FIN 301
Investment Decision
What Should a Good Criterion Do?
A good evaluation method should
Consider all cash flows
Account for timing differences
Provide unambiguous decision rule
Measure wealth cr
Answers to Extra Practice Problems: Inflation and Duration
FIN 301
Problem 1
a) rreal
1 rnominal
1.25
1
1 4.1667%
1 inflation
1.2
M $100, 000
M $48, 225.31
1.24
Note: This is not discounting, the
Bond Question 1
Consider 20year bond paying semiannual coupons
Coupon rate:
10.5%
YTM:
12.0%
How much would you pay for this
bond?
1
1
$1,000
1
P0 $52.5
$887.15
40
40
0.06 1 0.06 1 0.06
1
Growing Annuity
C1
(1 g)
P0
1
T
rg
(1 r)
T
1
Growing Annuity, g=r
What is the present value of a growing fouryear
annuity that pays $100 in one year, and is growing
thereafter at a rate of 10%
Seminar 7:
Risk and Return
Risk
Capital budgeting problems discussed so
far have ignored the issue of risk discount
rates were provided
Riskreturn relationship is a key concept in
finance
Riskret
Homework #5: Risk and Return, Options
Solutions
FIN 301, Winter 2016
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?
A. Topics on Midterm 1
FIN 301
Textbooks:
 Berk et al.: Up to and including Chapter 6 + Chapter 6 Appendix C (see Readings
from Fundamentals of Corporate Finance, 2nd Canadian Ed. by Berk et al. un
Seminar 6:
Project Valuation
Part II
Simple Replacement Problem
New
Original
Machine
Machine
Initial
Initial cost
cost =
= 150,000
100,000
5year
life
CCA ratein=520%
Salvage
years = 0
Purchased
5
Seminar 4:
Equity Valuation
Cash Flows for Shareholders
If you buy a share of stock, you can
receive cash in two ways
The company pays dividends
You sell your shares, either to another
investor in
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
Seminar 3:
Bond Valuation and Duration
Bond Definitions
Bond
Face value
Coupon rate
Coupon payment
Maturity date
Yield or Yield to maturity
2
Bond Basics
Issuer = borrower (corporations or government
Seminar 1:
Time Value of Money
Part I
Future Value and Present Value
For whatever problem you solve: DRAW A
TIMELINE!
$1
compoundi
ng
0
1
PV
FV
2
discountin
g
T
Period
$1
2
Future Value: Example
Supp
Seminar 5:
Project Valuation
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
=
=
=
=

FIN 301
Midterm 2
Instructions & Review
Midterm & Review Session
NOTE ROOM CHANGES: you will NOT be in
the same room you were during Midterm 1 !
Midterm 2
Thursday, March 10, 3:30 4:50pm
Rooms (Last n
Weighted Average Cost of Capital
The cost of capital
Sources of financing:
Debt
Equity
Main differences:
Cash flow rights
Control rights
2
Different Contractual Obligations
Debt:
IOU: an obliga
A. Topics on Midterm 2
FIN 301
Textbooks:
 Berk et al.: Chapters 7, 8 and 9 (see Readings from Fundamentals of Corporate
Finance, 2nd Canadian Ed. by Berk et al. under Berk Textbook Resources on Ul
FIN 301
Investment Decision
What Should a Good Criterion Do?
A good evaluation method should
Consider all cash flows
Account for timing differences
Provide unambiguous decision rule
Measure wealth cr
Seminar 9:
Capital Structure
Capital Structure and Firm Value
Sources of funds:
Debt
aftertax cost of debt = rD (1 TC)
fraction of firm value financed by debt =
D/V
Equity
cost of equity = rE
FIN 301
Final Exam Review
Final Exam
Thursday, April 21, 2016
2pm to 4pm
Pavilion (Butterdome)
Rows:
Rows 10, 12, 14, 16, 18, 20, 22, 24,
26, and 28 (row 28: seats 125
only!)
2
Bring to Exam
Cheat s
Seminar 2:
Time Value of Money
Part II
Annual Percentage Rate (APR)
This is the annual rate that must be quoted
by law
By definition APR = periodic rate times the
number of compounding periods per y
Problems
Problem 5.2
Problem 53
Problem 56
Problem 57
Problem 514
Problem 516
Problem 517
Problem 518
Problem 519
Problem 525
Problem 526
Problem 52
Which do you prefer: a bank account that
Problems
Problem 311
Problem 315
Problem 328
Problem 311
A friend asks to borrow $55 from you and in return will pay you $58 in one year. If you
bank is offering a 6% interest rate on deposits and
Options
Short selling
Short selling: sell the stock you dont
own. Borrow sbs share or stock and
later return
Profits it
50
20
0
80
30
50
infinite
ST
30
2
Options, Options Everywhere
All risky inves
Homework #6: Capital Structure
Solutions
FIN 301, Winter 2016
Problem 1
a)
The current value of the firm V! =
!"#$%!"# !"
!
=
$"#(!.!)
!.!"
= $. .
b) With debt, V! = V! + DT! = $23.33M + $12M 0.3 = $.
Midterm 1, Review Questions, Solutions
FIN 301
1. The interest rate on a $10,000 loan is 8% APR compounded quarterly. What is the EAR on this loan?
Suppose the loan is to be repaid in three equal inst
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 ex
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
Homework #1: Time Value of Money
Solutions
FIN 301, Winter 2016
Problem 1
a) This is a Canadian mortgage so we need to follow two steps. Firstly, find EAR from the semiannually
compounded APR. Then f
Chapter 3
The Valuation Principle: The Foundation of
Financial Decision Making
Note:
All problems in this chapter are available in MyFinanceLab. An asterisk (*) indicates
problems with a higher level