Chapter 8: Weighted Average Cost of Capital Chapter Review Solutions

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "Chapter 8: Weighted Average Cost of Capital Chapter Review Solutions"

Transcription

1 Chapter 8: Weighted Average Cost of Capital Chapter Review Solutions 1. ( a ) Next expected dividend: Year 1 = $0.21 ( i ) Kr = d1 Po + g = ( ii ) Ke = do 0.20 = Po (1- f) 2.80 ( b ) Kps = dps 0.10 = Pps = 10.0% = 7.14% = 12.5% ( c ) Kd = n PV PMT FV COMP i Answer = x 0.70 = 8.67% ( d ) Market $ Proportion Cost Weighted Cost Ordinary 500, % Preferred 100, % Debt 400, % 1,000, W.A.C.C. = 7.10% ( e ) ( i ) Shareholders Debt Retained earnings ( ii ) Date at which principal has to be repaid by the borrower with interest. ( iii ) Able to better manage changes in interest rates 2. Calculate the yield to maturity of the following $100 debentures Present Interest Rate ( i ) % ( ii ) % ( iii ) % ( iv ) % Maturity Yield to Maturity After Tax Cost 3 ( a ) Ordinary Shares: Ke = d1 + g = Po = 10.50% 1.20 ( b ) Retained Earnings = 10.50% ( c ) Kps = dps 0.20 = Pps 2.50 = 8.00% ( d ) Cost of Debt (Kd) - Using Sharp EL 738 Enter: C.CE 2ndF C.CE n PV PMT FV COMP i Answer = 12.00% The cost will be = 12.00% x (1 - Rate of Tax) = 12.00% x 0.70 = 8.40% 62

2 0.16 (1.02) 4. ( a ) Cost of Equity = = 9.25% ( b ) Cost of Debt = 0.08 (1-0.30) = 5.60% ( c ) Market Proportion Cost W.A.C.C Equity 3, % Debt % 4, % 5. Cost of Ordinary Shares (Ke) = d1 Po + g = 0.08 (1.05) Cost of Debt (Kd) - Using Sharp EL 738 = 9.20% Answer = 4.63% After Tax ( x 0.70 ) = 3.24% Answer = 7.23% After Tax ( x 0.70 ) = 5.06% Market Proportion Cost W.A.C.C Ordinary Shares 800, % 6% Debentures 212, % 8% Unsecured 306, % Notes 1,318, % 63

3 6. ( a ) Cost of Debt (Kd) - Using Sharp EL Answer = 11.39% The cost will be = 11.39% x (1 - Rate of Tax) = 11.39% x 0.70 = 7.97% Preference Shares: = 7.27% Ordinary Shares: = 13.66% Retained Earnings: = 13.66% ( b ) Component Market Proportion Cost After W.A.C.C. Tax Ordinary 1,120, % Ret Earnings 280, % Preference 110, % Debentures 90, % 1,600, % $ Proportion Ordinary Shares 800,000 80% 1,120,000 Retained 200,000 20% 280,000 Earnings 1,000, % 1,400,000 ( c ) Higher return; but also higher risk involved. 64

4 7. Cost of Ordinary Shares (ke) = d (1.05) + g = Po = 7.10% Cost of Debt (Kd) - Using Sharp EL Answer = 8.50% The cost will be = 8.50% x (1 - Rate of Tax) = 8.50% x 0.70 = 5.95% Answer = 10.00% The cost will be = 10.00% x (1 - Rate of Tax) = 10.00% x 0.70 = 7.00% Component Market Proportion Cost W.A.C.C. Ordinary 1,200, % 6% Debentures 270, % 8% Debentures 475, % 1,945, % 8. ( a ) Cost: Cost of Debt (Kd) - Using Sharp EL N PV PMT FV COMP i Answer = 8.50% Kd = 8.50 (1-0.30) = 5.95% Ke = Ordinary Preference Debentures d1 Po + g Kps = dps Kd = 8.50 pps = = = 8.50 x 0.70 = 10% = 4% = 5.95% Component Market Proportion Cost W.A.C.C. Ordinary 1,000, % 8% Preference 600, % 9% Debentures 411, % 2,011, % 65

5 9. Ordinary shares Ke = $ = 11.00% $5.00 Retained earnings Kre = = 11.00% 9% Preference shares Kp = $0.09 = 4.50% $ %Debentures Kd Yield to maturity = 8.00% x ( ) = 5.60% % Mortgage = 12.00% x ( ) = 8.40% Source of funds market value Source of Funds Market Proportion Cost W.A.C.C. Ordinary hares 3,333, Retained Earnings 1,666, % Preference Shares 200, % Debentures 533, % Mortgage 266, ,000, Balance Sheet Market Ordinary Shares 1,000,000 3,333,333 Retained Earnings 500,000 1,666,667 Total 1,500,000 5,000,000 66

