PROBLEM SET 5:
INTEREST RATES, AMORTIZING LOANS, BOND VALUATION, STOCK VALUATION

1. A typical credit card agreement quotes an interest rate of 18 percent APR. Monthly payments are required. What is the actual interest rate you pay on such a credit card? 2. After carefully going over your budget, you have determined you can afford to pay €632 per month toward a new sports car. You call up your local bank and find out that the going rate is 1 percent per month for 48 months. How much you can borrow? 3. You ran a little short on your spring break vacation, so you put €1,000 on your credit card. You can only afford to make the minimum payment of €20 per month. The interest rate on the credit card is 1.5 percent per month. How long will you need to pay off the €1,000? 4. Suppose you borrow €10,000. You are going to repay the loan by making equal annual payments for five years. The interest rate on the loan is 14 percent per year. Prepare an amortization schedule for the loan. How much interest will you pay over the life of the loan? 5. You have recently finished your Master degree and you want to purchase a new BMW immediately. The car costs about €21,000. The bank quotes an interest rate of 15 percent APR for a 72-month loan with a 10 percent down payment. What will your monthly payment be? What is the effective interest rate on the loan? 6. A bond has a 10 percent coupon rate and a €1,000 face value. Interest is paid semiannually, and the bond has 20 years to maturity. If investors require a 12 percent yield, what is the bond’s value? What is the effective annual yield on the bond? 7. A bond carries an 8 percent coupon, paid semiannually. The par value is €1,000, and the bond matures in six years. If the bond currently sells for €911.37, what is its yield to maturity? What is the effective annual yield? 8. Company X is expected to pay dividends of $5.50 a share in 1 year’s time and $5.80 a share in 2 years’ time, after which its stock is expected to sell at $91....

...Problems form CorporateFinance
1. Compute the following:
Present Value | Years | Interest Rate | Future Value |
$227,382 | 20 | 5 | |
| 16 | 17 | $886,073 |
$25,000 | 18 | | $143,625 |
$1,941 | | 5 | $3,700 |
2. At 9 percent interest, how long does it take to double your money? To quadruple it?
3. In 2006, a gold $3 coin minted in 1879 was auctioned for $9.000. For this to have been true, what was the annual increase in the value of the coin?
4. You can earn 0.45 percent per month at your bank. If you deposit $1.500, how long must you wait until your account has grown to $3,600?
5. You need $75,000 in 10 years. If you can earn 0.55 percent per month, how much will you have to deposit today?
6. If you put up $20,000 today in exchange for a 8.5 percent, 12-year annuity, what will the annual cash flow be?
7. Bath's Bank offers you a $50,000, seven-year term loan at 8 percent annual interest. What will your annual loan payment be?
8. Curly's Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $25,000 per year forever. If the required return on this investment is 7percent, how much will you pay for the policy? Suppose Curly's told you the policy cost $400.000. At what interest rate would this be a fair deal?
9. First National Bank charges 12.4 percent compounded monthly on its business loans. First United Bank charges 12.7...

...The following formula calculates the present values: PV = FV/ (1+r) ^t, where
FV is the cash flow, discount rate r = 11%, t = year.
From there: 1st year = $2.00 x 0.901= PV= $1.80
2nd year = $2.20 x 0.802 = PV= $1.79
3rd year = $35.40 x 0.731 = PV=$25.88
Total PV= $29.47
Thus, the PV of total benefit is $29.47
Chapter 9 # 22: Alternative present values
Your rich godfather has offered you a choice of one of the three following alternatives: $10,000 now; $2,000 a year for eight years; or $24,000 at the end of eight years. Assuming you could earn 11 percent annually, which alternative should you choose? If you could earn 12 percent annually, would you still choose the same alternative?
Answer: I found two answers for the same problems. One is bringing the present value to the future and the other is bringing the future value to the present. In each one of them, different solutions were proposed.
A. Present Value to the future
Option 1: $10,000 now with 11% interest.
$10,000 x 11% = $11,100(10,000 + 1,100)
1,100 x 8 yrs = $8,800 + $10,000 = $18,800
$10,000 now with 12% interest.
$10,000 x 12% = $11,200 (10,000 + 1,200)
1,200 x 8 yrs = $ 9,600 + 10,000 = $19,600
Option 2: $2,000 a year for eight years.
$2,000 x 11% = $2,220
$2,220 x 8 Years = $17,760
$2,000 x 12% = $2,240
$2,240 x 8 Years = $17,920
Option 3
$24,000 at the end of eight years.
Choice: Option 3. The rate of return in Options 1 and 2 is less than what is...

