Final Exam Review - FIN3403
Problem Breakdown
18.
Birthday Problem:
This question is going to be a cash flow
problem, but Tapley makes the problem way longer than is necessary.
It’s most likely going to be exactly like the one from the first exam with
different numbers so look that one over.
19.
Realized Compounded Yield:
This was also on the last test
so if you look over the question from the last test that says “realized
compound yield” in the question it should be very similar, if not the
same.
First, find the Current Price of the bond (top 5 buttons). Then,
find the Price you can sell the bond for in the future (N will depend on
how many years that REMAIN on the bond). Then, find the value of
your coupon payments that earned interest AT the time you are selling
the bond using the top 5 buttons (N=time you HELD the bond,
I=reinvestment rate, PMT=coupon payments, FV=?). Last step, find
the I/yr=? with PV=-(Price you found in step 1), FV=+(Value of
coupons plus price you sold the bond for), N=# of periods you held the
bond.
Suggested Problems: “Bond Valuation” - 48, 62.
20.
Yield to Maturity and term structure: You will most likely
get a chart with 1-year rates and cash flows for each year. What you
have to do is discount back each cash flow the respective number of
years back to year zero to first find the current price of the bond. For
example, if the 1-year rates for years 1, 2, and 3 were 3%, 4%, and
5%, and the cash flow for year 3 was $50, you would take
$50/(1.05*1.04*1.03). Then, once you get the current price, use the
top 5 buttons to find the I/yr. Payment will be what the cash flows were
for all the years except
the last one, present value will be the (-) of the
price you just calculated, future value will be 1000, and N is, well N.
Suggested Problems: “Bond Valuation” - 38, 43
21.
WACC: This will be a problem where you are given a bulleted list
of information about the company which will allow you to figure out
both their cost of debt and cost of stock. r
s
=(D
1
/P
0
)+g. And to find cost
of debt, you use the top 5 buttons to find I/yr, which is the yield to
maturity. Remember these things: g=(Retention Rate)(ROE) and don’t
forget that if the company has to issue new stock, they may have to
incur a flotation expense which you would subtract from the P
0
in the
cost of stock equation. The other way he may ask it is if he tells you