6 10. Source of Funds Market Weighting Cost W.A.C.C. Ordinary Shares 1,215, Retained Earnings 135, % Preference Shares 250, % Mortgage 400, ,000, Balance Sheet Market Ordinary Shares 900,000 1,215,000 Retained Earnings 100, ,000 Total 1,000,000 1,350, ( a ) Investors purchasing ordinary shares acquire a proportion of shareholders funds. As retained earnings form part of the shareholders funds and could be paid as dividends, they rank equally with ordinary shares in terms of cost to the company. ( b ) Companies use the W.A.C.C as the discount factor when calculating present value of cash flows. It is also used as a benchmark, against which I.R.R are assessed. W.A.C.C. is the required rate of return on investment in assets. 12. Fudge-It Co. Cost of Ordinary Shares = = 10.83% Current Year x 1.05:0.10 x 1.05 = Cost of Retained Profits (same as ordinary) = 10.83% Cost of Preference: D/P = = 8.00% Cost of Debt (Kd) - Using Sharp EL 738 = 8.42% Answer = 12.02% x 0.70 Weighted Average Cost of Capital Component Market Proportion Cost WACC Ordinary Shares 1,125, Retained Profits 675, Preference Shares 500, Debentures 1,700, ,000, $ Proportion Market Ordinary Shares 1,000, $1,125,000 Retained Earnings 600, ,000 $1,600, % $1,800,000 67

7 13. Source of Funds Market Weighting Cost W.A.C.C. Ordinary Shares 1,600, Retained Earnings 400, % Preference Shares 200, % Mortgage 300, ,500, Balance Sheet Market Ordinary Shares 800,000 1,600,000 Retained Earnings 200, ,000 Total 1,000,000 2,000, ,000 x $3.30 = $2,310, ,000 1,000,000 x 2,310,000 = $1,617, ,000 1,000,000 x 2,310,000 = 693,000 $2,310,000 Sources of Funds Proportion Cost % WACC % Ordinary Shares 1,617, Retained Earnings 693, % Preference Shares 280, % Debentures 364, % Mortgage Loan 45, ,000,

8 15. As a fixed interest security the value of a debenture is determined by prevailing interest rates. Given the current interest rate, interest payment and maturity period it is possible to calculate the yield to maturity ,000 x $2.70 = $1,350, , , 000 x 1,350,000 = $1,125,000 = Market valuation of Ordinary Shares 100, ,000 x 1,350,000 = 225,000 = Market valuation of General Reserve $ 1,350,000 = Market valuation of Ordinary Equity Source of Funds Proportion Cost % WACC % Ordinary Shares $1,125, General Reserve 225, % Preference Shares 132, % Debentures 285, % Mortgage loan 233, $2,000,

Module 1: Corporate Finance and the Role of Venture Capital Financing TABLE OF CONTENTS

Module 1: Corporate Finance and the Role of Venture Capital Financing TABLE OF CONTENTS 1.0 FINANCING PRINCIPLES Module 1: Corporate Finance and the Role of Venture Capital Financing Financing Principles 1.01 Introduction to Financing Principles 1.02 Capitalization of a Business 1.03 Capital

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

Most publicly limited companies (PLCs) will use a number of different sources of finance including:

Most publicly limited companies (PLCs) will use a number of different sources of finance including: Weighted Average Cost of Capital (WACC) Article by Bernard Vallely, FCCA, MBA, Current Examiner. RELEVANT TO : P1 Managerial Finance P2 Financial Management (Transitional Students) P2 Strategic Corporate

More information

Basics of Discounted Cash Flow Valuation. Aswath Damodaran

Basics of Discounted Cash Flow Valuation. Aswath Damodaran Basics of Discounted Cash Flow Valuation Aswath Damodaran 1 Discounted Cashflow Valuation: Basis for Approach t = n CF Value = t t =1(1+ r) t where, n = Life of the asset CF t = Cashflow in period t r

More information

FIN 5413: Chapter 03 - Mortgage Loan Foundations: The Time Value of Money Page 1

FIN 5413: Chapter 03 - Mortgage Loan Foundations: The Time Value of Money Page 1 FIN 5413: Chapter 03 - Mortgage Loan Foundations: The Time Value of Money Page 1 Solutions to Problems - Chapter 3 Mortgage Loan Foundations: The Time Value of Money Problem 3-1 a) Future Value = FV(n,i,PV,PMT)

More information

Source of Finance and their Relative Costs F. COST OF CAPITAL

Source of Finance and their Relative Costs F. COST OF CAPITAL F. COST OF CAPITAL 1. Source of Finance and their Relative Costs 2. Estimating the Cost of Equity 3. Estimating the Cost of Debt and Other Capital Instruments 4. Estimating the Overall Cost of Capital

More information

Ing. Lenka Strýčková, Ph.D.

