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


 Earl Carpenter
 2 years ago
 Views:
Transcription
1 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 months later, however, you decide to quit school to become a ski instructor, so you close the account. How much money will you receive when you close the account? FV = 4000*(1+.08/4) 5 = $ You deposit $100 today. You make no further deposits for the next 12 months, but deposit $800 per month the following 12 months. How much will you have in 2 years if you earn interest at a quoted annual rate of 12%? FVA r=.01 t=12 = FV = 100*(1+.12/12) * FVA r=.01 t=12 = $10, The company you work for will deposit $200 at the end of each month into your retirement fund. Interest is compounded monthly. You plan to retire five years from now and estimate that you will need $1,000 per month out of the account for the next 2 years. If the account pays 1% compounded monthly (i.e. quoted annual rate of 12%), how much do you need to put into the account each month in addition to your company's contribution in order to meet your financial objective? FVA r=.01 t=60 = A r=.01 t=24 = PV 60 = 1000*A r=.01 t=24 = 21, (200+x)*81.67 = 21, x=60.11 (4) You are an investment advisor who has been approached by a client for help on his financial strategy. He has $250,000 in savings in the bank. He is 55 years old and expects to work for 10 more years, making $100,000 a year. (He expects to make a return of 5% on his investments for the foreseeable future. You can ignore taxes.) a. Once he retires 10 years from now, he would like to be able to withdraw $80,000 a year for the following 25 years. (His actuary tells him he will live to be 90 years old.) How much would he need in the bank 10 years from now to be able to do this? b. How much of his income would he need to save each year for the next 10 years to be able to afford these planned withdrawals ($80,000 a year) after the tenth year? c. Assume that interest rates decline to 4%, ten years from now. By how much, if any, would your client have to lower his annual withdrawal, assuming that he still plans to withdraw cash each year for the next 25 years? a. A r=.05 t=25 = Amount needed in the bank to withdraw $ 80,000 each year for 25 years = $1,127,512 b. Future Value of Existing Savings in the Bank $250,000* = $407,224 Shortfall in Savings $1,127,512  $407,224 = $720,288 FVA r=.05 t=10 = Annual Savings needed to get FV of $720,288 = $57,265 c. If interest rates drop to 4% after the 10th year, A r=.04 t=25 =
2 Annuity based upon interest rate of 4% and PV of $1,127,512 = $72,174 The decline in the amount of withdrawal = $80,000  $72,174 = $7,826 (5) You are comparing houses in two towns. You have $100,000 for a down payment, and 30year mortgage rates are at 8%. Town 1 Town 2 Price of the house Annual property tax $400,000 $6,000 $300,000 $12,000 The houses are roughly equivalent. a. Estimate the total per year payments (mortgage and property taxes) you would have on each house. Which one is less expensive (based on the total dollar yearly payment)? b. Are mortgage payments and property taxes directly comparable? Why or why not? c. If property taxes are expected to grow 3% a year forever, which house is less expensive (assume property taxes are paid at the beginning of the year)? a. A r=.08/12 t=360 = Town 1 Town 2 Mortgage: $300,000 $200,000 Monthly Payment. $2, $1, Annual Payments $26, $17, Property Tax $6,000 $12,000 Total Payment $32, $29, b. Mortgage payments will end after 30 years. Property taxes are not only a perpetuity; they arc a growing perpetuity. Therefore, they are likely to be more onerous. c. If property taxes are expected to grow at 3% annually forever, PV of property taxes = Property tax * (1 +g) / (r g) For Town 1, PV of property tax = $6,000 + $6000* 1.03/( ) = $129,600 For Town 2, PV of property tax = $12,000 + $12000*1.03/( ) = $259,200 To make the comparison, add these to the house prices, Cost of the Town 1 house $400,000 + $129,600 = $529,600 Cost of the Town 2 house $300,000 + $259,200 = $559,200 The Town 1 house is cheaper. (6) You are trying to assess the value of a small retail store that is for sale. The store generated a cash flow to its owner of $100,000 in the most profitable year of operation and is expected to have growth of about 5% a year in perpetuity. If the rate of return required on this store is 10%, what is your assessment of the value of the store? What would the growth rate need to be to justify a price of $2.5 million for this store? a. Value of Store = $100,000 (l.05)/( )= $2,100,000 b. Growth rate needed to justify a value of $ 2.5 mi1lion: Solving for g, 100,000(1+g)/(.10g) = 2,500,000 g = 5.77% (.05769)
