CHAPTER 5
INTRODUCTION TO VALUATION: THE
TIME VALUE OF MONEY
Answers to Concepts Review and Critical Thinking Questions
1.
The four parts are the present value (PV), the future value (FV), the discount rate (r), and the life of
the investment (t).
2.
Comp
SOLUTION TO PRACTICE PROBLEMS
1.
Consider the following cash flows and interest rates:
Period
1
2
3
4
Interest Rate
5%
6%
7%
7%
Cash Flow
5,000
1,000
1,000
1,000
a) What is the present value of each of the cash flows if the cash flows occur at the end
of
MORE BOND PRACTICE PROBLEMS
1) BDC Industries is contemplating issuing a 30 year bond with a coupon rate of 7%
(semi-annual coupon payments) and a face value of $1,000. BDC believes it can get a
rating of A from Standard & Poors. However, due to recent fi
SOLUTION
1) C = (10%*1,000)/2 = $50 every six months
t = 7 years * 2 = 14 periods
2
.14 2
r 1
1 7%
2
F = $1,000
1
1 1 .07 14
B 0 50
.07
1,000
$825.09
14
1 .07
2) a. The market rate of interest when you purchased the bond was
equal to the coupon ra
PRACTICE PROBLEMS TIME VALUE OF MONEY
1. Consider the following cash flows and interest rates:
Period
1
2
3
4
Interest Rate
5%
6%
7%
7%
Cash Flow
5,000
1,000
1,000
1,000
a) What is the present value of each of the cash flows if the cash flows occur at the
BOND PRACTICE PROBLEMS
1) A bond has a $1000 par value, a coupon rate of 10% (paid semi- annually)
and 7 years to maturity. Similar bonds are priced to yield 14% in the market.
What is the market price of this bond?
2) Three years ago, you purchased at pa
Jianing Liu A00329781
Total 69 marks
Note: DO NOT ROUND YOUR INTEREST FACTORS! All calculations carry 9 decimal places. IF you decide to
round your calculations before the final answer, the markers will round the marks that are allocated. Show
ALL of your
Jianing Liu A00329781
Question 1. (4 marks)
What are some of the problems of using profit maximization as the goal of the firm?
The goal of financial management is to maximize the current value of per share of the existing shock. Here
are the three proble
Student Name:
Finance 2360
Midterm Exam
Winter 2017
Student Number:
Section:
Total Time Allowed: 2 1/2 hours
Instructions:
Please read the questions carefully.
Show all necessary steps and related formulas for math problems. Correct final answers without
Lecture 5(b)
FINA 2360
LO2
Standardized Financial Statements
Firms vary in different dimensions at a given point in
time as well as over time
To compare a firms performance over time (time
series analysis) or to compare a firms performance
with other firm
!"#$%#&$!'
FINA 2360
Lecture 9
Making Capital Investment Decisions
! Projected future cash flows are the key elements for any given
capital budgeting process
! To evaluate a project, we must determine changes in the firms
cash flows due to taking the proj
14/03/2017
Lecture 8
FINA 2360
Capital budgeting
Capital budgeting is one of the most important issue
in corporate finance
Pertains to investment in long term assets
It is a long term strategic decision
Relative to financing (capital structure) and short-
FINA 2360, Winter 2017
Outline for the midterm exam
Midterm Exam Date and Time:
Friday, February 10, 2017
5:30 PM 8:00 PM
Locations: Seating plan will be posted in the course website before the exam date
Calculator Policy: Only specific calculators are al
SAINT MARYS UNIVERSITY
SOBEY SCHOOL OF BUSINESS
Department of Finance, Information Systems and Management Science
FINA 2360 Business Finance I
Winter 2017 Formula Sheet
PV
FVt
(1 r )t
PV
1
1
t
1 r
PV C
r
C
r
1 r t 1
FVt C
r
m
APR
EAR 1
1
m
EAR e
Name(Print):
ID: A_
Exam 1
FINA4466: Investments Winter 2016-17
Instructor: George Ye
You have 1 hour and 15 minutes to complete this exam.
I have neither given, nor received any help, will not give any help, and I have followed
and will continue to follo
Name(Print):
ID: A_
Exam 2
FINA4466: Investments Winter 2016-17
Instructor: George Ye
Instructions:
1) Write your name and student ID on the cover page and score card.
2) You are not allowed to use any electronic device with communication function as
a ca
Ch14_Cost of Capital Practice Problems
SOLUTIONS
1) Since Cooper Enterprises is considering entering into a new line of business (with a different
level of risk), they should use a risk adjusted cost of capital. Assuming that Reinhold has a
similar level
SMU
Finance II
Risk & Return - Class Problems
(Part 3 Beta and CAPM/SML)
1) Calculating Beta
State of the
Economy
Boom
Normal
Probability
of State
Occurring
.40
.60
Associated
Rate
of Return
Stock
A
11%
3.5%
Stock
Market
M
14%
5.25%
Calculate the Beta for
CH 15 PRACTICE PROBLEMS - SOLUTIONS
1) You decide to sell an additional 1,500 shares of stock in your firm through a Dutch
auction. The bids that you receive include:
How much will you receive in total from selling the additional 1,500 shares? Ignore all
FINA3361
RISK & RETURN
PRACTICE QUESTIONS & PROBLEMS #1
1. Define the term risk and explain how it is related to the expected return.
2. Discuss the relationship between risk and return.
3. Classify and explain the following events as mostly systematic or
FINA3361
Chapter 15 Practice Problems #2
1. Redberry is a new firm that needs to raise $16,560,000 to begin operations. No
debt will be used. The underwriters commission will be 8% of the gross
proceeds from the sale. The company expects earnings per shar
Finance 3361
Risk and Return
Practice Problems #2
(Note: Some of these problems are tougher than Practice Problems #1!)
1)
Suppose you invest your money in equal proportions in the two securities A and
B, whose properties are shown below:
Stock A
Stock B
Winter 2017
FINA3361
Willis
Extra Practice Problems - Capital Structure (M&M Case I and II)
Problem #1
Jensen Boat Works is an all equity firm that has 340,000 shares of stock outstanding. The
company is in the process of borrowing $4 million at 8% intere
Willis
FINA3361
Capital Structure
M&M Case (World) 3
Example #1:
This problem shows a method of solving for the optimal capital structure in Case III by estimating the
PV of future financial distress. We can use the formula:
V L VU TD PV of financial dist
FINA3361
Ch. 14 Cost of Capital
Divisional or Risk Adjusted Cost of Capital
Mountain Gaming (MG) Inc. is a company that sells board games to toy retailers across
Canada. Its line of business is generally considered quite stable and low risk. MG Inc.
would
Indifference Extra Problems
Example 1: A firm has 200,000 common shares outstanding. They require
$1,000,000 to finance an expansion. Options available are:
(i)
issue new shares for $20 each
(ii) issue a 20 year debenture at face value with annual interes
c8
Student: _
1. As diversification increases, the total variance of a portfolio approaches _.
A. 0
B. 1
C. the variance of the market portfolio
D. infinity
E. none of these
2. As diversification increases, the firm-specific risk of a portfolio approaches