TIME VALUE OF MONEY PROBLEMS
Problems
1. In how many years $100 will become $265 if k = 11%?
265
ln
100
n
9.33844 9.34 years
ln(1 0.11)
2. In how many years will an amount double if k = 7.6%?
n
ln 2
9.46 years
ln 1.076
3. In how many years will an a
FIN 3414
Examination I
Spring 2012
1. Suppose Manij needs $ 138,000 to buy a new kitchen at the end of 2017. Assume that
Manij uses an account earning 2.45% yearly. What does Manij have to deposit at the
beginning of 2012, assuming monthly compounding?
a.
Chapter One
I: BASIC MATHEMATICAL TOOLS
As the reader will see, the study of the time value of money involves substantial use of variables and numbers that
are raised to a power. The power to which a variable is to be raised is called an exponent. For ins
FIN 3414
Examination I
Summer A 2010
1. Suppose 25 years ago your mother deposited $ 14,500 in an account earning 8% each year. Obtain todays value,
assuming semiannual compounding.
a. 103,046.91
b. 103,498.60
c. 106,416.36
d. 106,625.52
e. None of the ab
FIN 3414
Examination I Spring 2012
1. Suppose Manij needs $ 138,000 to buy a new kitchen at the end of 2017. Assume that Manij uses an account earning 2.45%
yearly. What does Manij have to deposit at the beginning of 2012, assuming monthly compounding?
a.
Chapter Six
THE TIME VALUE OF MONEY WITH MORE THAN ONE COMPOUNDING PER YEAR
Unlike the previous section where the compounding interval was annual (compounded annually), we will now
assume that the compounding intervals are purely arbitrary, say, up to m t
FIN 3414
Examination I Version A
Fall 2011
1. You inherited $55,000 from Auntie Paris. What is the maximum amount you can withdraw each year forever if the
interest rate is 7.5%?
a. 4,125
b. 4,225
c. 4,325
d. 4,425
e. None of the above
2. Suppose you need
CHAPTER 3
Hedging Strategies Using Futures
Practice Questions
Problem 3.1.
Under what circumstances are (a) a short hedge and (b) a long hedge appropriate?
A short hedge is appropriate when a company owns an asset and expects to sell that asset in the
fut
CHAPTER 2
Mechanics of Futures Markets
Problem 2.1.
Distinguish between the terms open interest and trading volume.
The open interest of a futures contract at a particular time is the total number of long positions
outstanding. (Equivalently, it is the to
CHAPTER 1
Introduction
Problem 1.1.
What is the difference between a long forward position and a short forward position?
When a trader enters into a long forward contract, she is agreeing to buy the underlying asset
for a certain price at a certain time i
Historical (Actual) Return
Most individuals invest money with an expectation to earn more
money at some future date. So, how do we assess performance
of our investments?
Dollar Return = Amount Received-Amount Invested = P i,t - P i,t-1
Rate of Return = Do
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
85,000
100,000
110,000
110,000
110,000
New Unit Sales
0
75,000
75,000
75,000
75,000
75,000
Current Unit Sales
0
10,000
25,000
35,000
35,000
35,000
Project Unit Sales
0
Price per Unit
$0
$200
$200
$200
$200
$200
Ol
Valuation Discounted Cash Flow Analysis
DCF is a fundamental valuation methodology used for a range of applications. It is
premised on the notion that the value of a firm is equal to the present value of its future
cash flows. Therefore, one needs to proj
Comparable Companies Analysis
Applicable to IPO valuation, restructuring, investment decisions, M&A.
Comparable Companies Analysis (CCA) is one of the key valuation methodologies. CCA established a benchmark
against which the banker can establish valuatio
Case 16
Kimberly-Clark Corporation
(Firm valuation using DCF)
Determine the enterprise value, market value of equity and price per share of Kimberly Clark
using DCF analysis. Use a projection period of 5 years and 8x multiple to compute terminal value.
Us
Case 15
Kimberly-Clark Corporation
(Firm valuation using comparable firms)
Determine the enterprise value, market value of equity and price per share of Kimberly Clark
using the following industry comparables: Colgate Palmolive, Proctor and Gamble, Clorox
Chapter 7
I.
Preferred Stock
A.
Features of preferred stock
1.
Owners of preferred stock receive dividends instead of interest.
2.
Most preferred stocks are perpetuities (non-maturing).
3.
Multiple classes, each having different characteristics, can be is
Case 7
Kimberly-Clark Corporation
(Cost of Capital)
The Kimberly-Clark Corporation has hired you to develop a hurdle rate to be used as the basis for
analyzing investment decisions. In other words, estimate their cost of capital. Assume new debt financing
Cost of Capital
The cost of capital is most often used as hurdle rate (minimum
acceptable return on a new project) for capital budgeting decisions. In
other words, a project has to earn at least its cost for a firm to invest in
it. From the investors poin
Case 7
Kimberly-Clark Corporation
(Cost of Capital)
The Kimberly-Clark Corporation has hired you to develop a hurdle rate to be used as the basis for
analyzing investment decisions. In other words, estimate their cost of capital. Assume new debt financing
Case 5
HERSHEY COMPANY
(Cost of Equity)
You have been asked by your boss, the Director of Equity Research, to estimate the
Cost of Equity for Hershey. Since one of the primary purposes of your assignment is to provide
a blueprint for newly hired analysts
Case 6
CAPITAL STRUCTURE WEIGHTS
(For Weighted Average Cost of Capital)
In estimating a corporations cost of capital, it is generally recognized that the
appropriate weights to apply to the costs of debt and equity are the weights of the target
capital st
Case 5
HERSHEY COMPANY
(Cost of Equity)
You have been asked by your boss, the Director of Equity Research, to estimate the
Cost of Equity for Hershey. Since one of the primary purposes of your assignment is to provide
a blueprint for newly hired analysts
Case 4
General Mills, Inc.
(Cost of Equity)
Your goal is to estimate the cost of equity for General Mills using the Gordon or
Discounted Cash Flow Model approach [Rcs=Div1/P0+g]. You are given that the cost of debt
for General Mills is 4.3 percent. Use an
Case 4
General Mills, Inc.
(Cost of Equity)
Your goal is to estimate the cost of equity for General Mills using the Gordon or
Discounted Cash Flow Model approach [Rcs=Div1/P0+g]. You are given that the cost of debt
for General Mills is 4.3 percent. Use an