3 (7) What is the value of 15year corporate bonds, with a coupon rate of 9%, if current interest rates on similar bonds is 8%? How much would the value change if interest rates increased to 10%? Under what conditions will this bond trade at par (face value)? Value of 15year corporate bond; 9% coupon rate; 8 % market interest rate Assuming coupons are paid semiannually, A r=.04 t=30 = Value of Bond = 45*(11.04^(30))/.04+ 1,000/1.04^30 = $1, If market interest rates increase to 10%, A r=.05 t=30 = Value of Bond = 45*(11.05^(30))/.05+1,000/1.05^30 = $ The bonds will trade at par only if the market interest rate = coupon rate. (8) Chrysler bonds quoted on the New York Exchange include 12% coupon bonds maturing in 2003 and 12% coupon bonds maturing in Both are $1,000 face value bonds and mature on March 1. The first bond was issued in 1988 and the second one in Interest rates are currently at the 8% level. a. Determine the current prices of the bonds (today is March 1, the price does not include the 3/1/2002 coupon payment). Assume coupon payments are made semiannually. b. The Federal Reserve is expected to announce a cut in the discount rate, which will cause the level of interest rates to fall to 6%. Which bond will be more affected by the change in interest rates? a. P= 60/(1+.08/2) / = A r=.04 t=42 = P=60* / = b. bond 2, longer term. (9) 9.A. World Wide Pants (WWP), a well known entertainment company, has been experiencing financial difficulty and has omitted its annual dividend. The company is expected to resume dividend payments two years from now beginning at $.50 per share; dividends are then expected to grow at 2% for 2 years, and then at 5% thereafter. What is the price of the stock today if you are given a monthly interest rate of 2%? EAR = 26.82% ; P=$ B.George is considering purchasing stock and holding it for 3 years. The projected dividends (at a 5% growth rate) and market price are: D 1 = $4.20; D 2 = $ 4.41 ; D 3 = $4.63; and P 3 = $ His required rate of return, given the risk involved, is 10%. a. What is the maximum price George should pay for the stock? b. If the dividends for years 1 and 2 remain at $4.20 and $4.41, respectively, and are expected to grow at 5% per year to infinity, what would the stock price be at the end of the second year if George sold the stock then? (assume investors still require a 10% return for this stock)? What is
4 the total discounted present value (today) of the cash flows George receives if he holds the stock only 2 years? c. Is the value of the stock today dependent on how long George plans to hold it? Does its price today depend on whether he plans to hold the stock for 2 years, 3 years, or any other period of time? ; ; 84 ; no (10) What is the value of stock in a company that currently pays out $1.00 per share in dividends and expects these dividends to grow 15% a year for the next five years and 6% a year forever after that? Assume that investors require a 12.5% return on stocks of equivalent risk. D 1 =1*1.15 ; growing annuity factor = [1(1+g) T /(1+r) T ]/(rg) = Value of Dividends during high growth period = $ l.00(1.15)(11.15^5/1.125^5)/( ) = $5.34 Expected Dividends in year 6 = $1.00 (1.15)^5*1.06 = $2.13 Expected Terminal Price $2.13/( ) = $32.77 Value of Stock = $ $32.77/1.125^5 = $ $ = $23.53 (11) A company is considering building a hotel in Beijing, China. Because of the political risk involved, the company wants to have a small payback period. The cash flows are estimated to be as follows: Year Cash Flows 03,000, , , , , ,000 a. Find the payback period for the project. b. Find the discounted payback period if the discount rate is 10% a: the payback period = 5 years. b: the discounted payback period = 7 + some part of 8 th yr = 9.84 ; 9.84/ =.028 Yr CF PV Sum PV (12) Your company is considering a project that will bring in annual free cash flow in the amount of $50,000 for 10 years. If the discount rate is 14%, what would be the maximum initial required investment below which the project would be accepted based on the NPV rule?