Ing. Lenka Strýčková, Ph.D. Ing. Lenka Strýčková, Ph.D. 1. Introduction to Business Financial Management (introduction to the course, basic terminology) 2. Capital Budgeting: Long-Term Decisions (capital budgeting, short-term and

More information

USING THE SHARP EL 738 FINANCIAL CALCULATOR

USING THE SHARP EL 738 FINANCIAL CALCULATOR USING THE SHARP EL 738 FINANCIAL CALCULATOR Basic financial examples with financial calculator steps Prepared by Colin C Smith 2010 Some important things to consider 1. These notes cover basic financial

More information

Compound Interest Chapter 8

Compound Interest Chapter 8 8-2 Compound Interest Chapter 8 8-3 Learning Objectives After completing this chapter, you will be able to: > Calculate maturity value, future value, and present value in compound interest applications,

More information

Fundamentals Level Skills Module, Paper F9. Section A. Monetary value of return = $3 10 x 1 197 = $3 71 Current share price = $3 71 $0 21 = $3 50

Fundamentals Level Skills Module, Paper F9. Section A. Monetary value of return = $3 10 x 1 197 = $3 71 Current share price = $3 71 $0 21 = $3 50 Answers Fundamentals Level Skills Module, Paper F9 Financial Management December 2014 Answers Section A 1 A Monetary value of return = $3 10 x 1 197 = $3 71 Current share price = $3 71 $0 21 = $3 50 2

More information

Chapter 6. Learning Objectives Principles Used in This Chapter 1. Annuities 2. Perpetuities 3. Complex Cash Flow Streams

Chapter 6. Learning Objectives Principles Used in This Chapter 1. Annuities 2. Perpetuities 3. Complex Cash Flow Streams Chapter 6 Learning Objectives Principles Used in This Chapter 1. Annuities 2. Perpetuities 3. Complex Cash Flow Streams 1. Distinguish between an ordinary annuity and an annuity due, and calculate present

More information

Capital Structure II

Capital Structure II Capital Structure II Introduction In the previous lecture we introduced the subject of capital gearing. Gearing occurs when a company is financed partly through fixed return finance (e.g. loans, loan stock

More information

BF 6701 : Financial Management Comprehensive Examination Guideline

BF 6701 : Financial Management Comprehensive Examination Guideline BF 6701 : Financial Management Comprehensive Examination Guideline 1) There will be 5 essay questions and 5 calculation questions to be completed in 1-hour exam. 2) The topics included in those essay and

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

6. Debt Valuation and the Cost of Capital

6. Debt Valuation and the Cost of Capital 6. Debt Valuation and the Cost of Capital Introduction Firms rarely finance capital projects by equity alone. They utilise long and short term funds from a variety of sources at a variety of costs. No

More information

Module 1: Corporate Finance and the Role of Venture Capital Financing TABLE OF CONTENTS

Module 1: Corporate Finance and the Role of Venture Capital Financing TABLE OF CONTENTS 1.0 ALTERNATIVE SOURCES OF FINANCE Module 1: Corporate Finance and the Role of Venture Capital Financing Alternative Sources of Finance TABLE OF CONTENTS 1.1 Short-Term Debt (Short-Term Loans, Line of

More information

Ratio Analysis. A) Liquidity Ratio : - 1) Current ratio = Current asset Current Liability

Ratio Analysis. A) Liquidity Ratio : - 1) Current ratio = Current asset Current Liability A) Liquidity Ratio : - Ratio Analysis 1) Current ratio = Current asset Current Liability 2) Quick ratio or Acid Test ratio = Quick Asset Quick liability Quick Asset = Current Asset Stock Quick Liability

More information

Problem Set: Annuities and Perpetuities (Solutions Below)

Problem Set: Annuities and Perpetuities (Solutions Below) Problem Set: Annuities and Perpetuities (Solutions Below) 1. If you plan to save $300 annually for 10 years and the discount rate is 15%, what is the future value? 2. If you want to buy a boat in 6 years

More information

1 (a) Calculation of net present value (NPV) Year 1 2 3 4 5 6 $000 $000 $000 $000 $000 $000 Sales revenue 1,600 1,600 1,600 1,600 1,600

1 (a) Calculation of net present value (NPV) Year 1 2 3 4 5 6 $000 $000 $000 $000 $000 $000 Sales revenue 1,600 1,600 1,600 1,600 1,600 Answers Fundamentals Level Skills Module, Paper F9 Financial Management December 2011 Answers 1 (a) Calculation of net present value (NPV) Year 1 2 3 4 5 6 $000 $000 $000 $000 $000 $000 Sales revenue 1,600

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

Bonds. Accounting for Long-Term Debt. Agenda Long-Term Debt. 15.501/516 Accounting Spring 2004

Bonds. Accounting for Long-Term Debt. Agenda Long-Term Debt. 15.501/516 Accounting Spring 2004 Accounting for Long-Term Debt 15.501/516 Accounting Spring 2004 Professor S. Roychowdhury Sloan School of Management Massachusetts Institute of Technology April 5, 2004 1 Agenda Long-Term Debt Extend our

More information

DISCOUNTED CASH FLOW VALUATION and MULTIPLE CASH FLOWS

DISCOUNTED CASH FLOW VALUATION and MULTIPLE CASH FLOWS Chapter 5 DISCOUNTED CASH FLOW VALUATION and MULTIPLE CASH FLOWS The basic PV and FV techniques can be extended to handle any number of cash flows. PV with multiple cash flows: Suppose you need $500 one

More information

Equity Analysis and Capital Structure. A New Venture s Perspective

Equity Analysis and Capital Structure. A New Venture s Perspective Equity Analysis and Capital Structure A New Venture s Perspective 1 Venture s Capital Structure ASSETS Short- term Assets Cash A/R Inventories Long- term Assets Plant and Equipment Intellectual Property

