HOMEWORK 2
This homework is due on October 24th/25th depending on the section. It should be handwritten and
handed in at the beginning of your own lecture. No late homeworks will be accepted. Please show all
your work to receive partial credit.
1) A clien
Aysun Alp
FIN301 Financial Management
Problem Set 5
1. Suppose you are offered $8,000 today but must make the following payments:
Year
0
1
2
3
4
Cash Flows ($)
$8,000
-4,400
-2,700
-1,900
-1,500
a) What is the IRR of this offer?
b) If the appropriate disc
In-Class Exercise 4
Let x and y be two stocks with E(R)=12% for x and E(R)=20% for y, x=50%, y= 70%, xy =
0.1, where denotes volatility and denotes correlation. You invest 30% of your wealth in
stock x and 70% in stock y.
a) What is the expected return of
In-Class Exercise 3
Lean Dining Restaurant is considering the purchase of a $16,000 waffle maker. The waffle
maker has an economic life of four years and will be fully depreciated by the straight-line
method. The machine will produce 2,000 waffles per yea
In-Class Exercise 5
Find the WACC of William Tell Computers. The total book value of the firm's equity is
$10M. Book value per share is $20. The stock sells for a price of $30 per share. The cost
of equity is 15%. The firm's bonds have a face value of $5M
In-Class Exercise 4
Let x and y be two stocks with E(R)=12% for x and E(R)=20% for y, x=50%, y= 70%, xy =
0.1, where denotes volatility and denotes correlation. You invest 30% of your wealth in
stock x and 70% in stock y.
a) What is the expected return of
In-Class Exercise 3
Lean Dining Restaurant is considering the purchase of a $16,000 waffle maker. The waffle
maker has an economic life of four years and will be fully depreciated by the straight-line
method. The machine will produce 2,000 waffles per yea
Aysun Alp
FIN301 Financial Management
Assignment 3
1. Answer the following questions comparing the IRR rule with the NPV rule:
a. What conditions must be satisfied for the IRR rule to result in the same decision as the NPV
rule for independent projects?
b
Solution to In-Class Exercise 1
On September 1 2007 Susan bought a motorcycle of $25000. She paid $1000 down and
financed the balance with 8.4% APR, compounded monthly with a five year loan. She
started the monthly payments exactly one month after the pur
In-Class Exercise 1
On September 1 2007 Susan bought a motorcycle of $25000. She paid $1000 down and
financed the balance with 8.4% APR, compounded monthly with a five year loan. She
started the monthly payments exactly one month after the purchase (Octob
Aysun Alp
FIN301 Financial Management
Solutions to Assignment 3
1. Answer the following questions comparing the IRR rule with the NPV rule:
a. What conditions must be satisfied for the IRR rule to result in the same decision as the NPV
rule for independen
Aysun Alp
FIN301 Financial Management
Assignment 1
1. You are planning to save for retirement over the next 40 years. To do this, you
will invest $800 a month in a stock account and $400 a month in a bond account.
The return of the stock account is expect
Solutions to Assignment 1
1. Stock account: FVA=800[(1+(.12/12)]^480-1/(.12/12)]=9,441,818.008
Bond account: FVA=400[1+(.08/12)]^480-1/(.08/12)]=1,396,403.133
So the total amount saved at retirement is:
9,441,818.008+1,396,403.133=10,781,221.14
Solving fo
Aysun Alp
FIN301 Financial Management
Assignment 2
1. White Wedding Corporation will pay a $3.05 per share dividend next year. The
company pledges to increase its dividend by 5.25% per year, indefinitely. If you require
an 11 percent return on your invest
Lecture 6
Valuing Stocks
Fundamental Analysis
How to identify stocks that are mispriced relative to
some measure of true value.
True value can only be estimated, therefore analysts
use models to estimate the fundamental value of a
stock from observable
Solutions to Problem Set 7
Question 1
CAPM states the relationship between the risk of an asset and its expected return. CAPM
is:
E(Ri) = Rf + [E(RM) Rf] i
Substituting the values we are given, we find:
E(Ri) = .05 + (.12 .05)(1.25) = .1375 or 13.75%
Ques
Aysun Alp
Fin301 Financial Management
Problem Set 8 - Cost of Capital
1. XYZ Inc. is considering a project that will result in initial after tax cash savings of $4
million at the end of the first year and these savings will grow at a rate of 4 percent per
Aysun Alp
Fin301 Financial Management
Problem Set 7 - Risk and Return
Question 1
A stock has a beta of 1.25, the expected return on the market is 12 percent, and the riskfree rate is 5 percent. What must the expected return on this stock be?
Question 2
Yo
1) What are the advantages of investing indirectly in stocks and bonds via mutual funds?
2) Investing $200,000 in additional raw materials todaymostly in palladiumshould allow
Cryogenic Concepts to increase production and earn an additional $228,000 next
HOMEWORK 3
This homework is due on October 31 st / November 1st depending on the section. It should be
handwritten and handed in at the beginning of our lecture. No late homeworks will be accepted.
Please show all your work to receive partial credit.
1) A
Lecture 5
Valuing Bonds
Basic Terminology
Bond: long-term loans
Par (face) value: amount repaid at the end of the loan
Coupon rate: coupon payment quoted as a percent of
par value
Coupon payment: regular interest payments
Maturity date: time until pa
Lectures 3 & 4
The Time Value of Money
Time Value of Money
One problem that the financial managers should solve
is determining the value today of cash flows expected
in the future.
Time value of money refers to the fact that a dollar
in hand today is wo
Aysun Alp
FIN301 Financial Management
Solutions to Problem Set 5
1. Suppose you are offered $8,000 today but must make the following payments:
Year
0
1
2
3
4
Cash Flows ($)
$8,000
-4,400
-2,700
-1,900
-1,500
a) What is the IRR of this offer?
b) If the app
Aysun Alp
FIN301 Financial Management
Solutions to Problem Set 2
1. For discrete compounding, to find the EAR, we use the equation:
EAR = [1 + (APR / m)]m 1
EAR = [1 + (.08 / 4)]4 1 = .0824 or 8.24%
EAR = [1 + (.18 / 12)]12 1 = .1956 or 19.56%
EAR = [1 +
Solutions to Problem Set 8
1.
2.
a) Re = 5% + 1.2(15% - 5%) = 17%
b) WACC = 0.5 *17% + 0.5* 7 = 12%
c) 12% + 2% = 14%
d) PV = 4/ (0.14 0.04)= $40 million. For this project to be + NPV, the initial cost of the
project has to be less than $40 million.
MV of
Aysun Alp
FIN301 Financial Management
Problem Set 2
1. Find the EAR in each of the following cases:
Stated Rate (APR)
8%
18
12
14
Number of Times
Compounded
Quarterly
Monthly
Daily
Infinite
Effective Rate (EAR)
2. You are planning to save for retirement o
Aysun Alp
FIN301 Financial Management
Problem Set 3
Please solve the following end of chapter questions before the due date and upload to
SuCourse. Online submissions only, no hard copies will be accepted.
1. A 30-year Treasury bond is issued with face va
Aysun Alp
FIN301 Financial Management
Problem Set 6
1. Raphael Restaurant is considering the purchase of a $12,000 souffl maker. The
souffl maker has an economic life of five years and will be fully depreciated by the
straight-line method. The machine wil