I am going through the practice problems for Reading 5 (Level 1 Volume 1, Page 294), and it seems that the book is pretty inconsistent in how it treats time periods. Based on the solutions, it is hard to decipher the number of periods involved in the problems. Is my experience simply an anomaly? Or maybe I am just over-engineering things? For example, look at problems 20 and 21. In problem 20, you’d think the number of periods is 5, however, the book’s solution assumes N=4. With that same analogy, you’d think the number of periods in problem 21 should be 4, however, N=5. Am I missing anything here? Any sane explanation/feedback is welcome!
hiya. I don’t have my books in front of me but as a general rule, it really helps to draw a timeline. depending on the language, it can be confusing. eg “payments beginning at the start of the 5th year” – these payments are actually beginning after 4 completed years therefore you would discount it by 4 periods to work out present value. hope that makes sense.
In Q 21, ‘Next-five year period’ clearly implies 5 time periods. Say it is end of 2006 right now then 5 time periods are - 2007, 2008, 2009, 2010 till end of 2011… In Q 20, You need to find the rate of growth of EPS, from 4 to 7. 4 is the EPS at the end of period 1. It is your base value. It compounds over next 4 periods to give you a value of 7. Hence you use n = 4 in this question.
Thanks for the clarification, guys. It helped. I just wanted to make sure that these problems can, in fact, be confusing :).