value, Future Value, Present Value of an Annuity, Future Value of an Annuity, Amortization.

It can be one of these above or multiple.

Explain the example and how this/these money valuation tools fit into your example.

Please be thorough and specific.

Question #2 – Debt Valuation

Part I – How are corporate bond ratings determined? Why is there so much variation in the coupon rates and prices of various bonds?

Part II - Finally, why do some bonds sell for less that their face value, while others sells at a premium?

Question #3 – Stock Valuation & Risk

DOW DROPOUT - General Electric will drop out of the Dow industrials next week, a milestone in the decline of a company that once ranked among the mightiest of blue chips and was a pillar of the U.S. economy. It will be replaced by drugstore retailer Walgreens Boots Alliance, the latest sign of the rise of the global consumer economy and the post crisis boom in debt issuance that has fueled a global deal-making frenzy. The decision to drop GE, an original member of the Dow that has been a part of the 30-stock index continuously since 1907, marks the latest setback for a conglomerate that once was the most valuable U.S. company, but has been hit hard in recent years by the unraveling of its finance business and competitive problems. GE shares have tumbled 55% over the past 52 weeks, erasing more than $100 billion in wealth.

As an investor in General Electric, please give examples what the above means in relation to an investment? Let’s say you purchased 100 shares of General Electric common stock on January 1, 2002.

Question #4 – Risk Evaluation

Select a company from the Dow Jones Industrials Index and prepare a risk analysis.

You risk analysis should include minimally below:

Credit rating

Beta value

CAPM required return on equity investment

CAPM rates to use:

Risk Free Interest Rate = 2.85%

Market Risk Return = 8.25%

Homework Answers

Answer #1

1)

Time value of the money can be used in retirement planning.

The amount to be saved annually until the retirement so that it is sufficient to provide funds for expenses during the retirement period.

To calculate the annual amount to be saved, present value of total expenses is calculated at the time of retirement.

Then the savings should be such that the future value of saving at the retirement equals the present value of expenses after the retirement at calculated above depending on the rate of return earned during the period.

Thus time value of money helps in planning for the retirement.

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