IOE 452
University of Michigan
Assignment 2
Fall 2015
Due in Class, September 30, before 4:30 PM
Q1Chapter 3 (Textbook), Ex. 20. (55 pts.)
Q2Reproduce Table 3.5 of the Textbook in Excel . (10 pts.)
Q3Chapter 3 (Textbook), Ex. 25. (20 pts.)
Q4Lotto took ou

IOE 452
University of Michigan
Assignment 6
Suggested Solutions
Fall 2015
Q1Suppose we want to determine rE . Let us use CAPM:
rE = rf + (rM rf ) E
= 10% + (18% 10%) 1.5 = 22%
Next, let us determine D . We know that the required return on debt is
rD = rf

IOE 452
University of Michigan
Assignment 4
Fall 2015
Electronic Submission, November 16, before 4:30 PM
Q1
Q2(15 pts.)
(a) Beta of a portfolio P made up of N assets with weights equal to wi , i = 1, , N here each
asset has a beta of i , is given by
N
P =

IOE 452
University of Michigan
Assignment 3
Fall 2015
Electronic Submission, October 12, before 4:30 PM
Q1A rm with the required return on equity of 10% is expected to pay the following annual
dividends:
Year
Dividend
1
$2.00
2
$2.10
3
$2.20
4
$3.50
5
$3.

IOE 452
University of Michigan
Assignment 3
Fall 2015
Electronic Submission, October 12, before 4:30 PM
Q1A rm with the required return on equity of 10% is expected to pay the following annual
dividends:
Year
Dividend
1
$2.00
2
$2.10
3
$2.20
4
$3.50
5
$3.

PARAMETERS
C_0
C_1
C_2
NPV
W
-10000
-10000
0
6700
X
0
-20000
5000
9000
Y
-10000
5000
5000
0
Z
-15000
5000
4000
-1500
DECISION VARIABLES
X_i
W
1
X
0.75
Y
1
Z
0
OBJECTIVE FUNCTION (Maximize)
Net NPV
DECISION VARIABLES
Financing needed right now
Financing ne

Journal of Economic PerspectivesVolume 18, Number 3Summer 2004 Pages 324
The Capital Asset Pricing Model
Andre F. Perold
A
fundamental question in finance is how the risk of an investment should
affect its expected return. The Capital Asset Pricing Model

IOE 452
University of Michigan
Fall 2016
Averages
1
Averages
Recall that for a given nondividend paying stock, the rate of return during a specified period, say between
t = 0 and t = T is
r=
S(T ) S(0)
S(0)
From above we note that
1+r =
S(T )
S(0)
Note t

Introduction to Risk & Return
Reza Kamaly
IOE 452: Corporate Finance
University of Michigan: Fall 2016
November 7 & 9, 2016
1
Characterizing Efficient Portfolios
Markowitz portfolio analysis is a mathematical procedure to determine the optimum portfolios

P21
United Pigpen is considering a proposal o manufacture high-protein hog feed. The project would make use of an exi
year's rental charge on the warehouse is $100,000, and thereafter the rent is expected to grow in line with inflation
investment in plant

ESTIMATING BOND PRICE
Company X decides to issue a 5-yr bond with face value $900 and with a coupon rate of 7%. Company X has priced this b
$1000. Is the bond undervalued or overvalued? What is your valuation?
KNOWN: Face Value, Coupon Rate, Spot Rates.
O

0
1
$ 1,000.00 $ 300.00
What is the FV of $1000 at the end of 4 years @
$1,360.49
(Using FV financial functi
1360.49
(Using formula from not
PV=f(Rate,Nper, Pmt,FV,Type)
Type: 0 (default) for ordinary annuities and 1 for
annuity due.
Note how the PV of an

IOE 452 HW4
Shengqi Fan 10259216
Q3/ Chap 5 P18
Shadow prices are 0.05 right now, 0.45 at year 1, 0 at year 2.
Q6/ Chap 6 P11
Q7/Chap 6 P14
NPV of tax shields for case 1 is higher. Therefore, case 1 is more beneficial because after-tax
cost is lower.
Q8/

IOE 452
University of Michigan
Suggested Solutions:Assignment 5
Fall 2016
Q1Suppose there are two securities: A and B. RK invests w fraction of her wealth in asset B.
Assume security A has an expected return of 1 and a standard deviation of return of 1 .