5 A r=.14 t=10 = The PV cash flows 50,000 * = $260,805 This would be the maximum initial investment on the project so that the NPV would be greater than zero. (13) It is sometimes argued that net present value should be based on timevarying discount rates. As an example, consider a project with projected cash flows as follows: Year Cash Flows Appropriate discount rate 0500, ,000 10% 2 350,000 12% What is the NPV of this project? The NPV =  500, ,000/(1+10%) + 350,000/(1+12%)(1+10%) = 500, , ,090 = $56,820 (14) A project is estimated to have the cash flows to firm as follows: Year Cash Flow 0200, per year 25, ,000 a. What is the internal rate of return of this project? b. Should the project be accepted if the discount rate is 10%? c. Is the NPV positive or negative? a: The IRR 7.1 (.07096) b: The project should be rejected since IRR < discount rate (10 %). c: Then NPV = *A r=.1 t=9 + 75/ =  $27,109. (A r=.1 t=9 = ) (15) There are two mutually exclusive projects with estimated cash flows to firm as follows: Year Project A Project B a. What is the IRR for Project A? b. What is the IRR for Project B? c. Which project should be accepted based on the IRR rule? d. What are the NPVs of Project A and Project B if the discount rate is 5%? Which project should be accepted based on the NPV rule? e. What are the NPVs of Project A and Project B if the discount rate is 8%? Which project should be accepted based on the NPV rule? f. Do the IRR rule and NPV rule always reach the same conclusion with regard to the
6 selection of two mutual exclusive projects? Which method is more consistent with the objective of corporate finance to maximize shareholders wealth? a: The IRR for Project A = 8.04% b: The IRR for Project B = 7.32% c: Project A is accepted based on the IRR rule since it has higher IRR. d: A r=.05 t=19 = Since the NPV of Project A = $ and the NPV of Project B = $ when the discount rate is 5%, it is obvious that the Project B should be accepted. e: A r=.08 t=19 = Since the NPV of Project A = $1.63 and the NPV of Project B $ when the discount rate is 8%, then Project A should he accepted. f: In this example, the IRR rule finds the Project A superior to the Project B, However, the NPV rule may give different conclusions when the cost of capital changes. The NPV rule is more consistent with the objective of financial management to maximize the shareholders wealth.
AFM 271 Practice Problem Set #1 Spring 2005
AFM 271 Practice Problem Set #1 Spring 2005 1. Text problems: Chapter 1 1, 3, 4 Chapter 2 5 Chapter 3 2, 6, 7 Chapter 4 2, 6, 12, 14, 16, 18, 20, 22, 24, 26, 30, 32, 34, 38, 40, 46, 48 Chapter 5 2, 4,
More informationChapter 5 Time Value of Money
1. Future Value of a Lump Sum 2. Present Value of a Lump Sum 3. Future Value of Cash Flow Streams 4. Present Value of Cash Flow Streams 5. Perpetuities 6. Uneven Series of Cash Flows 7. Other Compounding
More informationChapter 4 Discounted Cash Flow Valuation
University of Science and Technology Beijing Dongling School of Economics and management Chapter 4 Discounted Cash Flow Valuation Sep. 2012 Dr. Xiao Ming USTB 1 Key Concepts and Skills Be able to compute
More informationChapter 28 Time Value of Money
Chapter 28 Time Value of Money Lump sum cash flows 1. For example, how much would I get if I deposit $100 in a bank account for 5 years at an annual interest rate of 10%? Let s try using our calculator:
More information1. 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 informationChapter. Discounted Cash Flow Valuation. CORPRATE FINANCE FUNDAMENTALS by Ross, Westerfield & Jordan CIG.
Chapter 6 Discounted Cash Flow Valuation CORPRATE FINANCE FUNDAMENTALS by Ross, Westerfield & Jordan CIG. Key Concepts and Skills Be able to compute the future value of multiple cash flows Be able to compute
More informationYou just paid $350,000 for a policy that will pay you and your heirs $12,000 a year forever. What rate of return are you earning on this policy?
1 You estimate that you will have $24,500 in student loans by the time you graduate. The interest rate is 6.5%. If you want to have this debt paid in full within five years, how much must you pay each
More informationCHAPTER 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 informationChapter 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 informationReview 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 informationTimeValueofMoney and Amortization Worksheets
2 TimeValueofMoney and Amortization Worksheets The TimeValueofMoney and Amortization worksheets are useful in applications where the cash flows are equal, evenly spaced, and either all inflows or
More informationExam 2 Study Guide. o o
1. LS7a An account was established 7 years ago with an initial deposit. Today the account is credited with annual interest of $860. The interest rate is 7.7% compounded annually. No other deposits or withdrawals
More informationNet present value is the difference between a project s value and its costs.
