Financial Markets and Valuation - Tutorial 2: SOLUTIONS. Bonds, Stock Valuation & Capital Budgeting

Size: px
Start display at page:

Download "Financial Markets and Valuation - Tutorial 2: SOLUTIONS. Bonds, Stock Valuation & Capital Budgeting"

Transcription

1 Financial Markets and Valuation - Tutorial : SOLUTIONS Bonds, Stock Valuation & Capital Budgeting (*) denotes those problems to be covered in detail during the tutorial session Bonds Problem. (Ross, Westerfield & Jaffe) Consider a bond, which pays a $80 coupon annually and has a face value of $,000. Calculate the yield to maturity if the bond has a. 0 years remaining to maturity and it is sold at $,00. b. 0 years remaining to maturity and it is sold at $950. a. Since the bond sells at a premium, its yield is less than the coupon rate of 8%. PV =,00 <=> (80/y) * [ - /((y)^0)],000/[(y)^0] =,00 <=> y = 6.% b. Since the bond sells at a discount, its yield exceeds the coupon rate of 8%. PV = 950 <=> (80/y) * [ - /((y)^0)],000/[(y)^0] = 950 <=> y = 8.77% (*) Problem. (Ross, Westerfield & Jaffe) Available are three zero-coupon, $,000 face value bonds. All of these bonds are initially priced using an -percent interest rate. Bond A matures one year from today, bond B matures five years from today, and bond C matures 0 years from today. a. What is the current price of each bond? b. If the market rate of interest rises to 4%, what are the prices of these bonds? c. Which bond experienced the greatest percentage change in prices? a. PV (A, %) =,000/(0.) = PV (B, %) =,000/[(0.)^5] = PV (C, %) =,000/[(0.)^0] = 35.8 b. PV (A, 4%) =,000/(0.4) = => % change in A = ( )/900.9 = -.63% PV (B, 4%) =,000/[(0.4)^5] = => % change in B = ( )/ = -.48% PV (C, 4%) =,000/[(0.4)^0] = => % change in C = ( )/35.8 = -3.4% c. Bond C FMV/Tutorial Solutions/Sept.-Oct. 006

2 Problem 3. (Brealey and Myers) An 8-percent five-year bond yields 6%. a. If the yield remains unchanged, what will its price be one year hence? Assume annual coupon payments. b. What is the total return to an investor who held the bond over this year? We will find the price in percentages (the same as when assuming that the face value is $). a. Price today = 0.08 * A (5 years, 6%) / (.06)^5 = 0.08 * = =.0843 = 08.43% Price in one year = 0.08 * A(4 years, 6%) /(.06)^4 = 0.08 * = =.0693 = 06.93% b. Total annual return = (coupon plus difference in prices) / price today = (8% 06.93% %) / 08.43% = 6.5% / 08.43% = 6% (*) Problem 4. (Ross, Westerfield & Jaffe) The one-year spot rate equals 0 percent and the two-year spot rate equals 8 percent. a. What should a 5-percent coupon two-year bond cost? b. What is the forward rate expected over year? a. P = $50 /.0 $,050 / (.08) = $45.45 $900. = $ b. ( r )( ƒ ) = ( r ) (.0 ) ( ƒ ) = (.08 ) ƒ = (*) Problem 5. Your investment bank has just supplied you with the following term structure of spot rates (all annualized effective rates): Maturity Rate 3 months 3.5% 6 months 4% months 5% 8 months 5% 4 months 5% FMV/Tutorial Solutions/Sept.-Oct. 006

3 a. One broker calls to convince you to buy a bond with 8 months to maturity and face value of 000 that pays a semiannual coupon (stated rate) of 3%. He says he will sell you the bond for 00. Should you buy the bond? (Assume that the bond has just paid a coupon and ignore taxes). b. If market expectations about future interest rates are correct, at what price will the bond sell year from now? a. Coupon = 3%,000 = 30 (annual) Semiannual Coupon = 30 / = 5 (semiannual) PV =.5 = r r r ( ) ( ) ( ) ( ) ( 0.05) ( 0.05) 0,6m 0,m 0,8m 5.5 = The price at which the broker wants to sell is too expensive. You shouldn t buy the bond. NOTE: The result was obvious, because a bond that pays a coupon of 3% when all market interest rates are above 3% must sell below par. Since the broker was asking a price above par, you shouldn t buy the bond. b. One year from now, the bond will have 6 months to maturity. The only payment left is the last coupon and the face value. If market expectations are correct, the 6-month rate prevailing one year from now equals today s forward rate between months and 8 months.,5.5 ( r ) = ( r ) ( f ) ( 0.05) = ( 0.05) ( f ) f = 0,8m 0,m m,8m m,8m m, 8m NOTE: This was again obvious! If the term structure is flat after months and the market expectations theory holds, the forward term structure is also constant. PV = 05 ( 0.05) = FMV/Tutorial Solutions/Sept.-Oct

4 Stock Valuation Problem 6. (Ross, Westerfield & Jaffe) Suppose that a shareholder has just paid $50 per share for XYZ Company Stock. The stock will pay a dividend of $ per share in the upcoming year. This dividend is expected to grow at an annual rate of 0% for the indefinite future. The shareholder felt that she paid the fair price for the stock, given her assessment of XYZ s risks. What is the annual required rate of return of this shareholder? In this problem, you are given the current share price at $50. Dividends at t = is expected to be $, and growing indefinitely at 0% p.a. To find the annual required rate of return, we set up the solution as: Div Ρ = ( r g) 50 = 50 (r 0.) = r = 0.0 = 4% r 50 ( 0.) (*) Problem 7. (Ross, Westerfield & Jaffe) Brown, Inc. has just paid a $3 dividend per share of the common stock. The stock is currently being sold at $40. Investors expect that Brown s dividend will grow at a constant rate indefinitely. What growth rate is expected by investors if they require a 8% return on the stock? In this problem, we are given the current dividend (..just paid ) at t = 0 of $3 per share, and we expect the dividend to grow at a constant rate indefinitely. Therefore, we apply the constant growth model. The t= dividends are D = D ( g) = 3 ( g) I O P o Div at t = D0( g) = = ( r g) ( r g) 3 ( g) 40 = 40 ( 0.08 g ) = 3 ( g) ( 0.08 g) and then solving for g, g = 0.47% FMV/Tutorial Solutions/Sept.-Oct

