The Time Value of Money
73
31. Annuity Due. A store offers two payment plans. Under the installment plan, you pay 25 percent down and 25 percent of the purchase price in each of the next 3 years. If you pay the
entire bill immediately, you can take a 10 p
160
APPENDIX A
b. The current ratio is unaffected, since the firm merely exchanges one current asset (cash)
for another (inventories). However, the quick ratio will fall since inventories are not included among the most liquid assets.
3 Average daily expe
ACTSC 372 Corporate Finance 2
Assignment #2 Due Thursday February 16th at 1 pm
In the DROP BOXES
Question 1: Assume we believe securities follow a 2 factor APT model, i.e. assume for an asset
we have
= 5% + 1.5(1 0.5(2 2 ) +
1 )
Where represents the fa
308
SECTION THREE
8 a. The sustainable growth rate is
g = return on equity plowback ratio
= 10% .40 = 4%
b. First value the company. At a 60 percent payout ratio, DIV1 = $3.00 as before. Using the
constant-growth model,
P0 =
$3
= $37.50
.12 .04
which is $
Valuing Bonds
265
RATE OF RETURN
RATE OF RETURN
Total income per period per
dollar invested.
When you invest in a bond, you receive a regular coupon payment. As bond prices
change, you may also make a capital gain or loss. For example, suppose you buy the
76
SECTION ONE
67. Real versus Nominal Rates. You will receive $100 from a savings bond in 3 years. The
nominal interest rate is 8 percent.
a. What is the present value of the proceeds from the bond?
b. If the inflation rate over the next few years is exp
The Time Value of Money
79
15 The present value is
PV =
$5,000
= $4,629.63
1.08
The real interest rate is 2.857 percent (see Self-Test 3.14a). The real cash payment is
$5,000/(1.05) = $4,761.90. Thus
PV =
$4,761.90
= $4,629.63
1.02857
16 Calculate the rea
Accounting and Finance
129
a. What was the firms net income?
b. What must have been the firms revenues?
c. What was EBIT?
17. Profits versus Cash Flow. Butterfly Tractors had $14 million in sales last year. Cost of
goods sold was $8 million, depreciation
Chapter 17
Firm Value
17.1 Janetta Corp. has an EBIT rate of $850,000 per year that is expected to continue in perpetuity.
The unlevered cost of equity for the company is 14 percent, and the corporate tax rate is 35
percent. The company also has a perpetu
Chapter 12
Factor Models
12.1 A researcher has determined that a two-factor model is appropriate to determine the return on
a stock. The factors are the percentage change in GNP and an interest rate. GNP is expected to
grow by 3.5 percent, and the interes
74
SECTION ONE
41. EAR versus APR. You invest $1,000 at a 6 percent annual interest rate, stated as an APR.
Interest is compounded monthly. How much will you have in 1 year? In 1.5 years?
42. Annuity Value. You just borrowed $100,000 to buy a condo. You w
Chapter 16
EBIT and Leverage
16.1 Money Inc. has no debt outstanding and a total market value of $225,000. Earnings before
interest and taxes, EBIT, are projected to be $19,000 if economic conditions are normal. If there
is strong expansion in the economy
Chapter 18
NPV and APV
18.1 Zoso is a rental car company that is trying to determine whether to add 25 cars to its fleet. The
company fully depreciates all its rental cars over five years using the straight-line method. The
new cars are expected to genera
Chapter 11
Determining Portfolio Weights
11.1 What are the portfolio weights for a portfolio that has 95 shares of stock A that sell for $53 per
share and 120 shares of stock B that sell for $29 per share?
Portfolio Expected Return
11.2 You own a portfoli
320
SECTION THREE
Average Standard
return, deviation,
percent percent
3.8
3.2
Number of years
FIGURE 3.15
Historical returns on major asset classes, 19261998.
50
45
40
35
30
25
20
15
10
5
0
Treasury bills
10
0
10
Rate of return, percent
25
5.7
9.2
Number
326
SECTION THREE
TABLE 3.15
Rate of return assumptions
for two stocks
Rate of Return, %
Scenario
Probability
Auto Stock
Gold Stock
Recession
Normal
Boom
1/3
1/3
1/3
8
+5
+18
+20
+3
20
simply the average of the three possible outcomes.8 For the auto stock
314
SECTION THREE
MARKET INDEXES
MARKET INDEX
Measure of the investment
performance of the overall
market.
DOW JONES
INDUSTRIAL AVERAGE
Index of the investment
performance of a portfolio of
30 blue-chip stocks.
STANDARD & POORS
COMPOSITE INDEX
Index of th
Introduction to Risk, Return, and the Opportunity Cost of Capital 315
ongoing study by Ibbotson Associates which reports the performance of several portfolios of securities since 1926. These include
1. A portfolio of 3-month loans issued each week by the
316
SECTION THREE
TABLE 3.9
Average rates of return on
Treasury bills, government
bonds, and common stocks,
19261998 (figures in
percent per year)
MATURITY PREMIUM
Extra average return from
investing in long- versus
short-term Treasury
securities.
RISK PR
318
SECTION THREE
Suppose there is an investment project which you knowdont ask howhas the
same risk as an investment in the portfolio of stocks in Standard & Poors Composite
Index. We will say that it has the same degree of risk as the market portfolio o
Introduction to Risk, Return, and the Opportunity Cost of Capital 319
These calculations assume that there is a normal, stable risk premium on the market
portfolio, so that the expected future risk premium can be measured by the average past
risk premium.
Introduction to Risk, Return, and the Opportunity Cost of Capital 321
Head + head:
Head + tail:
Tail + head:
Tail + tail:
You make 20 + 20 = 40%
You make 20 10 = 10%
You make 10 + 20 = 10%
You make 10 10 = 20%
There is a chance of 1 in 4, or .25, that you
322
SECTION THREE
TABLE 3.11
The coin-toss game;
calculating variance and
standard deviation when
there are different
probabilities of each outcome
(1)
Percent Rate
of Return
(2)
Probability
of Return
(3)
Deviation from
Expected Return
(4)
Probability
Sq
Valuing Stocks
Fraction
of earnings paid out as
dividends.
PAYOUT RATIO
PLOWBACK RATIO
Fraction of earnings retained
by the firm.
297
buy income stocks principally for the cash dividends. Let us see whether these distinctions make sense.
Think back once m
FINANCE IN ACTION
A Small Spat about $1.6 Billion
Company valuation is not a precise science. When two
companies dispute the price that one should pay for the
other, a battle between their investment bankers can be
guaranteed.
AT&T bought McCaw Cellular i
FINANCE IN ACTION
New Paradigm View
for Stocks Is Bolstered
Maybe all the new-economy hype isnt just hype after
all.
Almost everyone agrees the revolution in information
technology has probably played some part in the extraordinary valuations that stocks
1) Suppose a decision maker has an exponential utility function
wealth
a)
w
u ( w ) =e
and initial
w 0=10,000 . Calculate the insurance premium for the following losses:
X L ( $ 1900,0 ; 0.1 )
b) X is uniformly distributed in range (0,380)
x
c)
X
1 190
is
ACTSC 372 Winter 2017 Written Assignment 3 Due on Feb 17th
Question 1 (25pt): Risk, Return, and Capital Budgeting (Multiple Choices)
In these multiple choice questions, circle the correct answer. No justication is required.
(1) (5pt) The NPV formula for
ACTSC 372 Winter 2017
Written Assignment 1
Due on Jan 20, 2017
Question 1 (15 pts):
Consider a perpetuity that pays $ at the end of each year, forever. Suppose the discount rate is .
a. What is the fair price of this perpetuity, expressed as a formula wit