1 2 Net present value is the difference between a project s value and its costs. We need to calculate the Present Value of future cash flows (discounted by the opportunity cost of capital) and subtract
More informationTime Value of Money Practice Questions Irfanullah.co
1. You are trying to estimate the required rate of return for a particular investment. Which of the following premiums are you least likely to consider? A. Inflation premium B. Maturity premium C. Nominal
More informationTime 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 informationChapter 02 How to Calculate Present Values
Chapter 02 How to Calculate Present Values Multiple Choice Questions 1. The present value of $100 expected in two years from today at a discount rate of 6% is: A. $116.64 B. $108.00 C. $100.00 D. $89.00
More informationBUSINESS 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 informationSpring 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 informationChapter 7: Net Present Value and Other Investment Criteria
FIN 301 Class Notes Chapter 7: Net Present Value and Other Investment Criteria Project evaluation involves: 1 Estimating the cash flows associated with the investment project (ch. 8) 2 Determining the
More informationWhy Use Net Present Value? The Payback Period Method The Discounted Payback Period Method The Average Accounting Return Method The Internal Rate of
1 Why Use Net Present Value? The Payback Period Method The Discounted Payback Period Method The Average Accounting Return Method The Internal Rate of Return Problems with the IRR Approach The Profitability
More informationChapter 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 informationOklahoma State University Spears School of Business. Time Value of Money
Oklahoma State University Spears School of Business Time Value of Money Slide 2 Time Value of Money Which would you rather receive as a signin bonus for your new job? 1. $15,000 cash upon signing the
More informationSAMPLE 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 information380.760: Corporate Finance. Financial Decision Making
380.760: Corporate Finance Lecture 2: Time Value of Money and Net Present Value Gordon Bodnar, 2009 Professor Gordon Bodnar 2009 Financial Decision Making Finance decision making is about evaluating costs
More informationMethods for Project Evaluation
Methods for Project Evaluation March 8, 2004 1 Alternative Methods Present worth (PW) method Future worth (FW) method Annual worth (AW) method Benefitcost ratio (BC) method Internal rate of return (IRR)
More informationFinQuiz Notes 2 0 1 5
Reading 5 The Time Value of Money Money has a time value because a unit of money received today is worth more than a unit of money to be received tomorrow. Interest rates can be interpreted in three ways.
More informationChapter 4. The Time Value of Money
Chapter 4 The Time Value of Money 1 Learning Outcomes Chapter 4 Identify various types of cash flow patterns Compute the future value and the present value of different cash flow streams Compute the return
More informationThe Time Value of Money
The Time Value of Money Future Value  Amount to which an investment will grow after earning interest. Compound Interest  Interest earned on interest. Simple Interest  Interest earned only on the original
More informationChapter 2 Present Value
Chapter 2 Present Value Road Map Part A Introduction to finance. Financial decisions and financial markets. Present value. Part B Valuation of assets, given discount rates. Part C Determination of riskadjusted
More informationDiscounted 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 informationOverview of Lecture 4
Overview of Lecture 4 Examples of Quoted vs. True Interest Rates Banks Auto Loan Forward rates, spot rates and bond prices How do things change when interest rates vary over different periods? Present
More informationDiscounted Cash Flow Valuation
6 Formulas Discounted Cash Flow Valuation McGrawHill/Irwin Copyright 2008 by The McGrawHill Companies, Inc. All rights reserved. Chapter Outline Future and Present Values of Multiple Cash Flows Valuing
More informationFIN 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 informationMBA 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 informationCHAPTER 2. Time Value of Money 21
CHAPTER 2 Time Value of Money 21 Time Value of Money (TVM) Time Lines Future value & Present value Rates of return Annuities & Perpetuities Uneven cash Flow Streams Amortization 22 Time lines 0 1 2 3
More informationNet Present Value (NPV)
Investment Criteria 208 Net Present Value (NPV) What: NPV is a measure of how much value is created or added today by undertaking an investment (the difference between the investment s market value and
More informationInvestment Decisions and Capital Budgeting
Investment Decisions and Capital Budgeting FINANCE 350 Global Financial Management Professor Alon Brav Fuqua School of Business Duke University 1 Issues in Capital Budgeting: Investment How should capital
More informationAPPENDIX 3 TIME VALUE OF MONEY. Time Lines and Notation. The Intuitive Basis for Present Value
1 2 TIME VALUE OF MONEY APPENDIX 3 The simplest tools in finance are often the most powerful. Present value is a concept that is intuitively appealing, simple to compute, and has a wide range of applications.