More information

The cost of capital. A reading prepared by Pamela Peterson Drake. 1. Introduction

The cost of capital. A reading prepared by Pamela Peterson Drake. 1. Introduction The cost of capital A reading prepared by Pamela Peterson Drake O U T L I N E 1. Introduction... 1 2. Determining the proportions of each source of capital that will be raised... 3 3. Estimating the marginal

More information

Financial Management

Financial Management Mock Examination : ACCA Paper F9 Financial Management Session : June 2014 Prepared by : Mr Ian Lim Your Contact Number : I wish to have my script marked by the lecturer and collect the marked script at

More information

The Mathematics of Financial Planning (supplementary lesson notes to accompany FMGT 2820)

The Mathematics of Financial Planning (supplementary lesson notes to accompany FMGT 2820) The Mathematics of Financial Planning (supplementary lesson notes to accompany FMGT 2820) Using the Sharp EL-733A Calculator Reference is made to the Appendix Tables A-1 to A-4 in the course textbook Investments:

More information

SUGGESTED SOLUTION IPCC NOVEMBER 2016 EXAM. Test Code - I N J

SUGGESTED SOLUTION IPCC NOVEMBER 2016 EXAM. Test Code - I N J P SUGGESTED SOLUTION IPCC NOVEMBER 206 EXAM FINANCIAL MANAGEMENT Test Code - I N J 3 9 BRANCH - (MUMBAI) (Date : 2.08.206) Head Office : Shraddha, 3 rd Floor, Near Chinai College, Andheri (E), Mumbai 69.

More information

Current liabilities and payroll

Current liabilities and payroll Chapter 12 Current liabilities and payroll Current liabilities are obligations that the business has to discharge within 12 months or its operating cycle if longer than one year. Obligations that are due

More information

Discount rates for project appraisal

Discount rates for project appraisal Discount rates for project appraisal We know that we have to discount cash flows in order to value projects We can identify the cash flows BUT What discount rate should we use? 1 The Discount Rate and

More information

Investment Analysis (FIN 670) Fall Homework 3

Investment Analysis (FIN 670) Fall Homework 3 Investment Analysis (FIN 670) Fall 2009 Homework 3 Instructions: please read carefully You should show your work how to get the answer for each calculation question to get full credit You should make 2

More information

Chapter 6 Contents. Principles Used in Chapter 6 Principle 1: Money Has a Time Value.

Chapter 6 Contents. Principles Used in Chapter 6 Principle 1: Money Has a Time Value. Chapter 6 The Time Value of Money: Annuities and Other Topics Chapter 6 Contents Learning Objectives 1. Distinguish between an ordinary annuity and an annuity due, and calculate present and future values

More information

Finance 331 Corporate Financial Management Week 1 Week 3 Note: For formulas, a Texas Instruments BAII Plus calculator was used.

Finance 331 Corporate Financial Management Week 1 Week 3 Note: For formulas, a Texas Instruments BAII Plus calculator was used. Chapter 1 Finance 331 What is finance? - Finance has to do with decisions about money and/or cash flows. These decisions have to do with money being raised or used. General parts of finance include: -

More information

Chapter 5 Time Value of Money 2: Analyzing Annuity Cash Flows

Chapter 5 Time Value of Money 2: Analyzing Annuity Cash Flows 1. Future Value of Multiple Cash Flows 2. Future Value of an Annuity 3. Present Value of an Annuity 4. Perpetuities 5. Other Compounding Periods 6. Effective Annual Rates (EAR) 7. Amortized Loans Chapter

More information

Chapter 16. Debentures: An Introduction. Non-current Liabilities. Horngren, Best, Fraser, Willett: Accounting 6e 2010 Pearson Australia.

Chapter 16. Debentures: An Introduction. Non-current Liabilities. Horngren, Best, Fraser, Willett: Accounting 6e 2010 Pearson Australia. PowerPoint to accompany Non-current Liabilities Chapter 16 Learning Objectives 1. Account for debentures payable transactions 2. Measure interest expense by the straight line interest method 3. Account

More information

Appendix C- 1. Time Value of Money. Appendix C- 2. Financial Accounting, Fifth Edition

Appendix C- 1. Time Value of Money. Appendix C- 2. Financial Accounting, Fifth Edition C- 1 Time Value of Money C- 2 Financial Accounting, Fifth Edition Study Objectives 1. Distinguish between simple and compound interest. 2. Solve for future value of a single amount. 3. Solve for future

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

Project Valuation for Managers

Project Valuation for Managers Project Valuation for Managers An Essential Skill Corporate Finance By Cameron Hall Key Messages The job of managers is to create value. Value in a firm comes from two sources: current operations and new

More information

Higher National Diploma in Business Administration Second Year, First Semester Examination 2014 BA 2113 - Business Finance

Higher National Diploma in Business Administration Second Year, First Semester Examination 2014 BA 2113 - Business Finance [All Rights Reserved] SLIATE SRI LANKA INSTITUTE OF ADVANCED TECHNOLOGICAL EDUCATION (Established in the Ministry of Higher Education, vide in Act No. 29 of 1995) Higher National Diploma in Business Administration

