1. If you deposit $1,500 today, how much will you have in 3 years, given that interest is 9%, compounded monthly
2. You just won $150,000 scholarship. What is the value of this scholarship if the payment wil be made of $50,000 per year for the next 2 years, followed by payments of $25,000 per year for the next two years. The appropriate interest rate is 8% per year
3. A levelcoupon bond has par value of $1,000 that pays $120 per year and has 10 years to maturity. If the yield for similar bonds is currently 14%, what is the bond's value?
4. You are thinking about investing in a $2,000 face value bond which will mature in two years. The bond has an 7% coupon and pays interest semiannually. The current yield to maturity on similar bonds is 5%, and rates are not expected to change. What is the bond's price?
5. The company has just paid a $3 annual dividend on its common stock. The dividend is expected to increase at a constant 5% per year indefinitely. If the required rate of return on the stock is 10%, what is its current value?
6. A firm just paid a dividend of $0.20 per share of common stock and the current stock price is $75. Dividends are expected to grow at a 7% rate for the foreseeable future. What is the current rate of return for this stock? (10 marks)
7. A project requires an investment of $7,300 and generates cash flows of $1600, $2750, $3800, $3000 over years one through four. Calculate the project’s payback period and discounted payback period at a rate of 12%.
8. A firm is considering the following mutually exclusive investment projects: Project A requires an initial outlay of $500 and will return $120 per year for the next seven years. Project B requires an initial outlay of $5,000 and will return $1,350 per year for the next five years. The required rate of return is 10%. What is the net present value of the project with the highest net present value? Which project should the firm choose?
...these two currencies is 1 euro =1.3118 dollars so in order to make easier the case we will use 1.31 to round it up.
The politics of the Group related to the management of the risk of change foresee, as a rule, the coverage of the future commercial flows that you/they will have bookkeeping demonstration within 12 months and of the orders acquired (or committed in progress) to put aside from their expiration. It is reasonable to believe that the relative effect of coverage suspended in the Reserve of cash flow hedge will primarily be in relief to economic account in the following exercise.
The Group is exposed to consequential risks by the variation of the rates of change, that you/they can influence on its economic result and on the value of the clean patrimony. Particularly:
Whereas the societies of the Group sustain costs denominated in different currencies by those of denomination of the respective proceeds, the variation of the rates of change can influence the Result operational of such societies. In 2012, the general amount of the commercial flows directly statements to the risk of change you/he/she has been equivalent to 10% around of the billing. Gives the last budget of Fiat the total billing of 83 billion of euro therefore the figure that we will go to analyze is equal to 830 million of Euro.
CASE STUDY
The Group, which operates in numerous markets worldwide, is naturally exposed to market risks stemming from fluctuations in currency and...
...Netpresentvalue
In finance, the netpresentvalue (NPV) or netpresent worth (NPW) of a time series of cash flows, both incoming and outgoing, is defined as the sum of the presentvalues (PVs) of the individual cash flows. In case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of money to appraise longterm projects. Used for capital budgeting, and widely throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in presentvalue terms, once financing charges are met.
The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputting a price; the converse process in DCF analysis, taking as input a sequence of cash flows and a price and inferring as output a discount rate (the discount rate which would yield the given price as NPV) is called the yield, and is more widely used in bond trading.
Formula
Each cash inflow/outflow is discounted back to its present...
...uniform
The cost of a proposal is $ 10,000. The cash flows are as follows:
Year Cash flows
1 2500
2 2500
3 2500
4 2500
5 2500
6 2500
Calculate Pay Back Period (PBP)
When the cash flows are not uniform
1. There are two Proposals. Proposal A and Proposal B. Both cost the amount of $ 60,000. The discount rate is 10%. The cash flows before depreciation and tax are as follows:
Year Proposal A Proposal B
$ $
0 (60,000) (60,000)
1 18,000 19,000
2 15,000 17,000
3 18,000 19,000
4 16,000 14,000
5 19,000 15,000
6 14,000 13,000
Evaluate the above proposals according to:
1. Pay Back Period.
2. Accounting Rate of Return (ARR)
3. Netpresentvalue method (NPV)
Proposal A is better than B, because ARR and NPV are higher than Proposal B
2. There are two Proposals. Proposal A and Proposal B. Proposal A costs $ 80,000 and Proposal B costs $ 100,000. The discount rate is 10%. The cash flows before depreciation and tax are as follows:
Year Proposal A Proposal B
$ $
1 13,000 15,000
2 15,000 14,000
3 18,000 19,000
4 16,000 16,000
5 19,000 13,000
6 14,000 13,000
7 16,000 19,000
8 20,000 15,000
9 0 18,000
10 0 17,000
Evaluate the above proposals according to:
1. ARR
2. NPV
3. Pay Back Period...
...debt to tangible net worth.
5. A measure of profitability and not shortterm liquidity is the
a. Accounts receivable turnover ratio.
b. Sales to working capital ratio.
c. Total asset turnover ratio.
d. Acidtest ratio.
6. Return on investment (ROI) is a term often used to express income earned on capital invested in a business unit. A company’s ROI would be increased if
a. Sales increased by the same peso amount as express and total assets increased.
b. Sales remained the same and expenses were reduced by the same peso amount that total assets increased.
c. Sales decreased by the same peso amount that expenses increased.
d. Sales and expenses increased by the same percentage that total assets increased.