More information9. Himal Trading has EBIT of Rs 80,000, interest expense of Rs 12,000, and preferred
Set A Fundamentals of Financial Management Model Questions 2072 Program: BBS Time: 3 Hours Part: III F.M.: 100 Code: MGT 215 P.M.: 35 The objective of the model questions is to give an overview of the
More informationFinding the Payment $20,000 = C[1 1 / 1.0066667 48 ] /.0066667 C = $488.26
Quick Quiz: Part 2 You know the payment amount for a loan and you want to know how much was borrowed. Do you compute a present value or a future value? You want to receive $5,000 per month in retirement.
More informationOverview 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 informationEconomic Feasibility Studies
Economic Feasibility Studies ١ Introduction Every long term decision the firm makes is a capital budgeting decision whenever it changes the company s cash flows. The difficulty with making these decisions
More information( ) ( )( ) ( ) 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 informationExercise 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 informationStock and Bond Valuation: Annuities and Perpetuities
Stock and Bond Valuation: Annuities and Perpetuities Lecture 3, slides 3.1 Brais Alvarez Pereira LdM, BUS 332 F: Principles of Finance, Spring 2016 February 23, 2016 Important Shortcut Formulas Present
More informationChapter 2: Capital Budgeting Techniques
Chapter 2: Introduction 2.1 Introduction In order to assess the feasibility of any investment project, some capital budgeting techniques should be used to evaluate that project. This part illustrates the
More informationFI 302, Business Finance Exam 2, Fall 2000 versions 1 & 8 KEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEY
FI 302, Business Finance Exam 2, Fall 2000 versions 1 & 8 KEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEY 1. (3 points) BS16 What is a 401k plan Most U.S. households single largest lifetime source of savings is
More informationHow to calculate present values
How to calculate present values Back to the future Chapter 3 Discounted Cash Flow Analysis (Time Value of Money) Discounted Cash Flow (DCF) analysis is the foundation of valuation in corporate finance
More informationFIN 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 31 a) Future Value = FV(n,i,PV,PMT)
More informationCAPITAL BUDGETING. Net Present Value and Other Investment Criteria
CAPITAL BUDGETING Net Present Value and Other Investment Criteria Net Present Value (NPV) Net present value is the difference between an investment s market value (in today s dollars) and its cost (also
More informationChapter 4 Time Value of Money
Chapter 4 Time Value of Money Solutions to Problems P41. LG 1: Using a Time Line Basic (a), (b), and (c) Compounding Future Value $25,000 $3,000 $6,000 $6,000 $10,000 $8,000 $7,000 > 0 1 2 3 4 5 6 End
More informationCapital Budgeting: Decision. Example. Net Present Value (NPV) FINC 3630 Yost
Capital Budgeting: Decision Criteria Example Consider a firm with two projects, A and B, each with the following cash flows and a 10 percent cost of capital: Project A Project B Year Cash Flows Cash Flows
More informationCHAPTER 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 information3. Time value of money. We will review some tools for discounting cash flows.
1 3. Time value of money We will review some tools for discounting cash flows. Simple interest 2 With simple interest, the amount earned each period is always the same: i = rp o where i = interest earned
More informationTime Value of Money 1
Time Value of Money 1 This topic introduces you to the analysis of tradeoffs over time. Financial decisions involve costs and benefits that are spread over time. Financial decision makers in households
More informationTopics Covered. Compounding and Discounting Single Sums. Ch. 4  The Time Value of Money. The Time Value of Money
Ch. 4  The Time Value of Money Topics Covered Future Values Present Values Multiple Cash Flows Perpetuities and Annuities Effective Annual Interest Rate For now, we will omit the section 4.5 on inflation
More informationFinance 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 informationKey Concepts and Skills. Multiple Cash Flows Future Value Example 6.1. Chapter Outline. Multiple Cash Flows Example 2 Continued
6 Calculators Discounted Cash Flow Valuation 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 informationCHAPTER 4 DISCOUNTED CASH FLOW VALUATION
CHAPTER 4 DISCOUNTED CASH FLOW VALUATION Solutions to Questions and Problems NOTE: Allendof chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability
More information1. 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 informationFinal Examination, BUS312, D1+ E1. SFU Student number:
Final Examination, BUS312, D1+ E1 NAME: SFU Student number: Instructions: For qualitative questions, point form is not an acceptable answer. For quantitative questions, an indication of how you arrived