More information

Review for Exam 2. Instructions: Please read carefully

Review for Exam 2. Instructions: Please read carefully Review for Exam 2 Instructions: Please read carefully The exam will have 20 multiple choice questions and 4 work problems. Questions in the multiple choice section will be either concept or calculation

More information

UNIVERSITY OF WAH Department of Management Sciences

UNIVERSITY OF WAH Department of Management Sciences BBA-330: FINANCIAL MANAGEMENT UNIVERSITY OF WAH COURSE DESCRIPTION/OBJECTIVES The module aims at building competence in corporate finance further by extending the coverage in Business Finance module to

More information

Discounted Cash Flow Valuation

Discounted Cash Flow Valuation 6 Formulas Discounted Cash Flow Valuation McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Outline Future and Present Values of Multiple Cash Flows Valuing

More information

The Mathematics of Financial Planning (supplementary lesson notes to accompany FMGT 2820)

The Mathematics of Financial Planning (supplementary lesson notes to accompany FMGT 2820) The Mathematics of Financial Planning (supplementary lesson notes to accompany FMGT 2820) Using the Sharp EL-738 Calculator Reference is made to the Appendix Tables A-1 to A-4 in the course textbook Investments:

More information

FSA Note: Summary of Financial Ratio Calculations

FSA Note: Summary of Financial Ratio Calculations FSA Note: Summary of Financial Ratio Calculations This note contains a summary of the more common financial statement ratios. A few points should be noted: Calculations vary in practice; consistency and

More information

1. If you wish to accumulate $140,000 in 13 years, how much must you deposit today in an account that pays an annual interest rate of 14%?

1. If you wish to accumulate $140,000 in 13 years, how much must you deposit today in an account that pays an annual interest rate of 14%? Chapter 2 - Sample Problems 1. If you wish to accumulate $140,000 in 13 years, how much must you deposit today in an account that pays an annual interest rate of 14%? 2. What will $247,000 grow to be in

More information

Fundamentals Level Skills Module, Paper F9. Section A. Mean growth in earnings per share = 100 x [(35 7/30 0) 1/3 1] = 5 97% or 6%

Fundamentals Level Skills Module, Paper F9. Section A. Mean growth in earnings per share = 100 x [(35 7/30 0) 1/3 1] = 5 97% or 6% Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2015 Answers Section A 1 A 2 D 3 D Mean growth in earnings per share = 100 x [(35 7/30 0) 1/3 1] = 5 97% or 6% 4 A 5 D 6 B 7

More information

2 The Mathematics. of Finance. Copyright Cengage Learning. All rights reserved.

2 The Mathematics. of Finance. Copyright Cengage Learning. All rights reserved. 2 The Mathematics of Finance Copyright Cengage Learning. All rights reserved. 2.3 Annuities, Loans, and Bonds Copyright Cengage Learning. All rights reserved. Annuities, Loans, and Bonds A typical defined-contribution

More information

9-17a Tutorial 9 Practice Review Assignment

9-17a Tutorial 9 Practice Review Assignment 9-17a Tutorial 9 Practice Review Assignment Data File needed for the Review Assignments: Restaurant.xlsx Sylvia has some new figures for the business plan for Jerel's. She has received slightly better

More information

QUARTERLY REPORT 2015

QUARTERLY REPORT 2015 15 3 Consolidated balance sheet 5 Consolidated income statement 6 Statement of changes in equity 7 Condensed notes 3 Consolidated financial statements Consolidated balance sheet ASSETS 31.12.2014 in %

More information

Chapter 9 Bonds and Their Valuation ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS

Chapter 9 Bonds and Their Valuation ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS Chapter 9 Bonds and Their Valuation ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS 9-1 a. A bond is a promissory note issued by a business or a governmental unit. Treasury bonds, sometimes referred to as

More information

RATIO ANALYSIS FORMULAS + THEORIES

RATIO ANALYSIS FORMULAS + THEORIES A) Cash Position Ratio : - 1) Absolute Cash Ratio = Cash Reservoir Current Liabilities 2) Cash Position to Total asset Ratio = Cash Reservoir * 100 (Measure liquid layer of assets) Total Assets 3) Interval

More information

Bonds and preferred stock. Basic definitions. Preferred(?) stock. Investing in fixed income securities

Bonds and preferred stock. Basic definitions. Preferred(?) stock. Investing in fixed income securities Bonds and preferred stock Investing in fixed income securities Basic definitions Stock: share of ownership Stockholders are the owners of the firm Two types of stock: preferred and common Preferred stock:

More information

Chapter 5: Valuing Bonds

Chapter 5: Valuing Bonds FIN 302 Class Notes Chapter 5: Valuing Bonds What is a bond? A long-term debt instrument A contract where a borrower agrees to make interest and principal payments on specific dates Corporate Bond Quotations

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

Appendix. Time Value of Money. Financial Accounting, IFRS Edition Weygandt Kimmel Kieso. Appendix C- 1

Appendix. Time Value of Money. Financial Accounting, IFRS Edition Weygandt Kimmel Kieso. Appendix C- 1 C Time Value of Money C- 1 Financial Accounting, IFRS Edition Weygandt Kimmel Kieso C- 2 Study Objectives 1. Distinguish between simple and compound interest. 2. Solve for future value of a single amount.

