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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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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
each year, and the year or time period that the payments begin)?
P#1 gives 1000 from 2020 (time 12) and P#2 gives 1000 from 2030 (time 22).
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This note was uploaded on 06/30/2008 for the course BUAD 306 taught by Professor Selvili during the Summer '07 term at USC.
 Summer '07
 Selvili
 Finance, Valuation

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