More informationFinancial Markets and Valuation  Tutorial 2: SOLUTIONS. Bonds, Stock Valuation & Capital Budgeting
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
More informationEXAM 2 OVERVIEW. Binay Adhikari
EXAM 2 OVERVIEW Binay Adhikari FEDERAL RESERVE & MARKET ACTIVITY (BS38) Definition 4.1 Discount Rate The discount rate is the periodic percentage return subtracted from the future cash flow for computing
More information3. Time value of money
1 Simple interest 2 3. Time value of money With simple interest, the amount earned each period is always the same: i = rp o We will review some tools for discounting cash flows. where i = interest earned
More informationCh. Ch. 5 Discounted Cash Flows & Valuation In Chapter 5,
Ch. 5 Discounted Cash Flows & Valuation In Chapter 5, we found the PV & FV of single cash flowseither payments or receipts. In this chapter, we will do the same for multiple cash flows. 2 Multiple Cash
More informationFinance 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 informationProject 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 informationTime Value of Money. Background
Time Value of Money (Text reference: Chapter 4) Topics Background One period case  single cash flow Multiperiod case  single cash flow Multiperiod case  compounding periods Multiperiod case  multiple
More informationFin 3312 Sample Exam 1 Questions
Fin 3312 Sample Exam 1 Questions Here are some representative type questions. This review is intended to give you an idea of the types of questions that may appear on the exam, and how the questions might
More informationChapter 13 The Basics of Capital Budgeting Evaluating Cash Flows
Chapter 13 The Basics of Capital Budgeting Evaluating Cash Flows ANSWERS TO SELECTED ENDOFCHAPTER QUESTIONS 131 a. The capital budget outlines the planned expenditures on fixed assets. Capital budgeting
More informationAnswers to WarmUp Exercises
Answers to WarmUp Exercises E101. Answer: E102. Answer: Payback period The payback period for Project Hydrogen is 4.29 years. The payback period for Project Helium is 5.75 years. Both projects are acceptable
More informationSOCIETY OF ACTUARIES/CASUALTY ACTUARIAL SOCIETY EXAM FM SAMPLE QUESTIONS
SOCIETY OF ACTUARIES/CASUALTY ACTUARIAL SOCIETY EXAM FM FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS Copyright 2005 by the Society of Actuaries and the Casualty Actuarial Society Some of the questions
More informationLecture 5 (Chapter 9) Investment Criteria. Some Problems
Lecture 5 (Chapter 9) Investment Criteria Up to now, we have analyzed how to finance a firm (capital structure) Today we switch to analyzing what to do with the money once we ve got it (capital budgeting
More informationChapter 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 informationMidterm exam financiering/finance. <Front page>
Midterm exam financiering/finance Question 1 An agency problem can be alleviated by: A) requiring all organizations to be sole proprietorships. B) compensating managers in such a way that
More informationCompound Interest. Invest 500 that earns 10% interest each year for 3 years, where each interest payment is reinvested at the same rate:
Compound Interest Invest 500 that earns 10% interest each year for 3 years, where each interest payment is reinvested at the same rate: Table 1 Development of Nominal Payments and the Terminal Value, S.
More informationExcel Financial Functions
Excel Financial Functions PV() Effect() Nominal() FV() PMT() Payment Amortization Table Payment Array Table NPer() Rate() NPV() IRR() MIRR() Yield() Price() Accrint() Future Value How much will your money
More informationPrepared by: Dalia A. Marafi Version 2.0
Kuwait University College of Business Administration Department of Finance and Financial Institutions Using )Casio FC200V( for Fundamentals of Financial Management (220) Prepared by: Dalia A. Marafi Version
More informationPresent Value. Aswath Damodaran. Aswath Damodaran 1
Present Value Aswath Damodaran Aswath Damodaran 1 Intuition Behind Present Value There are three reasons why a dollar tomorrow is worth less than a dollar today Individuals prefer present consumption to
More informationHOW TO CALCULATE PRESENT VALUES
Chapter 2 HOW TO CALCULATE PRESENT VALUES Brealey, Myers, and Allen Principles of Corporate Finance 11 th Global Edition McGrawHill Education Copyright 2014 by The McGrawHill Companies, Inc. All rights
More informationClick Here to Buy the Tutorial
FIN 534 Week 4 Quiz 3 (Str) Click Here to Buy the Tutorial http://www.tutorialoutlet.com/fin534/fin534week4quiz3 str/ For more course tutorials visit www.tutorialoutlet.com Which of the following
More informationLO.a: Interpret interest rates as required rates of return, discount rates, or opportunity costs.
