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practice_questions_with_answers - Practice Questions for...

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Practice Questions for Midterm 1 BUAD 306 Summer 2008 The questions are only about valuation. Midterm question will be similar or less difficult. We solve these questions on Monday (June 16 th ). Hints (1) We can value (price) any asset. Price at present time is PV of all CF and price at some future time is value at that future time of all CF. (2) A discount rate is also a required rate of return by investors (recall the last lecture). NOTE (3) All tables have the same number of columns. You can add or ignore some columns if needed. Also, you don’t have to write consecutive years or time periods unless needed. (4) Time represents time relative present time (for example, year 2008 is time 0 and year 2009 is time1) (5) Year is a calendar year.
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Q1. An insurance company Trust Inc is selling a financial product this year (2008). It gives $1000 every year from 2020 for 10 years. Assume a discount rate of 10%. (1) Fill out the table to get CF and PV of each CF of this product. year 2008 2009… 2020 2021 2029 Time 0 1… 12 13 21 CF 0 0… 1000 1000 1000 PV 0 0… 1000/(1.1) 12 1000/(1.1) 13 1000/(1.1) 21 (2) We need two perpetuities to value the product. What perpetuities do we need (provide the amount that they pay
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