5 (*) Problem 8. (Ross, Westerfield & Jaffe) Whizzkids, Inc., is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 8% during the next two years, 5% in the third year, and at a constant rate of 6% thereafter. Whizzkids last dividend, which has just been paid, was $.5. If the required rate of return on the stock is %, what is the price of the stock today? You are asked to compute the share price of a company that is expected to have stages of growth: an initial high growth period of about /3 years and a subsequent constant growth thereafter $.5 (.8) $.5 (.8) $.5(.8) (.5) Ρ O = 3. (.) (.).5 (.8) (.5)(.06) ( ) = $ (.) Problem 9. Allen Inc. is expected to pay an equal amount of dividends at the end of the first two years. Thereafter the dividend will grow at a constant rate of 4% indefinitely. The stock is currently traded at $30. What is the expected dividend per share for the next year if the required rate of return is %? D = D and a growth rate g = 0.04 thereafter r = 0. Po = $30. Hence, we can set up the following equation: 30 = D. D (.) D (.04) ( ) ( ). 30 = D (.05357) D = $.49 (*) Problem 0. (Ross, Westerfield & Jaffe) California Electronics, Inc., expects to earn $00 million per year in perpetuity if it does not undertake any new projects. The firm has an opportunity that requires an investment of $5 million today and $5 million in one year. The new investment will begin to generate additional annual earnings of $0 million two years from today in perpetuity. The firm has 0 million shares of common stock outstanding, and the required rate of return on the common stock is 5 percent. (a) What is the price of a share of the stock if the firm does not undertake the new project? (b) What is the value of the growth opportunities resulting from the new project? FMV/Tutorial Solutions/Sept.-Oct

6 (c) What is the price of a share of the stock if the firm undertakes the new project? Solution (a) The present value (PV) of the current earnings stream can be obtained using the perpetuity formula: CF/r. Then simply divide this PV by the number of shares outstanding to get the price per share. This implies that PV = $00/() = $ million Price per share = /0 = $33.33 (b) The cash flows from the new project can be depicted as: Time (Years) 0 to infinity Cash flows The NPV of the project is simply: NPV 5 0 = 5 = $38. (.5).5 6 million (c) The new share price can be obtained by adding the NPV of the new project to the firm s current PV and then dividing by the shares outstanding. This will be equal to: New Share Price = ( )/0 = $35.6 Capital Budgeting (*) Problem. (Ross, Westerfield & Jaffe) Dickinson Brothers, Inc., is considering investing in a machine to produce computer keyboards. The price of the machine is $400,000 and its economic life is 5 years. The machine is fully depreciated by the straight-line method. The machine will produce 0,000 units of keyboards each year. The price of the keyboard is $40 in the first year, and it will increase at 5% per year. The production costs per unit of the keyboard is $0 in the first year, and it will increase at 0% per year. Corporate tax rate for the company is 34%. If the appropriate discount rate is 5%, what is the NPV of the investment? FMV/Tutorial Solutions/Sept.-Oct

7 $400,000 0 Straight Line Depreciations (5 yr life) per year = = $80, t Sales Production Costs 0,000 units x $40 each 0,000 units x $0 each = $400,000 = $00,000 $400,000 x.05 $00,000 x.0 = $40,000 = $0,000 3 $400,000 x.05 $00,000 x.0 = $44,000 = $4,000 4 $400,000 x.05 3 $00,000 x.0 3 = 463,050 = $66,00 5 $400,000 x.05 4 $00,000 x.0 4 = $486,03 = $9, Sales Revenues $400,000 $40,000 $44,000 $463,050 $486,03 Production Costs ($00,000) ($0,000) ($4,000) ($66,00) ($9,80) Depreciation ($ 80,000) ($ 80,000) ($ 80,000) ($ 80,000) ($ 80,000) EBIT $0,000 $0,000 $9,000 $6,850 $3,383 Taxes (34%) -40,800-40,800-40,460-39,389-38,550 NOPLAT $ 79,00 $ 79,00 $ 78,540 $ 77,46 $ 74,833 Add back: Depreciation 80,000 80,000 80,000 80,000 80,000 CAPEX ($400,000) Changes in NWC Free Cash Flows ($400,000) $59,00 $59,00 $58,540 $57,46 $54,833 r = 5% NPV = $ 400,000 $59,00 $59,00 $58, $57,46 $54,833 = = - $400,000 $38,435 $0,378 $04,43 $89,834 $76,979 = $9,869 FMV/Tutorial Solutions/Sept.-Oct

Financial Markets and Valuation - Tutorial 1: SOLUTIONS. Present and Future Values, Annuities and Perpetuities

Financial Markets and Valuation - Tutorial 1: SOLUTIONS. Present and Future Values, Annuities and Perpetuities Financial Markets and Valuation - Tutorial 1: SOLUTIONS Present and Future Values, Annuities and Perpetuities (*) denotes those problems to be covered in detail during the tutorial session (*) Problem

More information

CHAPTER 5 HOW TO VALUE STOCKS AND BONDS

CHAPTER 5 HOW TO VALUE STOCKS AND BONDS CHAPTER 5 HOW TO VALUE STOCKS AND BONDS Answers to Concepts Review and Critical Thinking Questions 1. Bond issuers look at outstanding bonds of similar maturity and risk. The yields on such bonds are used

More information

Practice Questions for Midterm II

Practice Questions for Midterm II Finance 333 Investments Practice Questions for Midterm II Winter 2004 Professor Yan 1. The market portfolio has a beta of a. 0. *b. 1. c. -1. d. 0.5. By definition, the beta of the market portfolio is

More information

SOLUTIONS. Practice questions. Multiple Choice

SOLUTIONS. Practice questions. Multiple Choice Practice questions Multiple Choice 1. XYZ has $25,000 of debt outstanding and a book value of equity of $25,000. The company has 10,000 shares outstanding and a stock price of $10. If the unlevered beta

More information

SAMPLE FACT EXAM (You must score 70% to successfully clear FACT)

SAMPLE FACT EXAM (You must score 70% to successfully clear FACT) SAMPLE FACT EXAM (You must score 70% to successfully clear FACT) 1. What is the present value (PV) of $100,000 received five years from now, assuming the interest rate is 8% per year? a. $600,000.00 b.