LO.a: Interpret interest rates as required rates of return, discount rates, or opportunity costs. 1. The minimum rate of return that an investor must receive in order to invest in a project is most likely
More informationIntroduction 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 informationCHAPTER 9 Time Value Analysis
Copyright 2008 by the Foundation of the American College of Healthcare Executives 6/11/07 Version 91 CHAPTER 9 Time Value Analysis Future and present values Lump sums Annuities Uneven cash flow streams
More informationLongTerm Debt. Objectives: simple present value calculations. Understand the terminology of longterm debt Par value Discount vs.
Objectives: LongTerm Debt! Extend our understanding of valuation methods beyond simple present value calculations. Understand the terminology of longterm debt Par value Discount vs. Premium Mortgages!
More informationTime Value of Money (TVM)
BUSI Financial Management Time Value of Money 1 Time Value of Money (TVM) Present value and future value how much is $1 now worth in the future? how much is $1 in the future worth now? Business planning
More informationDISCOUNTED 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 informationCapital Structure. Conclusion
Capital Structure Conclusion Target Capital Structure Target capital structure is a function of expected profitability riskiness of operations vulnerabilities to outside constituencies Steps in the Analysis
More informationBusiness 2019 Finance I Lakehead University. Midterm Exam
Business 2019 Finance I Lakehead University Midterm Exam Philippe Grégoire Fall 2002 Time allowed: 2 hours. Instructions: Calculators are permitted. One 8.5 11 inches crib sheet is allowed. Verify that
More informationCHAPTER 5 INTRODUCTION TO VALUATION: THE TIME VALUE OF MONEY
CHAPTER 5 INTRODUCTION TO VALUATION: THE TIME VALUE OF MONEY 1. The simple interest per year is: $5,000.08 = $400 So after 10 years you will have: $400 10 = $4,000 in interest. The total balance will be
More informationSolutions to Time value of money practice problems
Solutions to Time value of money practice problems Prepared by Pamela Peterson Drake 1. What is the balance in an account at the end of 10 years if $2,500 is deposited today and the account earns 4% interest,
More informationChapter 8. 48 Financial Planning Handbook PDP
Chapter 8 48 Financial Planning Handbook PDP The Financial Planner's Toolkit As a financial planner, you will be doing a lot of mathematical calculations for your clients. Doing these calculations for
More informationChapter 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 informationBF 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 1hour exam. 2) The topics included in those essay and
More informationSection 8.3 Notes Compound Interest
Section 8.3 Notes Compound The Difference between Simple and Compound : Simple is paid on your investment or principal and NOT on any interest added Compound paid on BOTH on the principal and on all interest
More informationNPV Versus IRR. W.L. Silber 1000 0 0 +300 +600 +900. We know that if the cost of capital is 18 percent we reject the project because the NPV
NPV Versus IRR W.L. Silber I. Our favorite project A has the following cash flows: 1 + +6 +9 1 2 We know that if the cost of capital is 18 percent we reject the project because the net present value is
More informationNPV and Other Investment Criteria
Chapter 8 NPV and Other Investment Criteria CAPITAL BUDGETING TERMS Capital budgeting is where we start to pull all of the tools and techniques we ve learned so far together (TVM, cash flow analysis, etc.)
More informationMODULE: PRINCIPLES OF FINANCE
Programme: BSc (Hons) Financial Services with Law BSc (Hons) Accounting with Finance BSc (Hons) Banking and International Finance BSc (Hons) Management Cohort: BFSL/13/FT Aug BACF/13/PT Aug BACF/13/FT
More informationChapter 4. Time lines show timing of cash flows. Time Value Topics. Future value Present value Rates of return Amortization
Time Value Topics Chapter 4 Time Value of Money Future value Present value Rates of return Amortization 1 2 Determinants of Intrinsic Value: The Present Value Equation Net operating Required investments
More informationChapter 10. Capital Budgeting Techniques. Copyright 2012 Pearson Prentice Hall. All rights reserved.
Chapter 10 Capital Budgeting Techniques Copyright 2012 Pearson Prentice Hall. All rights reserved. Overview of Capital Budgeting Capital budgeting is the process of evaluating and selecting longterm investments
More information