1. (3 points) As a principal in the consulting firm where Jose has worked for 20
ID: 1111085 • Letter: 1
Question
1. (3 points) As a principal in the consulting firm where Jose has worked for 20 years, he has accumulated 5000 shares of company stock. One year ago, each share of stock was worth $40. The company has offered to buy back his shares for $225,000. At what interest rate would the firm's offer be equivalent to the worth of the stock last year? 2. (3 points) If a company sets aside $1,000,000 now into a contingency fund, how much will the company have in 2 years, if it does not use any of the money and the account grows at a rate of 10% per year? 3. (4 points) During a recession, the price of goods and services goes down because of low demand. A company that makes Ethernet adapters is planning to expand its production facility at a cost of $1,000,000 one year from now. However, a contractor who needs work has offered to do the job for $790,000 if the company will do the expansion now instead of 1 year from now, if the interest rate is 15% per year, how much of a discount is the company getting?Explanation / Answer
(1)
Total Value of stock a year ago = 5,000 x $40 = $200,000
Interest rate (%) = [(Price offered / Total Value of stock a year ago) - 1] x 100
= [(225,000 / 200,000) - 1] x 100
= (1.125 - 1) x 100
= 0.125 x 100
= 12.5%
(2)
Future value ($) = Current value x (1 + Interest rate)Number of years
= 1,000,000 x (1.1)2
= 1,000,000 x 1.21
= 1,210,000
(3)
Present value of expansion cost ($) = Value of expansion cost after 1 year / (1 + Interest rate)
= 1,000,000 / (1 + 0.15)
= 1,000,000 / 1.15
= 869,565.22
Discount offered ($) = 869,565.22 - 790,000
= 79,565.22
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