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1.
2.
3.
4.
5.
6.
E. $1,315. Subject: Net New Borrowing. Net New Borrowing = 3,480 2,165 = 1,315
7.
8.
9.
10.
11.
12.
13.
14.
Page 1
CFIN300 Class 13
15.
16.
17.
7.8% 12
Monthly quoted rate, EPR = 1 +
1 = 0.6397%
2
Loan = 586.84
1
(1 + 0.006397) 360
= $82,500
0.006397
Calculator:
n = 360; I% = 7.8; PMT = -586.84; FV = 0; P/Y = 12; C/Y = 2. Compute PV = 82500
18.
PV = 1,000
1
(1 + 0.08)3
= $2,577.10
0.08
Calculator:
n = 3; I% = 8; PMT = -1000; FV = 0; P/Y = 1; C/Y = 1. Compute PV = 2577.10
19.
0.1
= $772.45
1
1 5
1.1
Calculator:
Step 1: n = 4; I% = 10; PV = -2000; PMT = 0; P/Y = 1; C/Y = 1. Compute FV = 2928.2
Step 2: n = 5; I% = 10; PV = 2928.2; FV = 0; P/Y = 1; C/Y = 1. Compute PMT = -772.45
20.
0.02
= $111.62
1
1
1.0230
(Calculator: n = 30; I% = 24; PV = 2500; FV = 0; P/Y = 12; C/Y = 12. Compute PMT = -111.62)
Monthly payment = 2,500
Page 2
CFIN300 Class 13
22.
0.01
= $214.21
1.01360 1
Calculator:
Step 1: n = 25; I% = 12; PMT = -100000; FV = 0; P/Y = 1; C/Y = 12. Compute PV = 748642
Step 2: n = 360; I% = 12; PV = 0; FV = 748642; P/Y = 12; C/Y = 12. Compute PMT = -214.21
23.
1
0.08
= $6,988.91
1
1
.
08
1
1.084
Calculator: n = 4; I% = 8; PV = 25000; FV = 0; P/Y = 1; C/Y = 1. Compute PMT = -6988.91 (Be
sure to select BGN for beginning cash flows.)
Annual withdrawal = 25,000
24.
25.
0.75%
= $128,740.
1
1
(1 + 0.75%)360
Calculator: n =360; I% = 9; PV = 16000000; FV = 0; P/Y = 12; C/Y = 12. Compute PMT = -128740
26.
FV = 10,000
(1 + 12.2369%)12 1
= $244,835
12.2369%
Calculator:
Step 1: (Use the Conversion menu). n = 0.6667 (i.e. 2/3); I% = 8. Compute APR = 8.15793
Step 2:
n=12; I%=12.2369 [ = 8.15793 / (2/3) ]; PV=0; PMT=-10000; P/Y=1; C/Y=1. Compute FV = 244835.
Alternatively (this only works on TI BAII+ or any calculator that accepts non-whole numbers for P/Y and
C/Y): n=12; I%= 8.15793; PV=0; PMT=-10000; P/Y= 0.6667; C/Y = 0.6667. Compute FV = 244835.
Page 3
CFIN300 Class 13
27.
0.002568
6.25% 24
= $816.0186
EPR = 1 +
1 = 0.2568%. PMT = 225,000
1
2
1
1.002568480
Balance at the end of the 5 years is the present value of the 360 remaining PMTs (for 15 years)
PV = 816.0186
1
1.002568360 = $191,557.57
0.002568
Calculator:
Step 1: (Use the Cash Flow or TVM menu)
n = 480; I% = 6.25; PV = 225000; FV = 0; P/Y = 24; C/Y = 2. Compute PMT = -816.0186
Step 2:
Either (Use the Cash Flow or TVM menu)
n = 360; I% = 6.25; PMT = -816.0186; FV = 0; P/Y = 24; C/Y = 2. Compute PV = 191557.57
28.
PMT (1 + r )
25 (1 + 0.5%)
ln
ln
PMT (1 + r ) PV r
25 (1 + 0.5%) 3000 0.05%
= 182.23 weeks
=
n=
ln(1 + r )
ln(1 + 0.05%)
1,000 20
st
r =
1 = 8% 1 year interest = 8%214.55 = $17.16
214
.
55
Page 4
CFIN300 Class 13
31.
1,000 15
Implicit interest rate: r =
1 = 6 .4 % .