More information

Primary Market - Place where the sale of new stock first occurs. Initial Public Offering (IPO) - First offering of stock to the general public.

Primary Market - Place where the sale of new stock first occurs. Initial Public Offering (IPO) - First offering of stock to the general public. Stock Valuation Primary Market - Place where the sale of new stock first occurs. Initial Public Offering (IPO) - First offering of stock to the general public. Seasoned Issue - Sale of new shares by a

More information

Chapter 8. Step 2: Find prices of the bonds today: n i PV FV PMT Result Coupon = 4% 29.5 5? 100 4 84.74 Zero coupon 29.5 5? 100 0 23.

Chapter 8. Step 2: Find prices of the bonds today: n i PV FV PMT Result Coupon = 4% 29.5 5? 100 4 84.74 Zero coupon 29.5 5? 100 0 23. Chapter 8 Bond Valuation with a Flat Term Structure 1. Suppose you want to know the price of a 10-year 7% coupon Treasury bond that pays interest annually. a. You have been told that the yield to maturity

More information

I. Readings and Suggested Practice Problems. II. Risks Associated with Default-Free Bonds

I. Readings and Suggested Practice Problems. II. Risks Associated with Default-Free Bonds Prof. Alex Shapiro Lecture Notes 13 Bond Portfolio Management I. Readings and Suggested Practice Problems II. Risks Associated with Default-Free Bonds III. Duration: Details and Examples IV. Immunization

More information

CHAPTER 7 INTEREST RATES AND BOND VALUATION

CHAPTER 7 INTEREST RATES AND BOND VALUATION CHAPTER 7 INTEREST RATES AND BOND VALUATION Answers to Concepts Review and Critical Thinking Questions 1. No. As interest rates fluctuate, the value of a Treasury security will fluctuate. Long-term Treasury

More information

Review Solutions FV = 4000*(1+.08/4) 5 = $4416.32

Review Solutions FV = 4000*(1+.08/4) 5 = $4416.32 Review Solutions 1. Planning to use the money to finish your last year in school, you deposit $4,000 into a savings account with a quoted annual interest rate (APR) of 8% and quarterly compounding. Fifteen

More information

CHAPTER 8 INTEREST RATES AND BOND VALUATION

CHAPTER 8 INTEREST RATES AND BOND VALUATION CHAPTER 8 INTEREST RATES AND BOND VALUATION Solutions to Questions and Problems 1. The price of a pure discount (zero coupon) bond is the present value of the par value. Remember, even though there are

More information

Finance 445 Practice Exam Chapters 1, 2, 5, and part of Chapter 6. Part One. Multiple Choice Questions.

Finance 445 Practice Exam Chapters 1, 2, 5, and part of Chapter 6. Part One. Multiple Choice Questions. Finance 445 Practice Exam Chapters 1, 2, 5, and part of Chapter 6 Part One. Multiple Choice Questions. 1. Similar to the example given in class, assume that a corporation has $500 of cash revenue and $300

More information

CHAPTER 12 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING

CHAPTER 12 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING CHAPTER 12 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING Answers to Concepts Review and Critical Thinking Questions 1. No. The cost of capital depends on the risk of the project, not the source of the money.

More information

PERPETUITIES NARRATIVE SCRIPT 2004 SOUTH-WESTERN, A THOMSON BUSINESS

PERPETUITIES NARRATIVE SCRIPT 2004 SOUTH-WESTERN, A THOMSON BUSINESS NARRATIVE SCRIPT 2004 SOUTH-WESTERN, A THOMSON BUSINESS NARRATIVE SCRIPT: SLIDE 2 A good understanding of the time value of money is crucial for anybody who wants to deal in financial markets. It does

More information

1. Present Value. 2. Bonds. 3. Stocks

1. Present Value. 2. Bonds. 3. Stocks Stocks and Bonds 1. Present Value 2. Bonds 3. Stocks 1 Present Value = today s value of income at a future date Income at one future date value today of X dollars in one year V t = X t+1 (1 + i t ) where

More information

GESTÃO FINANCEIRA II PROBLEM SET 2 - SOLUTIONS

GESTÃO FINANCEIRA II PROBLEM SET 2 - SOLUTIONS GESTÃO FINANCEIRA II PROBLEM SET - SOLUTIONS (FROM BERK AND DEMARZO S CORPORATE FINANCE ) LICENCIATURA UNDERGRADUATE COURSE 1 ST SEMESTER 010-011 Yield to Maturity Chapter 8 Valuing Bonds 8-3. The following

More information

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES 1. Expectations hypothesis. The yields on long-term bonds are geometric averages of present and expected future short rates. An upward sloping curve is

More information

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES CHAPTER : THE TERM STRUCTURE OF INTEREST RATES CHAPTER : THE TERM STRUCTURE OF INTEREST RATES PROBLEM SETS.. In general, the forward rate can be viewed as the sum of the market s expectation of the future

More information

Which projects should the corporation undertake

Which projects should the corporation undertake Which projects should the corporation undertake Investment criteria 1. Investment into a new project generates a flow of cash and, therefore, a standard DPV rule should be the first choice under consideration.

