ANSWERS TO THE END-OF-UNIT TESTS
UNIT 2
1.B 2.D 3.A 4.C 5.B 6.D 7.D 8.E 9.E 10.E
Notes:
5.
I applied the formula (4.16) for PV of annuity but adapted for a frequency different than once a year, quarterly instead: r = 0,055 C = 500 m = 4 T = 25

The result is approx. 27090 pounds which doesn’t appear as a possible answer. I chose the value nearest to that, therefore answer B. 6.
I calculated the future values of the cash flows as not annuity and as annuity. I really don’t think these cash flows should be understood as annuities therefore the right way to calculate the future values is using table A.3. By means of that table the result is 18957,11 which doesn’t appear as a possible result so I chose the nearest one, that’s D. Future value

End of year| Cash flow| Future value factor| Future value of cash flow| 1| 5180| 1,06| 5490,8|
2| 9600| 1,1236| 10786,56|
3| 2250| 1,1910| 2679,75|
| | TOTAL| 18957,11|

Just in case the calculation should be done as annuity:
Future value of an annuity
End of year| Cash flow| Future value factor| Future value of cash flow| 1| 5180| 1| 5180|
2| 9600| 2,06| 19776|
3| 2250| 3,2149| 7233,525|
| | TOTAL| 32189,525|

----
Just in case the assignment question was wrong, I calculated present values: Present value
End of year| Cash flow| Present value factor| Present value of cash flow| 1| 5180| 0,9434| 4886,812|
2| 9600| 0,89| 8544|
3| 2250| 0,8396| 1889,1|
| | TOTAL| 15319,912|

Present value of an annuity
End of year| Cash flow| Present value factor| Present value of cash flow| 1| 5180| 0,9434| 4886,812|
2| 9600| 1,8334| 17600,64|
3| 2250| 2,6730| 6014,25|
| | TOTAL| 28501,702|

...FORMULAS TIME VALUE OF MONEY
PV (simple without compounding) = FV/1+r
FV (simple without compounding) = PV (1+r)
PV (compounding) = FV / (1+r)n
FV (compounding) = PV (1+r)n
PV (for monthly, daily or bi-annually basis) = FV / (1+r/m)n*m
FV (for monthly, daily or bi-annually basis) = PV(1+r/m)n*m
To find interest rate: FV = PV (1+r(?))n (FV and PV are given)
APR (Annual Present Rate) = r * Total days in a year/given days
In Excel: =RATE(n,pmt,PV)
EAR (Effective...

...Chapter 06
Discounted Cash Flow Valuation
Multiple Choice Questions
1. An ordinary annuity is best defined by which one of the following?
A. increasing payments paid for a definitive period of time
B. increasing payments paid forever
C. equal payments paid at regular intervals over a stated time period
D. equal payments paid at regular intervals of time on an ongoing basis
E. unequal payments that occur at set intervals for a limited period of time
...

...1. Calculate TRUST’s company after-tax WACC. The risk-free rate was 4.21%, the market risk premium was 6% and the company tax rate was 30%. The WACC should be rounded to four decimal places.
After-tax WACC = rD (1-Tc) D/V + rE E/V
rE = rf + βequity(rm – rf)
rE = 0.0421 + 0.81(0.06)
rE = 0.0907
E = number of outstanding shares x current share price
E = 60 million x $3.43
E = $205.8 million
D = $44 million bank loans + $1.2 million short-term hire purchase commitments
D =...

...CONCEPT QUESTIONS - CHAPTER 1
1.1 ( What are the three basic questions of corporatefinance?
a. Investment decision (capital budgeting): What long-term investment strategy should a firm adopt?
b. Financing decision (capital structure): How much cash must be raised for the
required investments?
c. Short-term finance decision (working capital): How much short-term cash flow does...

...Final Exam Practice Problems
1. Firm ABC’s only outstanding debt is $100,000 worth of coupon bond (market value). Its yield to maturity is 8%. Given that its tax rate is 40%, what is its effective cost of debt?
Effective cost of debt = cost of debt * (1-tax rate) =8%*(1-40%)=4.8%
2. Firm ABC has a stock currently traded at $20. The next year’s dividend will be $0.20. The dividend growth rate is forecasted to be 6% forever. Risk-free rate is 3%, and market risk premium is...

...1. Refer to the following information:
Stock | E(r) | | Correlation Coefficients |
1 | 0.06 | 0.20 | 1 with 2: -0.10 |
2 | 0.08 | 0.10 | 1 with 3: +0.60 |
3 | 0.15 | 0.15 | 2 with 3: +0.05 |
A portfolio is formed as follows: sell short $1,000 of Stock 1; buy $1,500 of Stock 2; buy $1,500 of Stock 3. The investor uses $1,000 of his own equity, with the remaining amount borrowed at a risk-free interest rate of 4% (with continuous compounding).
(a) Assuming that there are...

...T he Sisyphean Corporation
The Sisyphean Corporation is considering investing in a new cane manufacturing
machine that has an estimated life of three years. The cost of the machine is
$30,000 and the machine will be depreciated straight line over its three-year life to a
residual value of $0.
The cane manufacturing machine will result in sales of 2,000 canes in year 1. Sales
are estimated to grow by 10% per year each year through year three. The price per
cane that Sisyphean will...

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