Commerce 298
Lecture 1B:
Valuation of Cash Flows
1
Objectives
By the end of this class, you should be able to:
Distinguish between simple and compound interest.
Explain why when you receive a cash flow partly
determines how much that cash flow is worth.

Solution to C298 Practice Problem Set #12
1 1.01797 10
10
$1,000 1.01797 $1,200 .00
.01797
1. D $40
RD YTM 3.594%
2. RP
$7
.08046 8.046%
$87
,
3. D 2,000 $10001.1201
20
$206,963.64
,
E $1000,000
V D E $206,963.64 $1000,000 $1 206,963.64
,
,

C298 Practice Problem Set #11
1.
Suppose you hold the following amounts in your portfolio
Stock
Value
$
Sonic Youth Corp. (SYC)
$10,000
0.60
Paul's Replacements (PR)
$10,000
1.50
T-Bills
-$5,000
0.00
(a)
(b)
2.
What is the $ of your portfolio?
If rf is 5%

C298 Practice Problem Set #12
1. Suppose a company has five-year, $1,000 face value, semi-annual-coupon bonds with
an 8% coupon rate and a YTM of 3.594%. What would be the market value of one of
these bonds? What would be the required return by the bondho

C298 Practice Problem Set #9
1.
The returns of shares A and B for the coming period are represented by the following jointprobability distribution:
Share A
6%
12%
8%
.02
.13
.50
9%
.05
.01
.04
10%
Share B
10%
.18
.06
.01
(a)
(b)
2.
For Share A and Share B

Solution to C298 Practice Problem Set #9
1.
a) The joint probability density is given by:
8%
Share B
9%
10%
Total
6%
0.02
0.05
0.18
0.25
Share A
10%
0.13
0.01
0.06
0.20
12%
0.50
0.04
0.01
0.55
Total
0.65
0.10
0.25
1.00
The expected returns E(R A ) and E(R

Solutions to C298 Practice Problem Set #10
1. First, determine the weight on the market portfolio from the expected return equation.
.05 .02 wM (.06 .02)
wM .75
Next, determine the portfolio standard deviation.
P wM M .75(.12) .09 or 9%
2,000
500
(.15)

C298 Practice Problem Set #10
1. What is the standard deviation of an efficient portfolio with a 5% expected rate of
return, given that the riskfree rate is 2%, the expected return on the market is 6%, and
the standard deviation of the market is 12%?
2. M

Cost of Capital
Problem Set
Question 1. The Down and Out Co. just issued a dividend of $2.40 per share on its
common stock. The company is expected to maintain a constant 5.5 percent growth rate in
its dividends indenitely. If the stock sells for $52 a sh

Solutions to C298 Practice Problem Set #7
1. An efficient market is one where current prices quickly and accurately reflect all relevant and
available information. In an efficient market, securities can be traded easily, quickly, and at
low cost. Markets

Commerce 298
Solutions to Practice Set #11
1.
(a)
Since you are short T-Bills, your total wealth is only $20,000 !$5,000 =
$15,000. So,
=
0.40 + 1.00 !0
=
1.40
(b)
2.
(a)
=
=
=
=
(.00644) = .0803
=
E(RA)
.00644
8.03%
=
=
.06 + 0.9(.12 !.06)
=
.114
=
11.4%