More information

DUKE UNIVERSITY Fuqua School of Business. FINANCE 351 - CORPORATE FINANCE Problem Set #7 Prof. Simon Gervais Fall 2011 Term 2.

DUKE UNIVERSITY Fuqua School of Business. FINANCE 351 - CORPORATE FINANCE Problem Set #7 Prof. Simon Gervais Fall 2011 Term 2. DUKE UNIVERSITY Fuqua School of Business FINANCE 351 - CORPORATE FINANCE Problem Set #7 Prof. Simon Gervais Fall 2011 Term 2 Questions 1. Suppose the corporate tax rate is 40%, and investors pay a tax

More information

Exercise 6 Find the annual interest rate if the amount after 6 years is 3 times bigger than the initial investment (3 cases).

Exercise 6 Find the annual interest rate if the amount after 6 years is 3 times bigger than the initial investment (3 cases). Exercise 1 At what rate of simple interest will $500 accumulate to $615 in 2.5 years? In how many years will $500 accumulate to $630 at 7.8% simple interest? (9,2%,3 1 3 years) Exercise 2 It is known that

More information

DUKE UNIVERSITY Fuqua School of Business. FINANCE 351 - CORPORATE FINANCE Problem Set #1 Prof. Simon Gervais Fall 2011 Term 2.

DUKE UNIVERSITY Fuqua School of Business. FINANCE 351 - CORPORATE FINANCE Problem Set #1 Prof. Simon Gervais Fall 2011 Term 2. DUKE UNIVERSITY Fuqua School of Business FINANCE 351 - CORPORATE FINANCE Problem Set #1 Prof. Simon Gervais Fall 2011 Term 2 Questions 1. Two years ago, you put $20,000 dollars in a savings account earning

More information

The Term Structure of Interest Rates CHAPTER 13

The Term Structure of Interest Rates CHAPTER 13 The Term Structure of Interest Rates CHAPTER 13 Chapter Summary Objective: To explore the pattern of interest rates for different-term assets. The term structure under certainty Forward rates Theories

More information

Bonds, Preferred Stock, and Common Stock

Bonds, Preferred Stock, and Common Stock Bonds, Preferred Stock, and Common Stock I. Bonds 1. An investor has a required rate of return of 4% on a 1-year discount bond with a $100 face value. What is the most the investor would pay for 2. An

More information

Analysis of Deterministic Cash Flows and the Term Structure of Interest Rates

Analysis of Deterministic Cash Flows and the Term Structure of Interest Rates Analysis of Deterministic Cash Flows and the Term Structure of Interest Rates Cash Flow Financial transactions and investment opportunities are described by cash flows they generate. Cash flow: payment

More information

TIP If you do not understand something,

TIP If you do not understand something, Valuing common stocks Application of the DCF approach TIP If you do not understand something, ask me! The plan of the lecture Review what we have accomplished in the last lecture Some terms about stocks

More information

MBA 8130 FOUNDATIONS OF CORPORATION FINANCE FINAL EXAM VERSION A

MBA 8130 FOUNDATIONS OF CORPORATION FINANCE FINAL EXAM VERSION A MBA 8130 FOUNDATIONS OF CORPORATION FINANCE FINAL EXAM VERSION A Fall Semester 2004 Name: Class: Day/Time/Instructor:. Read the following directions very carefully. Failure to follow these directions will

More information

Chapter 11. Bond Pricing - 1. Bond Valuation: Part I. Several Assumptions: To simplify the analysis, we make the following assumptions.

Chapter 11. Bond Pricing - 1. Bond Valuation: Part I. Several Assumptions: To simplify the analysis, we make the following assumptions. Bond Pricing - 1 Chapter 11 Several Assumptions: To simplify the analysis, we make the following assumptions. 1. The coupon payments are made every six months. 2. The next coupon payment for the bond is

More information

CORPORATE FINANCE REVIEW FOR THIRD QUIZ. Aswath Damodaran

CORPORATE FINANCE REVIEW FOR THIRD QUIZ. Aswath Damodaran CORPORATE FINANCE REVIEW FOR THIRD QUIZ Aswath Damodaran Basic Skills Needed What is the trade off involved in the capital structure choice? Can you estimate the optimal debt ratio for a firm using the

More information

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES Chapter - The Term Structure of Interest Rates CHAPTER : THE TERM STRUCTURE OF INTEREST RATES PROBLEM SETS.. In general, the forward rate can be viewed as the sum of the market s expectation of the future

More information

Bond Valuation. What is a bond?

Bond Valuation. What is a bond? Lecture: III 1 What is a bond? Bond Valuation When a corporation wishes to borrow money from the public on a long-term basis, it usually does so by issuing or selling debt securities called bonds. A bond

More information

ENTREPRENEURIAL FINANCE: Strategy Valuation and Deal Structure

ENTREPRENEURIAL FINANCE: Strategy Valuation and Deal Structure ENTREPRENEURIAL FINANCE: Strategy Valuation and Deal Structure Chapter 9 Valuation Questions and Problems 1. You are considering purchasing shares of DeltaCad Inc. for $40/share. Your analysis of the company

More information

MGT201 Financial Management Formulas Lecture 1 to 22

MGT201 Financial Management Formulas Lecture 1 to 22 MGT201 Financial Management Formulas Lecture 1 to 22 http://vustudents.ning.com 1. Fundamental Accounting Equation and Double Entry Principle. Assets +Expense = Liabilities + Shareholders Equity + Revenue

More information

CHAPTER15. Long-Term Liabilities. Acct202 15-1

CHAPTER15. Long-Term Liabilities. Acct202 15-1 CHAPTER15 Long-Term Liabilities Acct202 15-1 15-2 PreviewofCHAPTER15 Bond Basics Bonds are a form of interest-bearing notes payable. Three advantages over common stock: 1. Stockholder control is not affected.