394.34
Price @ Yr4 = 394.341.0644 = 505.40 (as FV of the current price compounded for 4 years) or
Price @ Yr4 = 1,000 / 1.06411 = 505.40 (as PV of the face value discounted for 11 years)
Calculator:
Step 1: n = 15; PV = -394.34; PMT = 0; FV = 1000; P/Y = 1; C/Y = 1. Compute I% = 6.4
Step 2: n = 4; I% = 6.4; PV = -394.34; PMT = 0; P/Y = 1; C/Y = 1. Compute FV = 505.40
or n = 11; I% = 6.4; PMT = 0; FV = 1000; P/Y = 1; C/Y = 1. Compute PV = -505.40
32.
1
Bond price = 70
1
1,000
(1 + 0.068)30
+
= 886.37 + 138.95 = 1,025.32
0.068
(1 + 0.068)30
Calculator:
Step 1: Calculate PV of Coupons
n = 30; I% = 6.8; PMT = 70; FV = 0; P/Y = 1; C/Y = 1. Compute PV = -886.37
Step 2: Calculate Bond price
n = 30; I% = 6.8; PMT = 70; FV = 1000; P/Y = 1; C/Y = 1. Compute PV = -1025.32
PV of Coupons / Bond price = 886.37 / 1,025.32 = 86.4%.
33.
1
1,000
(1 + y ) 40
+
y
(1 + y ) 40
PriceB = 35
1
1,000
(1 + 4%) 40
= $901.03
+
4%
(1 + 4%) 40
Calculator:
Step 1: n = 40; PV = -1098.96; PMT = 45; FV = 1000; P/Y = 1; C/Y = 1. Compute I% = 4
(i.e. semiannual YTM)
Step 2: n = 40; I% = 4; PMT = 35; FV = 1000; P/Y = 1; C/Y = 1. Compute PV = -901.03
Alternatively,
Step 1: n = 40; PV = -1098.96; PMT = 45; FV = 1000; P/Y = 2; C/Y = 2. Compute I% = 8
(i.e. annual YTM)
Step 2: n = 40; I% = 8; PMT = 35; FV = 1000; P/Y = 2; C/Y = 2. Compute PV = -901.03
Page 5
CFIN300 Class 13
34.
1,000 18
r =
1 = 10%
179.86
1
1,000
(1 + Y )14
YTM = 7.27% (See below)
+
Y
(1 + Y )14
Calculator:
n = 14; PV = -1234.93; PMT = 100; FV = 1000; P/Y = 1; C/Y = 1. Compute I% = 7.27
36.
(Calculator: n = 40; I% = 5.5, PMT = 20; FV = 1000; P/Y = 2; C/Y = 2. Compute PV = -819.41)
% Price = (819.41 1,000) / 1,000 = -18.06%
37.
(You can use the Conversion function in the calculator: n = 2; I% =4.295. Compute APR = 4.25)
Semiannual interest = 1,000 4.25% / 2 = $21.25
Page 6
CFIN300 Class 13
39.
Price = 989 = 40
1
1,000
(1 + y ) 30
Semiannual YTM, y = 4.064% (See below)
+
y
(1 + y ) 30
Calculator:
n=30; PV= -989; PMT=40; FV=1000; P/Y = 1; C/Y = 1. Compute I% = 4.064 (semiannual YTM)
Yearly coupon rate for new bonds (at par) = 4.064%2 = 8.13%
Alternatively,
n = 30; PV = -989; PMT = 40; FV = 1000; P/Y = 2; C/Y = 2. Compute I% = 8.13 (annual YTM)
40.
PV
267.8
n=
=
= 15.50 years.
ln(1 + r ) ln(1 + 8.87%)
CFIN300 Class 13
43.
P=
D0 (1 + g ) 2.5 [1 + (0.04)]
=
= $15
rg
0.12 (0.04)
44.
45.
B. The price will likely rise by less than 100%. Subject: Dividend Growth Model
49.
PV of Year 1 dividend
PV of Year 2 dividend
PV of Year 3 dividend
= 21.15 / 1.15
2
= 21.15 / 1.15
2
= 1.95
D2 (1 + g )
(1 1.052 ) (1 + g )
1.1025 (1 + g )
22 =
22 =
rg
0.15 g
0.15 g
52.
54.
55.
B. $18,100,000. Subject: Erosion Cost. Erosion Cost is the lost sales for Class A and Class C.
Total lost sales = $125,000 (1,000 950) + $39,500 (2,500 2,201) = $18,100,000
56.
Page 8
CFIN300 Class 13
57.
A. The tax due on the sale is $5,458.59. Subject: Salvage Value and CCA Recapture
1 1 3
1.1
= 11,500
0.1
28,599
PV of NWC investment
PV of NWC recovery
= 5,000 / 1.1
PV of Machine costs
PV of salvage value
PV of CCATS =
62.
