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FIN3 - Final Exam Review FIN3403 Problem Breakdown 18...

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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
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Final Exam Review - FIN3403 specific costs for certain dollar amounts they can raise from each of: equity, debt, and preferred stock. Suggested Problems: “Cost of Capital”, Type 1- 42, 45 Type 2- 4, 5, 10, 11 22. I don’t really see a difference this one and the last one. J ust be sure you are comfortable with weighted average cost of capital problems. 23. Unlever and Relever Beta: This should be a straight forward question where you have to use the B L and B U equations. Be aware that after you find the Beta, you may have to use it in the CAPM equation (r s =r*+(RPM)B) to find the cost of stock.
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