More information

Practice Set #2 and Solutions.

Practice Set #2 and Solutions. FIN-672 Securities Analysis & Portfolio Management Professor Michel A. Robe Practice Set #2 and Solutions. What to do with this practice set? To help MBA students prepare for the assignment and the exams,

More information

MBA Finance Part-Time Present Value

MBA Finance Part-Time Present Value MBA Finance Part-Time Present Value Professor Hugues Pirotte Spéder Solvay Business School Université Libre de Bruxelles Fall 2002 1 1 Present Value Objectives for this session : 1. Introduce present value

More information

ILLUSTRATING SPOT AND FORWARD INTEREST RATES Learning Curve August 2003

ILLUSTRATING SPOT AND FORWARD INTEREST RATES Learning Curve August 2003 ILLUSTRATING SPOT AND FORWARD INTEREST RATES Learning Curve August 003 Practitioners in the bond markets need to determine the true interest rate for any period or term to maturity, for a number of applications.

More information

Finance 2 for IBA (30J201) F.Feriozzi Regular exam December 15 th, 2010. Part One: Multiple-Choice Questions (45 points)

Finance 2 for IBA (30J201) F.Feriozzi Regular exam December 15 th, 2010. Part One: Multiple-Choice Questions (45 points) Finance 2 for IBA (30J201) F.Feriozzi Regular exam December 15 th, 2010 Question 1 Part One: Multiple-hoice Questions (45 points) Which of the following statements regarding the capital structure decision

More information

BUSINESS FINANCE (FIN 312) Spring 2009

BUSINESS FINANCE (FIN 312) Spring 2009 BUSINESS FINANCE (FIN 31) Spring 009 Assignment Instructions: please read carefully You can either do the assignment by yourself or work in a group of no more than two. You should show your work how to

More information

Click Here to Buy the Tutorial

Click Here to Buy the Tutorial FIN 534 Week 4 Quiz 3 (Str) Click Here to Buy the Tutorial http://www.tutorialoutlet.com/fin-534/fin-534-week-4-quiz-3- str/ For more course tutorials visit www.tutorialoutlet.com Which of the following

More information

1. What are the three types of business organizations? Define them

1. What are the three types of business organizations? Define them Written Exam Ticket 1 1. What is Finance? What do financial managers try to maximize, and what is their second objective? 2. How do you compare cash flows at different points in time? 3. Write the formulas

More information

How to Value Bonds and Stocks

How to Value Bonds and Stocks CHAPTER 5 How to Value Bonds and Stocks When the stock market closed on January 20, 2006, the common stock of McGraw-Hill, publisher of high-quality college textbooks, was going for $49.34 per share. On

More information

ANALYSIS OF FIXED INCOME SECURITIES

ANALYSIS OF FIXED INCOME SECURITIES ANALYSIS OF FIXED INCOME SECURITIES Valuation of Fixed Income Securities Page 1 VALUATION Valuation is the process of determining the fair value of a financial asset. The fair value of an asset is its

More information

Bond Valuation. Capital Budgeting and Corporate Objectives

Bond Valuation. Capital Budgeting and Corporate Objectives Bond Valuation Capital Budgeting and Corporate Objectives Professor Ron Kaniel Simon School of Business University of Rochester 1 Bond Valuation An Overview Introduction to bonds and bond markets» What

More information

Financial Markets and Valuation - Tutorial 6: SOLUTIONS. Capital Structure and Cost of Funds

Financial Markets and Valuation - Tutorial 6: SOLUTIONS. Capital Structure and Cost of Funds Financial Markets and Valuation - Tutorial 6: SOLUTIONS Capital Structure and Cost of Funds (*) denotes those problems to be covered in detail during the tutorial session (*) Problem 1. (Ross, Westerfield

More information

ECO 4368 Instructor: Saltuk Ozerturk. Bonds and Their Valuation

ECO 4368 Instructor: Saltuk Ozerturk. Bonds and Their Valuation ECO 4368 Instructor: Saltuk Ozerturk Bonds and Their Valuation A bond is a long term contract under which a borrower (the issuer) agrees to make payments of interest and principal on speci c dates, to

More information

Finance 2 for IBA (30J201) F.Feriozzi Resit exam June 14 th, 2011. Part One: Multiple-Choice Questions (45 points)

Finance 2 for IBA (30J201) F.Feriozzi Resit exam June 14 th, 2011. Part One: Multiple-Choice Questions (45 points) Question 1 Finance 2 for IBA (30J201) F.Feriozzi Resit exam June 14 th, 2011 Part One: Multiple-Choice Questions (45 points) Assume that financial markets are perfect and that the market value of a levered

More information

Chapter 3. Fixed Income Securities

Chapter 3. Fixed Income Securities IE 5441 1 Chapter 3. Fixed Income Securities IE 5441 2 Financial instruments: bills, notes, bonds, annuities, futures contracts, mortgages, options,...; assortments that are not real goods but they carry

More information

CIS September 2012 Exam Diet. Examination Paper 2.2: Corporate Finance Equity Valuation and Analysis Fixed Income Valuation and Analysis

CIS September 2012 Exam Diet. Examination Paper 2.2: Corporate Finance Equity Valuation and Analysis Fixed Income Valuation and Analysis CIS September 2012 Exam Diet Examination Paper 2.2: Corporate Finance Equity Valuation and Analysis Fixed Income Valuation and Analysis Corporate Finance (1 13) 1. Assume a firm issues N1 billion in debt

More information

Overview of Lecture 5 (part of Lecture 4 in Reader book)

Overview of Lecture 5 (part of Lecture 4 in Reader book) Overview of Lecture 5 (part of Lecture 4 in Reader book) Bond price listings and Yield to Maturity Treasury Bills Treasury Notes and Bonds Inflation, Real and Nominal Interest Rates M. Spiegel and R. Stanton,

More information

Bonds and the Term Structure of Interest Rates: Pricing, Yields, and (No) Arbitrage

