FINA1221
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The Corporation
1.1
The Types of Firms
Sole Proprietorships/Sole Traders
A business owned and run by one person.
Small
0 few employees
Most common type of firm
Do not account for much sales revenue in the economy
Have the advantage of being str
FINA1221
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Interest Rates
5.1
Interest Rate Quotes and Adjustments
The interest rate should reflect the actual return we could earn over that time period
The Effective Annual Rate
Interest rates are often states as an effective annual rate (EAR), which in
FINA1221
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Investment Decision Rules
7.1
NPV and StandAlone Projects
NPV investment rule
When making an investment decision, take the alternative with the highest NPV. Choosing this
alternative is equivalent to receiving its NPV in cash today.
Accepting
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Valuing Stocks
9.1
The DividendDiscount Model
The Law of One Price implies that to value any security, we must determine the expected cash flows
an investor will receive from owning it.
A OneYear Investor
There are two sources of cash flows f
FINA1221
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Optimal Portfolio Choice and the Capital Asset Pricing Model
11.1
The Expected Return of a Portfolio
Portfolio weights are the fraction of the total investment in the portfolio held in each individual
investment in the portfolio:
Portfolio wei
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Capital Markets and the Pricing of Risk
10.2
Common Measures of Risk and Return
When a manager makes an investment decision or an investor purchases a security, they
have some view as to risk involved and likely return investment will earn
Pro
FINA1221 and FINA2221
Semester 2, 2014
Solutions for tutorial 12 (week 13)
Brealey Myers Marcus 7th Edition
Chapter 12 Question 1
Textbook answer:
a.
False. Investors require higher expected rates of return on investments with high market
risk, not high t
FINA1221 and FINA2221
Semester 2, 2014
Solutions for tutorial 5 (week 6)
Brealey Myers Marcus 7th Edition
Chapter 7 Question 3
Textbook answer:
The preferred stock pays a level perpetuity of dividends. The expected dividend next year is
the same as this y
FINA1221 and FINA2221
Semester 2, 2014
Solutions for tutorial 1 (week 2)
Brealey Myers Marcus 7th Edition
Chapter 1 Question 13
Textbook answer:
Both capital budgeting decisions and capital structure decisions are longterm financial decisions.
However, c
FINA1221 and FINA2221
Semester 2, 2014
Solutions for tutorial 4 (week 5)
Brealey Myers Marcus 7th Edition
Chapter 6 Question 1
Textbook answer:
a.
Coupon rate = 6%, which remains unchanged. The coupon payments are fixed at $60 per year.
b.
When the market
FINA1221 and FINA2221
Semester 2, 2014
Solutions for tutorial 2 (week 3)
Brealey Myers Marcus 7th Edition
Chapter 3 Question 3
Accounting revenues and expenses can differ from cash flows because some items included in the
computation of revenues and expen
FINA1221 and FINA2221
Semester 2, 2014
Solutions for tutorial 9 (week 10)
Brealey Myers Marcus 7th Edition
Chapter 5 Question 68
Textbook answer:
a.
PV = $100/(1.08)3 = $79.38
b.
Real value = $100/(1.03)3 = $91.51
c.
Real interest rate =
d.
PV = $91.51/(1
FINA1221 and FINA2221
Semester 2, 2014
Solutions for tutorial 7 (week 8)
Brealey Myers Marcus 7th Edition
These extra questions are next best chapter questions after the questions selected for the
tutorials. Finish tutorials first.
Chapter
Extra Questions
FINA1221 and FINA2221
Semester 2, 2014
Solutions for tutorial 10 (week 11)
Brealey Myers Marcus 7th Edition
Chapter 10 Question 2
Textbook answer:
The extra 2 million burgers increase total costs by $1.0 million.
Therefore, variable cost = $0.50 per burge
FINA1221
8
Fundamentals of Capital Budgeting
8.1
Forecast Earnings
A capital budget lists the projects and investments that a company plans to undertake during the
coming year.
The capital budgeting process begins with forecasts of the projects future con
FINA1221
4
Time, Money, and Interest Rates
4.1
The Timeline
A stream of cash flows is what we call a series of cash flows lasting several periods.
We can represent a stream of cash flows on a timeline, a linear representation of the timing of the
expected
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Real Options
22.4
Growth and Abandonment Options
Growth option is when a firm has a real option to invest in the future.
The firm may have the option to reduce the scale of its investment in the future the option to
disinvest is the abandonmen
Week 4 Tutorial 1221 Exercises
Cash flow streams
411. Suppose you receive $100 at the end of each year for the next three years.
a. If the interest rate is 8%, what is the present value of these cash flows?
b. What is the future value in three years of t
Exercises for week 3 tutorial
Andy
(From Berk and DeMarzo 3rd global edition)
Accounting Revision
Chapter 2
Questions 2, 4, 9, 17, 23, 24, 45
How much of a $350 cash dividend would you need to
Franking Credits
pay in tax if your marginal tax rate is 37 c
FINA1221 and FINA2221 Introduction to Finance
Keith Godfrey  Lecture Three  August 2016
Time Value of Money Cash Flow Streams
Recap single cash flows

FV PV 1 R N
V0
V1
1 R
Berk & DeMarzo 4.1, 4.2
Cash flow streams in general, discounted cash flow (DC
FINA1221 and FINA2221 Introduction to Finance
Keith Godfrey  Lecture Four  August 2016
Financial Mathematics (3) Interest Rates
Recap
 Single cash flows
FV PV 1 R N
 Perpetuities
PV
PMT
R
 Annuities
PV
PMT
1
1
R 1 R N
Effective and Nominal Rate
FINA1221 and FINA2221 Introduction to Finance
Keith Godfrey  Lecture Six  September 2016
Project Evaluation or Capital Budgeting (1):
Investment Decision Rules
Accountingbased Investment Decision Rules
Berk DeMarzo 3rd global ed
 Accounting Rates of R
FINA1221 and FINA2221 Introduction to Finance
Keith Godfrey  Lecture Two  August 2016
1. Accounting Revision
[Chapter 2]
Accounting perspective is different from finance, but linked at the cash flows.
Main accounting statements:
 The need for standardi
FINA1221 and FINA2221
Semester 2, 2014
Solutions for tutorial 8 (week 9)
Brealey Myers Marcus 7th Edition
Chapter 9 Question 5
Textbook answer:
Gross revenues from new chip = 12 million $25 = $300 million
Cost of new chip = 12 million $8 = $96 million
Los
FINA1221
6
Valuing Bonds
6.1
Bond Cash Flows, Prices, and Yields
Bond terminology
A bond is a security sold by governments and corporations to raise money from investors today in
exchange for promised future payments.
The terms of the bond are described a
FINA1221
3
Financial Decision Making and the Law of One Price
3.1
Valuing Decisions
Financial managers job is to make decisions on behalf of the firms investors
For good decisions benefits exceed the costs
The analysis will often involve skills from other
FINA1221
2
Introduction to Financial Statement Analysis
2.1
Firms Disclosure of Financial Information
Financial statements are accounting reports issued by a firm periodically (quarterly/annually) that
present past information and a snapshot of the firms
FINA1221
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Taxation in Australia
Income taxation in Australia
Individual (personal) income tax
The above rates do not include the:
 Medicare levy of 2%
 Temporary Budget Repair Levy; this levy is payable at a rate of 2% for taxable
incomes over $180,000