Homework #1: Time Value of Money
Solutions
FIN 301, Winter 2015
Problem 1
a) This is a Canadian mortgage so we need to follow two steps. Firstly, find EAR from the semiannually
compounded APR. Then find EMR.
EAR = (1+0.0635/2)2 1 = 6.4508 %.
EMR = (1+EAR
FIN 301
Capital Structure
Capital Structure
A firm can be financed by equity or by a mix of
debt and equity
Equity financed firm: Entire cash flow goes to the
shareholders
Debt and equity financed firm: A relatively safe cash
flow stream goes to the debt
Risk and Return

Expected Return on Stock
o
pi = probability
o
zi = possible outcomes

Standard Deviation

Covariance
o

Positive covariance occurs when X,Y > 0
Correlation Coefficient
o
o
= 0 independent (dont move together at all)
o

= 1 move in
Homework #1: Time Value of Money
FIN 301, Winter 2015
Due by 4pm on January 23
Problem 1
Below you find mortgage rate information:
Term
5 year
6 year
7 year
10 year
Fixed Rate Mortgages1
Posted Rate (APR)
5.29%
6.16%
6.35%
6.75%
Assume that the bank calcu
FIN 301
Winter 2016
Name: _ Student ID Number: _
Exam Format
This is a 65minute exam and it is composed of 25 multiplechoice questions. All multiplechoice questions
can be solved independently.
You have access to a scientific or financial calculator an
Final Exam, Review Questions
FIN 301
1. If the semistrong form of the efficient market hypothesis holds, then
A. future stock prices can be predicted based on past prices.
B. investors should not invest in index funds.
C. stock prices reflect all publicl
Midterm 2, Sample Questions
FIN 301
Multiple Choice Problems
1. Forever Inc. just paid its annual dividend and its stock is currently traded at $50 (after the dividend
payment). Investors expect next years dividend to be $3, and their required rate of ret
Midterm 2, Sample Questions
Solutions
FIN 301
Multiple Choice Problems
1. Forever Inc. just paid its annual dividend and its stock is currently traded at $50 (after the dividend
payment). Investors expect next years dividend to be $3, and their required r
Homework #3: Equity Valuation
Solutions
FIN 301, Winter 2015
Problem 1
a) The dividend stream can be divided into a growing annuity (year 1 to year 5) and perpetuity (from year 6 on),
with
1 = $2.2, 5 = 6 = 0 (1 + )5 = $3.221
Perpetuity value at year 5: 5
Homework #5: Risk and Return, Options
Solutions
FIN 301, Winter 2015
Problem 1
a) What is the expected return of a portfolio with 40% of your money in Stock A, 20% in Stock B, and the rest in
Stock C?
( ) = , + . ,. + . ,.
= 0.3 0.25 + 0.4 0.12 + 0.3 0.07
Homework #2: Bond Valuation
Solutions
FIN 301, Winter 2015
Problem 1
a) Coupon = 0.12 $1,000 / 2 = $60 and r = YTM/2 = 0.12/2 = 0.06. This is an example where coupon rate =
YTM. Thus, without calculation, bond price = face value of the bond = $1,000.
Alte
Homework #6
FIN 301, Fall 2015
Professor Egor Matveyev
Due by 4:00 pm on Friday, December 4
Note: If not otherwise stated, interest rates are expressed as EARs (effective annual rates).
Problem 1
Consider IKEAs return policy:
If youve changed your mind an
Homework #4: Project Valuation
FIN 301, Winter 2015
Due by 4pm on March 9
Problem 1
You have the following projects available:
Time Period
0
1
2
3
4
5
Project A
$100,000
$70,000
$30,000
$25,000
$10,000
$500
Project Cash Flows
Project B
Project C
$100,00
Homework #2: Bond Valuation
FIN 301, Winter 2015
Due by 4pm on January 30
Note: If not otherwise stated, assume that:
Yieldtomaturity (YTM) is an APR, semiannually compounded
Bonds have a face value of $1,000
Coupon bonds make semiannual coupon pay
Homework #5: Risk and Return, Options
FIN 301, Winter 2015
Due by 4pm on March 30
Problem 1
Consider the following information about three stocks:
State of Economy
Boom
Average
Recession
Probability of
State of Economy
0.3
0.4
0.3
Rate of Return if State
Chapter 8
1.
How do monetary policy actions made by the Bank of Canada impact interest rates?
The Bank of Canadas mandate is to keep inflation under control and within an established band.
It does this through the Target Overnight Rate. When the Bank of C