Bonds and the Term Structure of Interest Rates: Pricing, Yields, and (No) Arbitrage Prof. Alex Shapiro Lecture Notes 12 Bonds and the Term Structure of Interest Rates: Pricing, Yields, and (No) Arbitrage I. Readings and Suggested Practice Problems II. Bonds Prices and Yields (Revisited)

More information

Sample Problems Chapter 10

Sample Problems Chapter 10 Sample Problems Chapter 10 Title: Cost of Debt 1. Costly Corporation plans a new issue of bonds with a par value of $1,000, a maturity of 28 years, and an annual coupon rate of 16.0%. Flotation costs associated

More information

Chapter 6 Valuing of Stocks and Equity Markets

Chapter 6 Valuing of Stocks and Equity Markets Chapter 6 Valuing of Stocks and Equity Markets MULTIPLE CHOICE 1. The first public sale of company stock to outside investors is called a/an a. seasoned equity offering. b. shareholders meeting. c. initial

More information

Chapter 4: Common Stocks. Chapter 5: Forwards and Futures

Chapter 4: Common Stocks. Chapter 5: Forwards and Futures 15.401 Part B Valuation Chapter 3: Fixed Income Securities Chapter 4: Common Stocks Chapter 5: Forwards and Futures Chapter 6: Options Lecture Notes Introduction 15.401 Part B Valuation We have learned

More information

FNCE 301, Financial Management H Guy Williams, 2006

FNCE 301, Financial Management H Guy Williams, 2006 Stock Valuation Stock characteristics Stocks are the other major traded security (stocks & bonds). Options are another traded security but not as big as these two. - Ownership Stockholders are the owner

More information

FNCE 301, Financial Management H Guy Williams, 2006

FNCE 301, Financial Management H Guy Williams, 2006 REVIEW We ve used the DCF method to find present value. We also know shortcut methods to solve these problems such as perpetuity present value = C/r. These tools allow us to value any cash flow including

More information

t = 1 2 3 1. Calculate the implied interest rates and graph the term structure of interest rates. t = 1 2 3 X t = 100 100 100 t = 1 2 3

t = 1 2 3 1. Calculate the implied interest rates and graph the term structure of interest rates. t = 1 2 3 X t = 100 100 100 t = 1 2 3 MØA 155 PROBLEM SET: Summarizing Exercise 1. Present Value [3] You are given the following prices P t today for receiving risk free payments t periods from now. t = 1 2 3 P t = 0.95 0.9 0.85 1. Calculate

More information

Review for Exam 1. Instructions: Please read carefully

Review for Exam 1. Instructions: Please read carefully Review for Exam 1 Instructions: Please read carefully The exam will have 20 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation

More information

Bond Valuation. FINANCE 350 Global Financial Management. Professor Alon Brav Fuqua School of Business Duke University. Bond Valuation: An Overview

Bond Valuation. FINANCE 350 Global Financial Management. Professor Alon Brav Fuqua School of Business Duke University. Bond Valuation: An Overview Bond Valuation FINANCE 350 Global Financial Management Professor Alon Brav Fuqua School of Business Duke University 1 Bond Valuation: An Overview Bond Markets What are they? How big? How important? Valuation

More information

Finance 3130 Corporate Finiance Sample Final Exam Spring 2012

Finance 3130 Corporate Finiance Sample Final Exam Spring 2012 Finance 3130 Corporate Finiance Sample Final Exam Spring 2012 True/False Indicate whether the statement is true or falsewith A for true and B for false. 1. Interest paid by a corporation is a tax deduction

More information

Corporate Finance: Final Exam

Corporate Finance: Final Exam Corporate Finance: Final Exam Answer all questions and show necessary work. Please be brief. This is an open books, open notes exam. For partial credit, when discounting, please show the discount rate

More information

Chapter 4 Valuing Bonds

Chapter 4 Valuing Bonds Chapter 4 Valuing Bonds MULTIPLE CHOICE 1. A 15 year, 8%, $1000 face value bond is currently trading at $958. The yield to maturity of this bond must be a. less than 8%. b. equal to 8%. c. greater than

More information

A) 1.8% B) 1.9% C) 2.0% D) 2.1% E) 2.2%

A) 1.8% B) 1.9% C) 2.0% D) 2.1% E) 2.2% 1 Exam FM Questions Practice Exam 1 1. Consider the following yield curve: Year Spot Rate 1 5.5% 2 5.0% 3 5.0% 4 4.5% 5 4.0% Find the four year forward rate. A) 1.8% B) 1.9% C) 2.0% D) 2.1% E) 2.2% 2.

More information

Yield to Maturity Outline and Suggested Reading

Yield to Maturity Outline and Suggested Reading Yield to Maturity Outline Outline and Suggested Reading Yield to maturity on bonds Coupon effects Par rates Buzzwords Internal rate of return, Yield curve Term structure of interest rates Suggested reading

More information

More Tutorial at Corporate Finance

More Tutorial at  Corporate Finance Corporate Finance Question 1. The cost of capital (8 points) St. Claire Enterprises is a levered firm. The equity cost of capital for St. Claire is 7%. The debt cost of capital for St. Claire is 2%. Assume

More information

Fixed Income: Practice Problems with Solutions

Fixed Income: Practice Problems with Solutions Fixed Income: Practice Problems with Solutions Directions: Unless otherwise stated, assume semi-annual payment on bonds.. A 6.0 percent bond matures in exactly 8 years and has a par value of 000 dollars.