More information

INTERIM FINANCIAL STATEMENT AS PER 30 SEPTEMBER 2015

INTERIM FINANCIAL STATEMENT AS PER 30 SEPTEMBER 2015 INTERIM FINANCIAL STATEMENT AS PER 30 SEPTEMBER 2015 15 3 Consolidated balance sheet 5 Consolidated income statement 6 Statement of changes in equity 7 Condensed notes INTERIM FINANCIAL STATEMENT AS PER

More information

Nomura Securities Co., Ltd. Non-consolidated Balance Sheets

Nomura Securities Co., Ltd. Non-consolidated Balance Sheets ASSETS Non-consolidated Balance Sheets Nomura Securities Co., Ltd. (Millions of yen) March 31, 2014 March 31, 2015 Increase/(Decrease) Current Assets 12,488,887 13,949,399 1,460,512 Cash and time deposits

More information

Topics in Chapter. Key features of bonds Bond valuation Measuring yield Assessing risk

Topics in Chapter. Key features of bonds Bond valuation Measuring yield Assessing risk Bond Valuation 1 Topics in Chapter Key features of bonds Bond valuation Measuring yield Assessing risk 2 Determinants of Intrinsic Value: The Cost of Debt Net operating profit after taxes Free cash flow

More information

Paper F9. Financial Management. Friday 7 June 2013. Fundamentals Level Skills Module. The Association of Chartered Certified Accountants.

Paper F9. Financial Management. Friday 7 June 2013. Fundamentals Level Skills Module. The Association of Chartered Certified Accountants. Fundamentals Level Skills Module Financial Management Friday 7 June 2013 Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FOUR questions are compulsory and MUST be attempted. Formulae

More information

Return on Equity has three ratio components. The three ratios that make up Return on Equity are:

Return on Equity has three ratio components. The three ratios that make up Return on Equity are: Evaluating Financial Performance Chapter 1 Return on Equity Why Use Ratios? It has been said that you must measure what you expect to manage and accomplish. Without measurement, you have no reference to

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

1 (a) NPV calculation Year 1 2 3 4 5 $000 $000 $000 $000 $000 Sales revenue 5,614 7,214 9,015 7,034. Contribution 2,583 3,283 3,880 2,860

1 (a) NPV calculation Year 1 2 3 4 5 $000 $000 $000 $000 $000 Sales revenue 5,614 7,214 9,015 7,034. Contribution 2,583 3,283 3,880 2,860 Answers Fundamentals Level Skills Module, Paper F9 Financial Management December 2012 Answers 1 (a) NPV calculation Year 1 2 3 4 5 $000 $000 $000 $000 $000 Sales revenue 5,614 7,214 9,015 7,034 Variable

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

Combination which capitalize on the wealth. FINANCIAL MANAGEMENT MAKE IT EASY TO LEARN Madhusudan Mishra CA Articled Assistant

Combination which capitalize on the wealth. FINANCIAL MANAGEMENT MAKE IT EASY TO LEARN Madhusudan Mishra CA Articled Assistant Combination which capitalize on the wealth. FINANCIAL MANAGEMENT MAKE IT EASY TO LEARN Madhusudan Mishra CA Articled Assistant CAPITAL STRUCTURE DECISION COMPOSITION OF CAPITAL STRUCTURE INDEFFERENCE POINT

More information

GUIDANCE ON VALUATION OF SHARES AND BUSINESSES

GUIDANCE ON VALUATION OF SHARES AND BUSINESSES GUIDANCE ON VALUATION OF SHARES AND BUSINESSES Valuation refers to determination of the worth of an asset using information available from the financial statements publications. Share valuation embraces

More information

Introduction to Bonds

Introduction to Bonds Bonds are a debt instrument, where the bond holder pays the issuer an initial sum of money known as the purchase price. In turn, the issuer pays the holder coupon payments (annuity), and a final sum (face

More information

Financing Your Dream: A Presentation at the Youth Business Linkage Forum (#EAWY2014) Akin Oyebode Head SME Banking, Stanbic IBTC Bank, Nigeria.

Financing Your Dream: A Presentation at the Youth Business Linkage Forum (#EAWY2014) Akin Oyebode Head SME Banking, Stanbic IBTC Bank, Nigeria. Financing Your Dream: A Presentation at the Youth Business Linkage Forum (#EAWY2014) Akin Oyebode Head SME Banking, Stanbic IBTC Bank, Nigeria. Content 1 Introduction 2 Profit and loss Account or Income

More information

MITSUI SUMITOMO INSURANCE COMPANY, LIMITED AND SUBSIDIARIES. CONSOLIDATED BALANCE SHEETS March 31, 2005 and 2006

MITSUI SUMITOMO INSURANCE COMPANY, LIMITED AND SUBSIDIARIES. CONSOLIDATED BALANCE SHEETS March 31, 2005 and 2006 CONSOLIDATED BALANCE SHEETS March 31, 2005 and 2006 2005 2006 ASSETS Investments - other than investments in affiliates: Securities available for sale: Fixed maturities, at fair value 3,043,851 3,193,503