Extra Problem #1
You want to repay a loan of $1,000 in 4 equal
annual installments (interest and repayment)
over the next 4 years. The first payment is due
in one year and the interest rate is 10 percent.
Whats the required annual installment?
Decompose t
Markets
Investors Bet on Facebook Fall; First Day of Options Trades Brings Wave of Skeptics; Shares Off 24%
Since IPO
By Kaitlyn Kiernan
And Jonathan Cheng
1,327 words
29 May 2012
07:25 PM
The Wall Street Journal Online
WSJO
English
Copyright 2012 Dow Jon
FIN 301
Time Value of Money
Investing for a Single Period
r interest rate (nominal)
P0 $ to be invested today
P1 $ available next period from investment
P = P0 + P0 r = P0 (1 + r )
1
P0 =
P
1
(1 + r )
2
Investing for Multiple Periods
Calculating
Future V
FIN 301
Bond Valuation
Debt
Debt: contract explicitly specifies
What cash flows will be received
When they will be received
Interest payments are
Tax deductible by the firm
Fully taxable by the recipient
Debt holders have priority claim on a firms
cash fl
FIN 301
Part 1: Multiple Choice Problems
(Total: 30 points; 2 points per question)
1. What is the payback period (in years) of a project that requires an investment of $75,000 today (t=0)
and promises annual cash flows of $16,000 to perpetuity, starting i
FIN 301
Final Exam Review  Answers
Put Your Stock in Gold?
Some of golds total risk may be irrelevant
because it can be eliminated through
diversification.
Gold probably has a low correlation with
the market portfolio. The resulting low beta
explains i
Seminar 5:
Capital Budgeting
Part I
Project Example Information
You are looking at a new project and
you have estimated the following
cash flows:
Year
Year
Year
Year
0:
1:
2:
3:
CF
CF
CF
CF
=
=
=
=
165,000
63,120
70,800
91,080
Your required return for
FIN 301
Time Value of Money
Investing for a Single Period
r interest rate (nominal)
P0 $ to be invested today
P1 $ available next period from
investment
P P0 P0 r P0 )
(1 r
1
P
P0 1
(1 r )
2
Investing for Multiple Periods
Calculating
Future Value:
P
Seminar 6:
Capital Budgeting
Part II
Simple Replacement Problem
Original Machine
Initial cost =
100,000
CCA rate = 20%
Purchased 5 years
ago
Salvage today =
65,000
Salvage in 5 years
= 10,000
New Machine
Initial cost = 150,000
5year life
Salvag
Seminar 8
Options
Options
A call option gives the owner the right
but not the obligation to buy an asset
at a predetermined price (strike price)
during a predetermined time period
A put option gives the owner the right
but not the obligation to sell an
FIN 301
Cash Flow Estimation
Valuation Model
T
CFt
P0
t
t (1 RRR )
0
We need cash flow estimates!
Project types:
Cost Saving (replacement decisions)
Revenue Expansion (new assets)
Both should increase cash flow
2
Considerations
Earnings
Earnings:
FIN 301
Capital Structure
Capital Structure
A firm can be financed by equity or by a mix
of debt and equity
Equity financed firm: Entire cash flow goes to the
shareholders
Debt and equity financed firm: A relatively safe
cash flow stream goes to the de
FIN 301
Bond Valuation
Debt
Debt: contract explicitly specifies
What cash flows will be received
When they will be received
Interest payments are
Tax deductible by the firm
Fully taxable by the recipient
Debt holders have priority claim on a firms
FIN 301
Time Value of Money
Investing for a Single Period
r interest rate (nominal)
P0 $ to be invested today
P1 $ available next period from investment
P1 P0 P0 r P0 (1 r )
P0
P1
(1 r )
2
Investing for Multiple Periods
Calculating
Future Value:
P1
FIN 301
Winter 2017
Midterm 2
March 21, 2017
Prof. Lukas Roth
Name: _ Student ID Number: _
Exam Format
This is a 65 minutes exam and is composed of 24 multiple choice questions. All the multiple choice
questions can be solved independently.
You have acces
FIN 301
Winter 2017
Midterm 1
February 9, 2017
Prof. Lukas Roth
Name: _ Student ID Number: _
Exam Format
This is a 65 minutes exam and is composed of 25 multiple choice questions. All the multiple choice
questions can be solved independently.
You have acc