More information

Answers to Chapter Review and Self-Test Problems

Answers to Chapter Review and Self-Test Problems CHAPTER 14 Options and Corporate Finance 483 minimum value of a convertible bond is given by its straight bond value or its conversion value, whichever is greater. 6. Many other corporate securities have

More information

SampleFinal Finance 320 Finance Department

SampleFinal Finance 320 Finance Department SampleFinal Finance 320 Finance Department Name Chapters: 1, 2, 3, 4, 5, 6, 7, 8, 9, 11, 12, and 13 1) A C corporation earns $4.50 per share before taxes. The corporate tax rate is 35%, the personal tax

More information

Chapter 6. Discounted Cash Flow Valuation. Key Concepts and Skills. Multiple Cash Flows Future Value Example 6.1. Answer 6.1

Chapter 6. Discounted Cash Flow Valuation. Key Concepts and Skills. Multiple Cash Flows Future Value Example 6.1. Answer 6.1 Chapter 6 Key Concepts and Skills Be able to compute: the future value of multiple cash flows the present value of multiple cash flows the future and present value of annuities Discounted Cash Flow Valuation

More information

Chapter 9 Valuing Stocks

Chapter 9 Valuing Stocks Chapter 9 Valuing Stocks 9-1. Assume Evco, Inc., has a current price of $50 and will pay a $2 dividend in one year, and its equity cost of capital is 15%. What price must you expect it to sell for right

More information

SOCIETY OF ACTUARIES FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS

SOCIETY OF ACTUARIES FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS SOCIETY OF ACTUARIES EXAM FM FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS This page indicates changes made to Study Note FM-09-05. April 28, 2014: Question and solutions 61 were added. January 14, 2014:

More information

Chapter Review Problems

Chapter Review Problems Chapter Review Problems State all stock and bond prices in dollars and cents. Unit 14.1 Stocks 1. When a corporation earns a profit, the board of directors is obligated by law to immediately distribute

More information

HOW TO CALCULATE PRESENT VALUES

HOW TO CALCULATE PRESENT VALUES Chapter 2 HOW TO CALCULATE PRESENT VALUES Brealey, Myers, and Allen Principles of Corporate Finance 11 th Global Edition McGraw-Hill Education Copyright 2014 by The McGraw-Hill Companies, Inc. All rights

More information

Solutions 2. 1. For the benchmark maturity sectors in the United States Treasury bill markets,

Solutions 2. 1. For the benchmark maturity sectors in the United States Treasury bill markets, FIN 472 Professor Robert Hauswald Fixed-Income Securities Kogod School of Business, AU Solutions 2 1. For the benchmark maturity sectors in the United States Treasury bill markets, Bloomberg reported the

More information

Chapter 8. Stock Valuation Process. Stock Valuation

Chapter 8. Stock Valuation Process. Stock Valuation Stock Valuation Process Chapter 8 Stock Valuation: Investors use risk and return concept to determine the worth of a security. In the valuation process: The intrinsic value of any investment equals the

More information

Stock valuation. Price of a First period's dividends Second period's dividends Third period's dividends = + + +... share of stock

Stock valuation. Price of a First period's dividends Second period's dividends Third period's dividends = + + +... share of stock Stock valuation A reading prepared by Pamela Peterson Drake O U T L I N E. Valuation of common stock. Returns on stock. Summary. Valuation of common stock "[A] stock is worth the present value of all the

More information

GESTÃO FINANCEIRA II PROBLEM SET 5 SOLUTIONS (FROM BERK AND DEMARZO S CORPORATE FINANCE ) LICENCIATURA UNDERGRADUATE COURSE

GESTÃO FINANCEIRA II PROBLEM SET 5 SOLUTIONS (FROM BERK AND DEMARZO S CORPORATE FINANCE ) LICENCIATURA UNDERGRADUATE COURSE GESTÃO FINANCEIRA II PROBLEM SET 5 SOLUTIONS (FROM BERK AND DEMARZO S CORPORATE FINANCE ) LICENCIATURA UNDERGRADUATE COURSE 1 ST SEMESTER 2010-2011 Chapter 18 Capital Budgeting and Valuation with Leverage

More information

The Term Structure of Interest Rates, Spot Rates, and Yield to Maturity

The Term Structure of Interest Rates, Spot Rates, and Yield to Maturity Chapter 5 How to Value Bonds and Stocks 5A-1 Appendix 5A The Term Structure of Interest Rates, Spot Rates, and Yield to Maturity In the main body of this chapter, we have assumed that the interest rate

More information

Answer Key to Midterm

Answer Key to Midterm Econ 121 Money and Banking Instructor: Chao Wei Answer Key to Midterm Provide a brief and concise answer to each question. Clearly label each answer. There are 50 points on the exam. 1. (10 points, 3 points

More information

2-8. Identify whether each of the following items increases or decreases cash flow:

2-8. Identify whether each of the following items increases or decreases cash flow: Problems 2-8. Identify whether each of the following items increases or decreases cash flow: Increase in accounts receivable Increase in notes payable Depreciation expense Increase in investments Decrease

More information

( ) ( )( ) ( ) 2 ( ) 3. n n = 100 000 1+ 0.10 = 100 000 1.331 = 133100

( ) ( )( ) ( ) 2 ( ) 3. n n = 100 000 1+ 0.10 = 100 000 1.331 = 133100 Mariusz Próchniak Chair of Economics II Warsaw School of Economics CAPITAL BUDGETING Managerial Economics 1 2 1 Future value (FV) r annual interest rate B the amount of money held today Interest is compounded

More information

MBA Financial Management and Markets Spring 2011 Dr. A. Frank Thompson Due: February 28, 2011 Competency Exam 1 Directions: Please answer the

MBA Financial Management and Markets Spring 2011 Dr. A. Frank Thompson Due: February 28, 2011 Competency Exam 1 Directions: Please answer the MBA Financial Management and Markets Spring 2011 Dr. A. Frank Thompson Due: February 28, 2011 Competency Exam 1 Directions: Please answer the following 33 questions designed to test your knowledge of the

More information

Final Exam Practice Set and Solutions

Final Exam Practice Set and Solutions FIN-469 Investments Analysis Professor Michel A. Robe Final Exam Practice Set and Solutions What to do with this practice set? To help students prepare for the final exam, three practice sets with solutions

More information

Valuation. The Big Picture: Part II - Valuation

Valuation. The Big Picture: Part II - Valuation Valuation The Big Picture: Part II - Valuation A. Valuation: Free Cash Flow and Risk Apr 1 Apr 3 Lecture: Valuation of Free Cash Flows Case: Ameritrade B. Valuation: WACC and APV Apr 8 Apr 10 Apr 15 Lecture:

More information

LECTURE- 4. Valuing stocks Berk, De Marzo Chapter 9

LECTURE- 4. Valuing stocks Berk, De Marzo Chapter 9 1 LECTURE- 4 Valuing stocks Berk, De Marzo Chapter 9 2 The Dividend Discount Model A One-Year Investor Potential Cash Flows Dividend Sale of Stock Timeline for One-Year Investor Since the cash flows are

More information

Mid-Term Exam Practice Set and Solutions.