More information

ACCA F9 FINANCIAL MANAGEMENT. Study System Sample Session

ACCA F9 FINANCIAL MANAGEMENT. Study System Sample Session ACCA F9 FINANCIAL MANAGEMENT Study System Sample Session ATC INTERNATIONAL ACCA PAPER F9 FINANCIAL MANAGEMENT STUDY SYSTEM No responsibility for loss occasioned to any person acting or refraining from

More information

CHAPTER 2. Time Value of Money 2-1

CHAPTER 2. Time Value of Money 2-1 CHAPTER 2 Time Value of Money 2-1 Time Value of Money (TVM) Time Lines Future value & Present value Rates of return Annuities & Perpetuities Uneven cash Flow Streams Amortization 2-2 Time lines 0 1 2 3

More information

Chapter 8 Financing a Business 1: Sources of Funds

Chapter 8 Financing a Business 1: Sources of Funds Financing a Business 1: Sources of Funds Solutions to Even-Numbered Problems and Cases 8.2 Coté Biologique Limitée (CBL) Data: Annual credit sales $10,000,000 Average collection period 50 days Industry

More information

Foundation review. Introduction. Learning objectives

Foundation review. Introduction. Learning objectives Foundation review: Introduction Foundation review Introduction Throughout FN1, you will be expected to apply techniques and concepts that you learned in prerequisite courses. The purpose of this foundation

More information

SYLLABUS CertITM. updated

SYLLABUS CertITM. updated SYLLABUS CertITM updated 02.09.13 OVERVIEW The Certificate in International Treasury Management covers the fundamentals of international treasury, risk and corporate finance and builds upon it in a practical,

More information

CFS. Syllabus. Certified Finance Specialist. International benchmark in Finance profession

CFS. Syllabus. Certified Finance Specialist. International benchmark in Finance profession CFS Certified Finance Specialist Syllabus International benchmark in Finance profession Certified Finance Specialist Summary: This award will provide candidates the opportunity to gain advanced level knowledge

More information

FIN 3000. Chapter 6. Annuities. Liuren Wu

FIN 3000. Chapter 6. Annuities. Liuren Wu FIN 3000 Chapter 6 Annuities Liuren Wu Overview 1. Annuities 2. Perpetuities 3. Complex Cash Flow Streams Learning objectives 1. Distinguish between an ordinary annuity and an annuity due, and calculate

More information

Understanding Credit and the Types of Interest Rates that Affect Your Loans

Understanding Credit and the Types of Interest Rates that Affect Your Loans Understanding Credit and the Types of Interest Rates that Affect Your Loans Presented By: Barbara Hume, Senior Assistant General Manager, NCB Retail Banking Division Why Borrow? To increase your capacity

More information

Indicative Content. 1.1.1 The main types of corporate form. 1.1.2 The regulatory framework for companies. 1.1.6 Shareholder Value Analysis.

Indicative Content. 1.1.1 The main types of corporate form. 1.1.2 The regulatory framework for companies. 1.1.6 Shareholder Value Analysis. Unit Title: Corporate Finance Unit Reference Number: L/601/3900 Guided Learning Hours: 210 Level: Level 6 Number of Credits: 25 Learning Outcome 1 The learner will: Understand the role of the Corporate

More information

COST OF CAPITAL Compute the cost of debt. Compute the cost of preferred stock.

COST OF CAPITAL Compute the cost of debt. Compute the cost of preferred stock. OBJECTIVE 1 Compute the cost of debt. The method of computing the yield to maturity for bonds will be used how to compute the cost of debt. Because interest payments are tax deductible, only after-tax

More information

INTERVIEWS - FINANCIAL MODELING

INTERVIEWS - FINANCIAL MODELING 420 W. 118th Street, Room 420 New York, NY 10027 P: 212-854-4613 F: 212-854-6190 www.sipa.columbia.edu/ocs INTERVIEWS - FINANCIAL MODELING Basic valuation concepts are among the most popular technical

More information

Question Bank. B.Com III: Financial Management

Question Bank. B.Com III: Financial Management Question Bank B.Com III: Financial Management Unit 1 Introduction to Financial Management 1. What is Financial Management? 2. Explain the scope of Financial Management. 3. Explain the objectives of the

More information

The Adjusted Present Value Approach to Valuing Leveraged Buyouts 1

The Adjusted Present Value Approach to Valuing Leveraged Buyouts 1 Chapter 17 Valuation and Capital Budgeting for the Levered Firm 17A-1 Appendix 17A The Adjusted Present Value Approach to Valuing Leveraged Buyouts 1 Introduction A leveraged buyout (LBO) is the acquisition

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

TERM LOAN AND WORKING CAPITAL. Seminar on Term Loan and Working Capital - December, 2010.