-5,000
3,757
= -20,000
3
= 2,000 / 1.1
1,503
3,588
NPV =
12,446
0.15 + 0.1
1 + 0.1
0.15 + 0.1
1.1
NPVA
= 87,600 +
NPVB
= 50,000 +
NPVA NPVB
= 37,600 +
(1)
CFIN300 Class 13
If r < Crossover rate, Equation (1) will have a positive value (as PV of the cash inflows will
rise), or NPVA NPVB > 0, or NPVA > NPVB. Choose A.
If r > Crossover rate, Equation (1) will have a negative value (as PV of the cash inflows will
fall), or NPVA NPVB < 0, or NPVA < NPVB. Choose B.
Proof:
At r = 10%, NPVA = $8,236.21; and NPVB = $7,625.85
At r = 11%, NPVA = $6,521.28; and NPVB = $6,588.36
63.
D. Machine B is better because its EAC is -$75.66, which is less than the EAC of -$84.60 for
A. Subject: Equivalent Annual Cost
1
1
2
0.15
= 84.60
PV of Costs of A: = 40 60 1.15 = 137.54 EACA = 137.54
1
0.15
1
1.152
1
1
3
0.15
= 75.66
PV of Costs of B: = 70 45 1.15 = 172.75 EACB = 172.75
1
0.15
1
1.153
Calculator:
Machine A
Step 1: Calculate NPV@15% for the following list: -40; -60; -60. NPV = -137.54
Step 2: n = 2; I% = 15; PV = -137.54; FV = 0; P/Y = 1; C/Y = 1. Compute PMT = 84.60
Machine B
Step 1: Calculate NPV@15% for the following list: -70; -45; -45; -45. NPV = -172.75
Step 2: n = 3; I% = 15; PV = -172.75; FV = 0; P/Y = 1; C/Y = 1. Compute PMT = 75.66
64.
PV of Equipment costs
-1,600,000
PV of Salvage value
397,741
PV of NWC
-120,000
PV of NWC recovery
59,661
PV of CCATS
248,860
1,013,738
302,414
= 800,000 / 1.155
= 120,000 / 1.155
(Using the PV of CCATS formula)
= 1,013,7380.15 / (1 1/1.155)
(Calculator: n = 5; I% = 15; PV = -1013738; FV
= 0; P/Y = 1; C/Y = 1. Compute PMT = 302414)
458,203
Fixed costs
700,000
Variable costs
815,000
Gross revenues
$1,973,203
197,320
= 302,414 / (1 0.34)
= 1081,500
= 1,973,203 / 10
Page 10
CFIN300 Class 13
Notes: For detailed answers to questions 65-79, refer to the Excel spreadsheet.
65.
D. Since both projects pay back, the NPV of both must be positive. Subject: Payback Rule
66.
67.
68.
D. With a payback cutoff of 1.75 years, only Project A is acceptable. Subject: Payback Rule
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
= 1,053.81
60
+
Price today =
0.045
(1 + 0.045) 4
(Calculator: n = 4; I% = 4.5; PMT = 60; FV = 1000; P/Y = 1; C/Y = 1. Compute PV = -1053.81)
1
Price today = 70
1
1,000
(1 + 0.08)5
+
= 960.07
0.08
(1 + 0.08)5
82.
Page 11
CFIN300 Class 13
83.
Return
Year
1
2
3
4
Price
$14.20
$14.64
$13.92
$15.08
Dividend
$0.50
$0.52
$0.55
$$$
6.62% = 0.94/14.20
-1.37% = -0.20/14.64
12.28% = 1.71/13.92
85.
89.
Page 12
CFIN300 Class 13
91.
Investment
$78,000
$65,000
$107,250
$9,750
$260,000
Weight
30.00%
25.00%
41.25%
3.75%
100.00%
Beta
0.6
1.3
1.2
0.0
Beta Weight
0.180
0.325
0.495
0
1
C. 10 percent invested in a stock with a beta of 1.0 and 90 percent invested in a stock with a
beta of 1.40. Subject: Systematic Risk
E(Ri) = rf + [E(RM) rf ]i
0.12 = rf + (0.11 rf)1.2.
95.
Reward-to-Risk Ratio =
E ( Ri ) rf
0.16 0.05
= 7.86%
1.4
Page 13
CFIN300 Class 13
96.
E(Ri) = rf + [E(RM) rf ]i
0.06 = 0.03 + [E(RM) 0.03)0.8
Solve this equation for E(RM) = 6.75%
99.
Page 14