Mid-Term Exam Practice Set and Solutions. FIN-469 Investments Analysis Professor Michel A. Robe Mid-Term Exam Practice Set and Solutions. What to do with this practice set? To help students prepare for the mid-term exam, two practice sets with

More information

CALCULATOR TUTORIAL. Because most students that use Understanding Healthcare Financial Management will be conducting time

CALCULATOR TUTORIAL. Because most students that use Understanding Healthcare Financial Management will be conducting time CALCULATOR TUTORIAL INTRODUCTION Because most students that use Understanding Healthcare Financial Management will be conducting time value analyses on spreadsheets, most of the text discussion focuses

More information

FINC 3630: Advanced Business Finance Additional Practice Problems

FINC 3630: Advanced Business Finance Additional Practice Problems FINC 3630: Advanced Business Finance Additional Practice Problems Accounting For Financial Management 1. Calculate free cash flow for Home Depot for the fiscal year-ended February 1, 2015 (the 2014 fiscal

More information

Exam 1 Morning Session

Exam 1 Morning Session 91. A high yield bond fund states that through active management, the fund s return has outperformed an index of Treasury securities by 4% on average over the past five years. As a performance benchmark

More information

Time Value of Money. 2014 Level I Quantitative Methods. IFT Notes for the CFA exam

Time Value of Money. 2014 Level I Quantitative Methods. IFT Notes for the CFA exam Time Value of Money 2014 Level I Quantitative Methods IFT Notes for the CFA exam Contents 1. Introduction...2 2. Interest Rates: Interpretation...2 3. The Future Value of a Single Cash Flow...4 4. The

More information

Duration and convexity

Duration and convexity Duration and convexity Prepared by Pamela Peterson Drake, Ph.D., CFA Contents 1. Overview... 1 A. Calculating the yield on a bond... 4 B. The yield curve... 6 C. Option-like features... 8 D. Bond ratings...

More information

Bond valuation and bond yields

Bond valuation and bond yields RELEVANT TO ACCA QUALIFICATION PAPER P4 AND PERFORMANCE OBJECTIVES 15 AND 16 Bond valuation and bond yields Bonds and their variants such as loan notes, debentures and loan stock, are IOUs issued by governments

More information

Long-Term Debt. Objectives: simple present value calculations. Understand the terminology of long-term debt Par value Discount vs.

Long-Term Debt. Objectives: simple present value calculations. Understand the terminology of long-term debt Par value Discount vs. Objectives: Long-Term Debt! Extend our understanding of valuation methods beyond simple present value calculations. Understand the terminology of long-term debt Par value Discount vs. Premium Mortgages!

More information

Chapter 3 Fixed Income Securities

Chapter 3 Fixed Income Securities Chapter 3 Fixed Income Securities Road Map Part A Introduction to finance. Part B Valuation of assets, given discount rates. Fixed-income securities. Stocks. Real assets (capital budgeting). Part C Determination

More information

Professional Level Skills Module, Paper P4

Professional Level Skills Module, Paper P4 Answers Professional Level Skills Module, Paper P4 Advanced Financial Management December 2011 Answers 1 Up to 4 professional marks are available for the presentation of the answer, which should be in

More information

Things to Absorb, Read, and Do

Things to Absorb, Read, and Do Things to Absorb, Read, and Do Things to absorb - Everything, plus remember some material from previous chapters. This chapter applies Chapter s 6, 7, and 12, Risk and Return concepts to the market value

More information

Spring 2012. True/False Indicate whether the statement is true or false.

Spring 2012. True/False Indicate whether the statement is true or false. Corporation Finance Spring 2012 Sample Exam 2B True/False Indicate whether the statement is true or false. 1. The total return on a share of stock refers to the dividend yield less any commissions paid

More information

Income Measurement and Profitability Analysis

Income Measurement and Profitability Analysis PROFITABILITY ANALYSIS The following financial statements for Spencer Company will be used to demonstrate the calculation of the various ratios in profitability analysis. Spencer Company Comparative Balance

More information

高顿网校 财经讲堂 2013 年 CFA 一级考试难点解析. 全球财经证书培训领导品牌 Fixed Income (1) Embedded Options. Fixed Income (1) Example: Embedded Options

高顿网校 财经讲堂 2013 年 CFA 一级考试难点解析. 全球财经证书培训领导品牌  Fixed Income (1) Embedded Options. Fixed Income (1) Example: Embedded Options 高顿网校 财经讲堂 2013 年 CFA 一级考试难点解析 高顿教育旗下品牌 : 高顿网校 Fixed Income (1) Embedded Options Option Type Benefits the Yield Price Call Issuer/Borrower Higher Lower Prepayment Issuer/Borrower Higher Lower Put Buyer

More information

FIN 472 Fixed-Income Securities Debt Instruments

FIN 472 Fixed-Income Securities Debt Instruments FIN 472 Fixed-Income Securities Debt Instruments Professor Robert B.H. Hauswald Kogod School of Business, AU The Most Famous Bond? Bond finance raises the most money fixed income instruments types of bonds

More information