1) If you have a loan with a 24% interest rate this past year and inflation was

Question

1) If you have a loan with a 24% interest rate this past year and inflation was 14%, what was the real rate of interest you paid on the loan using the approximation formula?

2)What is the effective annual interest rate on a 19% APR home equity loan that has quarterly payments?

3)If McDonald's Corp. had earnings of $4,986,320,000 in the last year, calculate the Price to Earnings ratio assuming the price per share is $54.7 and there are 1,126,600,000 shares outstanding. Choose the closest value.

4)A perpetuity of $50,000 per year beginning next year (year 1) offers a 10% interest rate. What is its present value?

5)What is the present value of the following payment stream, discounted at 18% annually: $10,000 in year 1, $20,000 in year 2, and $30,000 in year 3?

Explanation / Answer

1. real rate of interest = 24%-14% = 10%

2. effective annual interest rate = (1+19%/4)^4 -1 = 20.40%

3. Price to Earnings ratio = 54.7/(4,986,320,000/1,126,600,000 ) =$12.36

4. present value = 50,000/10%=$500000

5. present value =$10,000/1.18 + $20,000/1.18^2 + $30,000/1.18^3 =$41097.19

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