(CMA adapted)
7. When a balance sheet amount is related to an income statement amount in computing a ration;
a. The balance sheet amount should be converted to an average for the year.
b. The income statement amount should be converted to an average for the year.
c. Both amounts should be converted to market value.
d. Comparisons with industry ratios are not meaningful.
(PhilCPA adapted)
8. Ratios are used for many purposes in financial statement analysis. In order to determine the return on investment for a company, the numerator of the fraction used should be
a. Net income.
b. Income before nonrecurring items.
c. Income before nonrecurring items and before income taxes.
d. Income before...
...Tesca team we were able to create a comprehensive capital budget and cash flow analysis for the proposed refrigerator project.
Through our analysis we found that the cost of capital of the project to be 13.487% and a Weighted Average Cost of Capital (WACC) to be at a value of 9.70%. Factoring in the WACC into our projections we found that if the demand maintains at an average rate the project will be at a positive NetPresentValue of $5,997,505.31 with an IRR of 13.21%, a profitability index of 8.84, and an approximate payback period of 6.84 years. Please see Exhibits below for a snapshot of the capital budget and NPV values.
This information seemed to be very promising for the project in general. However, our continued analysis showed the project to be very sensitive to the sales price per unit of the refrigerator. We used the average demand scenario to produce a sensitivity analysis and found that with just a 5% decrease in the sales price of the refrigerator the NPV quickly dipped into a negative value thus showing the project to be extremely sensitive to the sales price of the refrigerator.
Our scenario analysis also exposed a strong probability of the project giving a negative NetPresentValue and giving a probable low Internal Rate of Return of only 4.01%. This is mainly due to the projects sensitivity to the sales price of...
...
FINC5001 Capital Market and Corporate Finance

Workshop 5 – Capital Budgeting II
1. Basic Concepts Review
a) In applying NetPresentValue, what factors do we include, and what factors do we ignore?
Use cash flows not accounting income
Ignore
* sunk costs
* financing costs
Include
* opportunity costs
* side effects
* working capital
* taxation
* inflation
2. Practice Questions
a) After spending $3 million on research, Better Mousetraps has developed a new trap. The project requires an initial investment in plant and equipment of $6 million. This investment will be depreciated straightline over five years to a value of zero, but, when the project comes to an end in five years, the equipment can in fact be sold for $500,000. The firm believes that working capital at each date must be maintained at 10% of next year's forecasted sales. Production costs are estimated at $1.50 per trap and the traps will be sold for $4 each. (There are no marketing expenses.) Sales forecasts are given in the following table. The firm pays tax at 35% and the required return on the project is 12%. What is the NPV?

Figures in 000's  
Year  0  1  2  3  4  5 
Unit Sales   500  600  1,000  1,000  600 
Revenues   2,000  2,400  4,000  4,000  2,400 ...
...Examples Of NetPresentValue (NPV), ROI and
Payback Analysis
Introduction
Terms and Definitions
NetPresentValue  Method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time.
Discount Rate  Also known as the hurdle rate or required rate of return, is the rate that a project must achieve in order to be accepted rather than rejected.
Return on Investment – Expected income divided by the amount originally invested
Payback Analysis – The number of years needed to recover the initial cash outlay.
Formulas
NetPresentValue = (t=1..n A * (1+r)t OR (t=1..n A/ (1+r)t
Where A = Cash flow
r = Required rate of return
t = year of cash flow
n = the nth year
Return On Investment = (Discounted Benefits – Discounted Costs) / Discounted Costs
Payback Period = Years taken to repay initial outlay .
Eg. Project Z Outlay = $ 4000
Yearly cash flows = $2000...
...rates are annual unless otherwise stated;
6) Bonds pay semiannual coupons unless otherwise stated;
7) Bonds have a par value (or face value) of $1,000; and
8) You may use the back of the exam paper as your scrap paper.
Good Luck.
32 Calculation Questions (4 marks each)
1. The common stock of Robin's Tools sells for $24.50. The firm's beta is 1.2, the riskfree rate is 4%, and the return on the market portfolio is 12%. Next year's dividend is
expected to be $1.50. Assuming that dividend growth is expected to remain constant
for Robin’s Tools over the foreseeable future, what is the firm's anticipated dividend
growth rate?
A)
B)
C)
D)
E)
6.65%
7.48%
9.15%
13.6%
15.0%
Solution: B
r = 4% + 1.2 x (12%  4%) = 13.6% and
$24.50 = $1.50 / (13.6%  g)
Leads to g = 7.48%
2. What is the yield to maturity on a 10year zerocoupon bond with a $1,000 face value
selling at $742?
A)
B)
C)
D)
E)
3.03%
7.42%
13.48%
34.78
42.37%
Solution: A
YTM = (1000/742) 1/10 1 = .03029 or 3.03%
3. Consider the following monthly cash flows (see the diagram below):
X
Today
Z
X
Z
X
Z
1
2
3
4
19
20
Cash flows of an amount X are made for months 1, 3, 5, …, 17 and 19 (the ten oddnumbered months) and cash flows of an amount Z are made for months 2, 4, 6, …, 18
and 20 (the ten evennumbered months). The APR is 6% and is compounded on a...
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