Financial Management

1. After placing $8,000 in a savings account paying annual compound interest of 8%, calculate the amount that will accumulate if it is left for 8 years?

2. You have just introduced “must have” headphones for the iPod. Sales of the product are expected to be 20,000 units this year and are expected to increase by 16% annually in the future. What are the expected sales in each of the next three years? If the 20,000 units were expected to increase by 18% a year, what are the expected sales next year for this product?

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3. What is the present value of a perpetual stream of cash flow that pays $80,000 at the end of one year and grows at a rate of 5% indefinitely? The rate of interest used to discount the cash flows is 10%. What is the present value of the growing perpetuity?

4.What is the present value of a $650 perpetuity discounted back to the present at 10%? What is the present value of the perpetuity?


You are given three investment alternatives to analyze. The cash flows from these three investments are as follows:
Investment table

What is the present value of investments A, B, and C if the appropriate discount rate is 10%?

6. Syntex is considering an investment in one of two stocks. Given the information that follows, which investment is better based on the risk (the standard deviation) and return? Given the information in the table, what percent is the rate of return for Stock B?

Commont Stock A B Table

7. The common stock of Plaxo Enterprises had a market price of $9.45 on the day you purchased it just 1 year ago. During the past year, the stock paid a dividend of $1.43 and closed at a price of $11.66. What rate of return did you earn on your investment in Plaxo’s stock? The rate of return you earned on Plaxo’s stock is what percent?

8. Caswell Enterprises had the following end-of-year stock prices over the last five years and paid no dividends.


  • Calculate the average rate of return for each year from the above information.
  • What is the arithmetic average rate of return earned by investing in Caswell’s stock over this period?
  • What is the geometric average rate of return earned by investing in Caswell’s stock over this period?
  • Considering the beginning and ending stock prices for the five-year period are the same, which type of average rate of return best describes the annual rate of return earned over the period (arithmetic or geometric)?
  • The annual rate of return at the end of year 3 is what percent?

9.  On December 5, 2007, the common stock of Google, Inc. (GOOG) was trading at $698.51. One year later, the shares sold for $301.99. Google has never paid a common stock dividend. What rate of return would you have earned on your investment had you purchased the shares on December 5, 2007? The rate of return you would have earned is what percent?