Chapter 17 - Does Debt Policy Matter?
CHAPTER 17 Does Debt Policy Matter? Answers to Problem Sets 1. Note the market value of Copperhead is far in excess of its book value:
Ms. Kraft owns .625% of the firm, which proposes to increase common stock to $17 m
Chapter 7: Net Present Value and Other Investment Rules
7.1 a.
The payback period is the time that it takes for the cumulative undiscounted cash inflows to equal the
initial investment.
Project A:
Cumulative cash flows Year 1 = $9,500
= $9,500
Cumulative
ACT349 Corporate Finance for Actuaries
Vital Statistics:
Instructor: Prof. Vicki Zhang, FSA, ACIA, CERA, MStat (with completion of PhD
qualifications)
Lectures: Wednesdays, 2-4pm (Except for term test dates, see below)
Lecture location: UC179
Tutorials: W
Announce 1-page Research Brief
Topics
(1) real-world examples where complex securities fooled investors (in
response to an argument on P413 market is shrewd) OR
(2) real-world examples of irrational investment behaviors in the capital
markets OR
(3) examp
ACT 349 Term Test 1 Aid Sheet
FV and compounding
Net Present Value
T
NPV C0
Ct
t 1 (1
r )t
Perpetuity
PV
C
r
Annuity
PV =
C
[1 1 (1 r )t ]
r
Growing Perpetuity
PV
C
rg
Growing Annuity
The value of a T-period annuity that grows at the rate g, where the
Chapter 6: How to Value Bonds and Stocks
6.1 The price of a pure discount (zero coupon) bond is the present value of the par.
a. PV = $1,000/(1+0.05)15 = $481.02
b. PV = $1,000/(1+0.10)15 = $239.39
c. PV = $1,000/(1+0.15)15 = $122.89
6.2 The price of any
Chapter 8 : Net Present Value and Capital Budgeting
8.1
a. Yes, the reduction in the sales of the companys other products, referred to as erosion, and should be
treated as an incremental cash flow. These lost sales are included because they are a cost
(a
ACT 349
Corporate Finance
for Actuarial Science
Class 9
Capital Structure: Limits to the Use of Debt
Lucas Thung
http:/www.utstat.toronto.edu/
Agenda
1) Introduction
2) Todays Class
3) Next Class
2
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ACT349
CorporateFinance
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RiskAnalysis,RealOptions,andCapitalBudgeting
LucasThung
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Workshop
On Thursday,October8th,CASUniversityLiaisonswillbecomingtogive
an introduction to P&C w
ACT349
CorporateFinance
for Actuarial Science
forActuarialScience
Class2
NetPresentValue;InvestmentRules&CapitalBudgeting
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ACT349
Corporate Finance for Actuaries
Lecture 2
Six Rules of Capital Budgeting
Net present value (NPV)
Payback period rule
Discounted payback period rule
Average accounting return
Profitability index
Internal rate of return (IRR)
LO 1.4
The Unprece
ACT349
Corporate Finance for Actuaries
Lecture 3
Three ways to participate in polling
and earn BONUS POINTS (from week
3)
1- Download the Poll Everywhere app on your phone
and vote! - FREE
2- Open any web browser on your phone/tablet/laptop
and go to Poll
Chapter 08 - Portfolio Theory and the Capital Asset Pricing Model
CHAPTER 8 Portfolio Theory and the Capital Asset Pricing Model Answers to Problem Sets 1. a. b. c. 7% 27% with perfect positive correlation; 1% with perfect negative correlation; 19.1% with
Chapter 05 - Net Present Value and Other Investment Criteria
CHAPTER 5
Net Present Value and Other Investment Criteria
Answers to Problem Sets
1.
a.
A = 3 years, B = 2 years, C = 3 years
b.
B
c.
A, B, and C
d.
B and C (NPVB = $3,378; NPVC = $2,405)
e.
Tru
Chapter 07 - Introduction to Risk and Return
CHAPTER 7
Introduction to Risk and Return
Answers to Problem Sets
1.
Expected payoff is $100 and expected return is zero. Variance is 20,000 (%
squared) and standard deviation is 141%.
2.
a.
Standard deviation
Chapter 22 - Real Options
CHAPTER 22
Real Options
Answers to Problem Sets
1.
a.
Increase value (unless the cash flows from the Mark II needed to be
discounted at a higher rate).
b.
Increase value.
c.
Reduce value.
2.
The company can buy furniture and rese
Chapter 19 - Financing and Valuation
CHAPTER 19
Financing and Valuation
Answers to Problem Sets
1.
Market values of debt and equity are D = .9 X 75 = $67.5 million and E = 42 X 2.5
= $105 million.
D/V = .39.
WACC = .09(1 - .35).39 + .18(.61) = .1325, or 1
Chapter 18 - How Much Should a Corporation Borrow?
CHAPTER 18
How Much Should a Corporation Borrow?
Answers to Problem Sets
1.
The calculation assumes that the tax rate is fixed, that debt is fixed and
perpetual, and that investors personal tax rates on i
Chapter 10 - Project Analysis
CHAPTER 10
Project Analysis
Answers to Problem Sets
1.
a.
False
b.
True
c.
True
a.
Cash-flow forecasts overstated.
b.
One project proposal may be ranked below another simply because cash
flows are based on different forecasts
Chapter 04 - The Value of Common Stocks
CHAPTER 4
The Value of Common Stocks
Answers to Problem Sets
1.
a.
True
b.
True
2.
Investors who buy stocks may get their return from capital gains as well as
dividends. But the future stock price always depends on
Chapter 01 - Goals and Governance of the Firm
CHAPTER 1
Goals and Governance of the Firm
Answers to Problem Sets
1.
a.
real
b.
executive airplanes
c.
brand names
d.
financial
e.
bonds
f.
investment
g.
capital budgeting
h.
financing
2.
c, d, e, and g are r
Chapter 06 - Making Investment Decisions with the Net Present Value Rule
CHAPTER 6
Making Investment Decisions with
the Net Present Value Rule
Answers to Problem Sets
1.
a, b, d, g, h.
2.
Real cash flow = 100,000/1.04 = $96,154; real discount rate = 1.08/
ACT349
Corporate Finance for Actuaries
Lecture 4
Three ways to participate in polling
and earn BONUS POINTS (from week
3)
1- Download the Poll Everywhere app on your phone
and vote! - FREE
2- Open any web browser on your phone/tablet/laptop
and go to Poll
ACT349
Corporate Finance for Actuaries
Lecture 7
Assumptions of CAPM
Homogenous expectation (everyone finds the same return, variance, covariance -> same
efficient set/frontier -> same market portfolio)
risk free borrowing and lending is easy to obtain
ACT349
Corporate Finance for Actuaries
ACT349?!
Three ways to participate in polling
and earn BONUS POINTS (from week
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2- Open any web browser on your phone/tablet/laptop
and go to the p
ACT349
Corporate Finance for Actuaries
Lecture 8
What is Liquidity?
The idea that the expected return on a stock and the
firms cost of capital are positively related to risk is
fundamental.
The expected return on a stock and the firms cost of
capital ar