Study topics for Exam II
Reza Kamaly
IOE 452: Corporate Finance
University of Michigan: Fall 2016
November 15, 2015
We covered many more concepts than what is presented in the Text in Chapters 410. We examined
the Gordons model and its extensions to value

Perpetuities questions
Perpetuities questions
QUESTION 1
Your Aunt Edna left you some perpetual preference shares. The
preference shares pay a fixed dividend of 1,000 a year. Assuming similar
investments have an interest rate of 5% and that the preference

Study topics for Exam III
Reza Kamaly
IOE 452: Corporate Finance
University of Michigan: Fall 2016
December 15, 2016
We covered CAPM (Chapter 8) and applied it to many risky situations. Chapters (9,17,18). We
considered risky bonds and WACC. We examined t

IOE 452
University of Michigan
Assignment 6
Fall 2015
Electronic Submission, December 7, before 4:30 PM
Q1RK Inc. is nanced through debt and equity. Alp plc has provided the following information
about RK Inc.s cost of capital. Fill in the blanks. (20pts.

IOE 452
University of Michigan
Assignment I
Fall 2016
Due: September 14, before 11:59 PM
Q1Suppose that $1000 is deposited and you are quoted an interest rate of 7% annually to be
received for 10 years. Determine the rate of return on investment based on

IOE 452
University of Michigan
Assignment 3
Fall 2016
Electronic Submission, October 20, before 11:50 PM
Q1 Go to http:/finance.yahoo.com/. For FDX & Dow Jones Industrial Average
1. Report the key statistics for FDX & Dow Jones Industrial Average. (5pts.)

IOE 452
University of Michigan
Assignment II
Fall 2016
Due: September 26, before 11:59 PM
Q1Let rt denote the spot rate at period t, where t is measured in years. Take r1 = 5%, r2 = 5.4%,
r3 = 5.7%, r4 = 5.9%, r5 = 6%.
1. What are the discount factors for

IOE 452
University of Michigan
Assignment II
Fall 2016
Suggested Solutions
Q1
Year
1.
Discount Factor
1
1
(1.05)1
= .952
2
1
(1.054)2
= .900
3
1
(1.057)3
= .9847
4
1
(1.059)4
= .795
5
1
(1.06)5
= .747
2. The price of a twoyear bond with 5% coupon equal to

IOE 452 HW3
Shengqi Fan 10259216
Q1
1.
2.
3. DIV yield = div/price @ beginning of Q42015 =1.3/148.61=0.87%
4.
5.
6.
Conclusion: the price is in line with the return. And for a particular stock, the fluctuation is in
line with the whole market
Q2
1.
Ford M

TUTORIAL : CAPITAL RATIONING USING LINEAR PROGRAMMING
IOE452
Fall16
Consider the following capital rationing problem:
Project
C0
C1
C2
NPV
W
X
Y
Z
Financing Available
-10,000
0
-10,000
-15,000
20,000
-10,000
-20,000
+5,000
+5,000
20,000
0
+5,000
+5,000
+4

IOE 452
University of Michigan
Fall 2016
Introduction to Bonds
1
Basics
Determining a bonds value involves computing the present value of the expected future cash flows using a
discount rate that reflects market interest rates and the bonds risks. The tra

IOE 452
University of Michigan
Assignment IV
Fall 2016
Suggested Solutions
Q1 Solution
The IIR, is the values of y such that the following equation is satisfied:
$550, 000 + $250, 000 $650, 000 + $250, 000
$650, 000
+
+
= 0
2
(1 + y)
(1 + y)
(1 + y)3
$300

Notes on Valuation
Reza Kamaly
IOE 452: Corporate Finance
University of Michigan: Fall 2016
October 3, 2016
1
Equity Valuation
Let Vt be the price of an asset at time t. The asset could be a security like the stock of a particular
company or it may repres

IOE 452
Corporate Finance
University of Michigan
Exam I
10/21/15
Q1An investor purchases a 4year debt instrument with the face value of $1, 000 and 9% coupon
payments. The instrument has no default risk and the lender promises to repay the principal at th

IOE 452
University of Michigan
Assignment I
Fall 2016
Suggested Solutions
Q1
In all cases, must first compute the future value of the deposit.
1. Annually:
FV = $1, 000 (1 + .07)10 = $1967.15
The rate of return is
1967.15 1000
= 96.72%
1000
Remark
Associa