TERM LOAN AND WORKING CAPITAL. Seminar on Term Loan and Working Capital - December, 2010. TERM LOAN AND WORKING CAPITAL -STRATEGIES 1 INVESTMENT AND FINANCE POLICY 2 INVESTMENT POLICY Investment Policy selects an optimum portfolio of investment opportunities that maximize anticipated net cash

More information

Long Term Business Financing Strategy For A Pakistan Business. Byco Petroleum Pakistan Limited

Long Term Business Financing Strategy For A Pakistan Business. Byco Petroleum Pakistan Limited Long Term Business Financing Strategy For A Pakistan Business Byco Petroleum Pakistan Limited Contents Why We Need Financing Strategy 3 How Financing Strategies are driven? 4 Financing Prerequisite for

More information

The Adjusted Present Value Approach to Valuing Leveraged Buyouts 1 Introduction

The Adjusted Present Value Approach to Valuing Leveraged Buyouts 1 Introduction Chapter 18 Valuation and Capital Budgeting for the Levered Firm 18A-1 Appendix 18A The Adjusted Present Value Approach to Valuing Leveraged Buyouts 1 Introduction A leveraged buyout (LBO) is the acquisition

More information

Fundamentals Level Skills Module, Paper F9

Fundamentals Level Skills Module, Paper F9 Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2008 Answers 1 (a) Calculation of weighted average cost of capital (WACC) Cost of equity Cost of equity using capital asset

More information

The Adjusted-Present-Value Approach to Valuing Leveraged Buyouts 1)

The Adjusted-Present-Value Approach to Valuing Leveraged Buyouts 1) IE Aufgabe 4 The Adjusted-Present-Value Approach to Valuing Leveraged Buyouts 1) Introduction A leveraged buyout (LBO) is the acquisition by a small group of equity investors of a public or private company

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

Discounted Cash Flow Valuation

Discounted Cash Flow Valuation Discounted Cash Flow Valuation Chapter 5 Key Concepts and Skills Be able to compute the future value of multiple cash flows Be able to compute the present value of multiple cash flows Be able to compute

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

According to Modigliani-Miller Proposition II with corporate taxes, the value of levered equity is:

According to Modigliani-Miller Proposition II with corporate taxes, the value of levered equity is: Homework 2 1. A project has a NPV, assuming all equity financing, of $1.5 million. To finance the project, debt is issued with associated flotation costs of $60,000. The flotation costs can be amortized

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

FIN 3403 Quiz #1 - Version 1 12 points [Show all work for credit] Time Value

FIN 3403 Quiz #1 - Version 1 12 points [Show all work for credit] Time Value FIN 3403 Quiz #1 - Version 1 [Show all work for credit] Time Value Frohlich Fall 1998 Do either problem one or two: (12 pts.) [show all work] 1. A)The Tried and True Company had earnings of $.30 per share

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

UNIT I : COST OF CAPITAL

UNIT I : COST OF CAPITAL 4 Financing Decisions Learning Objectives After studying this chapter you will be able to: UNIT I : COST OF CAPITAL Understand the concept of Cost of Capital that impacts the capital investments decisions

More information

Real estate investment & Appraisal Dr. Ahmed Y. Dashti. Sample Exam Questions

Real estate investment & Appraisal Dr. Ahmed Y. Dashti. Sample Exam Questions Real estate investment & Appraisal Dr. Ahmed Y. Dashti Sample Exam Questions Problem 3-1 a) Future Value = $12,000 (FVIF, 9%, 7 years) = $12,000 (1.82804) = $21,936 (annual compounding) b) Future Value

More information

Part 1: Concepts. (25 points, 5 each) 1.1). The possibility of conflict of interest between the stockholders and management of the firm is called: a.

Part 1: Concepts. (25 points, 5 each) 1.1). The possibility of conflict of interest between the stockholders and management of the firm is called: a. Part 1: Concepts. (25 points, 5 each) 1.1). The possibility of conflict of interest between the stockholders and management of the firm is called: a. The shareholders conundrum. b. Corporate breakdown.

More information

KEY EQUATIONS APPENDIX CHAPTER 2 CHAPTER 3

KEY EQUATIONS APPENDIX CHAPTER 2 CHAPTER 3 KEY EQUATIONS B CHAPTER 2 1. The balance sheet identity or equation: Assets Liabilities Shareholders equity [2.1] 2. The income statement equation: Revenues Expenses Income [2.2] 3.The cash flow identity:

More information

PV Tutorial Using Calculator (Sharp EL-738)

PV Tutorial Using Calculator (Sharp EL-738) EYK 15-2 PV Tutorial Using Calculator (Sharp EL-738) TABLE OF CONTENTS Calculator Configuration and Abbreviations Exercise 1: Exercise 2: Exercise 3: Exercise 4: Exercise 5: Exercise 6: Exercise 7: Exercise

More information

Chapter 4: Time Value of Money

Chapter 4: Time Value of Money FIN 301 Homework Solution Ch4 Chapter 4: Time Value of Money 1. a. 10,000/(1.10) 10 = 3,855.43 b. 10,000/(1.10) 20 = 1,486.44 c. 10,000/(1.05) 10 = 6,139.13 d. 10,000/(1.05) 20 = 3,768.89 2. a. $100 (1.10)

More information

TIME VALUE OF MONEY (TVM)

TIME VALUE OF MONEY (TVM) TIME VALUE OF MONEY (TVM) INTEREST Rate of Return When we know the Present Value (amount today), Future Value (amount to which the investment will grow), and Number of Periods, we can calculate the rate

More information