...
3210AFE
ADVANCE CORPORATEFINANCE
Financial Analysis Report
New Hope Coal Corporation
(4780 words)
STUDENT NAME: Member 1: S2704148 zhiqi Liu
Member 2: S2682143 Sai Tie
Member 3: S2730145 Lingfeng Zhan
Member 4: S2594576 Xindan Chen
Member 5: S2700906 Yinghui Huang
TABLES
Executive summary............................................................................................3
Introduction........................................................................................................6
Firm structure and corporate governance.......................................................6
Remuneration….................................................................................................8
Capital structure.................................................................................................9
CAPM BETA AND FACTOR MODEL ANALYSIS……………………….9
WACC Analysis..................................................................................................11
Firm Estimation by FCF and PE ratio.............................................................12
Growth project analysis.....................................................................................13
Mergers and Acquisitions Targets Analysis…………………………………16
Cost of Debt & Equity Funding........................................................................19
Risk...

...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 4%. Assume that Constant Dividend Growth Model and CAPM give you the same estimate of the cost of capital for equity, what is the beta of its stock?
By the Constant Dividend Growth Model:
Cost of Equity = D/P+g = 0.2/20+6%=7%
By CAPM, cost of equity = R(f)+ beta * market risk premium = 3% + beta* 4%,
Set this to be equal to 7%, solve for beta: beta=1
3. Firm ABC has a cost of equity of 8%, a cost of debt of 5%. It stock is traded at $10/share, and has 10 million shares outstanding. Its debt value is $20 million. Tax rate is 40%. What is its after-tax WACC?
Equity Value = 10*10=$100 million, Debt Value=$20 million
So, equity weight = 100/120=83.3%, debt weight=20/120=16.7%
After-tax WACC= equity weight * cost of equity + debt weight * effective cost of debt
=83.3%*8%+16.7%*5%*(1-40%) = 7.2%
4. Suppose you are the founder of a private company ABC. Initially you raised $500,000 from an angel investor from the first-round financing. As a...

...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
2. Which one of the following accurately defines a perpetuity?
A. a limited number of equal payments paid in even time increments
B. payments of equal amounts that are paid irregularly but indefinitely
C. varying amounts that are paid at even intervals forever
D. unending equal payments paid at equal time intervals
E. unending equal payments paid at either equal or unequal time intervals
3. Which one of the following terms is used to identify a British perpetuity?
A. ordinary annuity
B. amortized cash flow
C. annuity due
D. discounted loan
E. consol
4. The interest rate that is quoted by a lender is referred to as which one of the following?
A. stated interest rate
B. compound rate
C. effective annual rate
D. simple rate
E. common rate
5. A monthly interest rate expressed as an annual rate would be an example of which one of the following rates?
A. stated rate
B. discounted annual rate
C. effective annual rate
D. periodic monthly rate
E. consolidated...

...Questions and Problems
Page 1 of 3
CorporateFinance eBook
9/e Content
Chapter8: Interest Rates and Bond Valuation
Questions and Problems
1. Valuing Bonds What is the price of a 10-year, zero coupon bond paying $1,000 at maturity if the YTM is: BASIC (Questions 1– 12) a. 5 percent? b. 10 percent? c. 15 percent? 2. Valuing Bonds Microhard has issued a bond with the following characteristics: Par: $1,000 Time to maturity: 25 years Coupon rate: 7 percent Semiannual payments Calculate the price of this bond if the YTM is: a. 7 percent b. 9 percent c. 5 percent 3. Bond Yields Watters Umbrella Corp. issued 12-year bonds 2 years ago at a coupon rate of 7.8 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM? 4. Coupon Rates Rhiannon Corporation has bonds on the market with 13.5 years to maturity, a YTM of 7.6 percent, and a current price of $1,175. The bonds make semiannual payments. What must the coupon rate be on these bonds? 5. Valuing Bonds Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 15 years to maturity, and a coupon rate of 8.4 percent paid annually. If the yield to maturity is 7.6 percent, what is the current price of the bond? 6. Bond Yields A Japanese...

...faced with a STIP are more enticed to cut back on essential investments that are categorized as expenses, thus increasing current income in the short-term but consequentially leaving problems in the long run.
12. From the viewpoint of Stephens, what would be the worst feature of the long-term incentives? Explain.
Compensation via option relies on the absolute change in stock price, not the change relative to the market or to stock prices of other firms in the same industry. Due to this, Stephen will be exposed to the market and industry risks that are out of his control.
13. What specific source of funding would TRUST choose to use for the expansion project scheduled for next year? Assume TRUT’s financial position next year would be the same as of 31/12/13?
Assuming TRUST’s financial position will be the same as of 31/12/13, TRUST should choose to fund the expansion project using retained earnings as a source.
14. What should be the amount of the final dividend to be declared for financial year 2013? Explain.
Although management has the final say on what price they wish to set dividends, the final dividend in TRUST’s scenario must be equal to or be below the EPS of 27.6cents as dividends are paid out of earnings. Through a thorough analysis, the dividends may very well be set below that of the EPS in view of the earnings performance and capital requirements needed.
15. Calculate the alternative divisional...