Exam #1
Review Questions
Exercise #1
After reading the fine print in your credit card agreement, you find that the low interest rate is actually an
18% APR, or 1.5% per month. Now, to make you feel even worse, calculate the effective annual interest
rate.
Time Value of Money Practice Problems
1. Mr. Miser, who is 35 years old, has just inherited $11,000 and decides to use the windfall
towards his retirement. He places the money in a bank which promises a return of 6% per year
until his planned retirement a
FINA 3001 - Fundamentals of Finance
Lecture Notes Unit Two
Fall Semester 2012
The Valuation Principle
Cost Benefit Analysis
Most business decisions involve the evaluation of the benefits
generated compared the costs incurred creating the benefits.
If the
Time Value of Money Practice Problems
1. Mr. Miser, who is 35 years old, has just inherited $11,000 and decides to use the windfall
towards his retirement. He places the money in a bank which promises a return of 6% per year
until his planned retirement a
Exam #1 Study Guide
Chapter 1
In-class power point
Chapter 3
Power points
Cost Benefit Analysis
Valuation Principle
Time Value of Money
NPV Decision Rule
The Law of One Price
Arbitrage
Chapter 4
Future Value and Present Value
Power points
Cash Flows at
Solutions to Additional practice problems for exam #1
Exercise #1
1
PV = $500
.0067
.00667(1.00667)48
1
= $20,479.36
A difference of $4,520.64 exists between cash price and loan value. This should
be the down payment.
Exercise #2
1
PV = $200 1
+ 400
Additional practice problems for exam #1
Exercise #1
The salesperson offers, Buy this new car for $25,000 cash or, with appropriate
down payment, pay $500 per month for 48 months at 8% interest. Assuming
that the salesperson does not offer a free lunch, c
Weighted Average Cost of Capital (WACC)-In Class
Weir Enterprises Balance Sheet is listed below. The preferred stock currently sells for
$15 per share and pays a $1.50 dividend. There are one million common shares
outstanding and the stock sells for $30 p
Stock Valuation
1.
Carlton Corporation just paid a dividend of $3 per share. The company expects to grow
their dividend at 20% per year for the next three years. After three years, the company
expects to grow their dividends at 6% for the foreseeable futu
Risk and Return
In-class assignment
1) Draw a Security Market Line that has the Expected Return on the Market of 11% and
the risk-free rate of 4%.
E(R)
A
E(Rm)
= 11%
Rrf =
4%
B
0.8
1.0 1.2
2) Assume that you have a security A, that has a Beta of 1.2 and a
Economic Break-even/Minimum Bid Price problems
1) Dime a Dozen Diamonds makes synthetic diamonds by treating carbon. Each
diamond can be sold for $100. The materials cost for a standard diamond is $40. The
fixed costs incurred each year for the factory up
Given the following information, calculate operating cash flow.
Sales
Cost of Goods Sold
Operating Expenses
Depreciation
EBIT
Interest
Tax. Inc.
Taxes (0.34)
Net Income
2008
700,000
340,000
150,000
90,000
120,000
20,000
100,000
34,000
66,000
Assets
Cash
A