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THE UNIVERSITY OF HONG KONG

FACULTY OF BUSINESS AND ECONOMICS


FINA1003/1310A/B/C Corporate Finance
FIRST SEMESTER, 2015-2016

Tutorial 1 Lecture 3 Introduction to Valuation: Time Value of


Money (Chapter 5)
General Information
Instructor: Dr.

Yang SUN

E-mail: sunyang@hku.hk

Tutor: Mr.

Clive Man Chung HO


Office: Room 1026, KKL Building

E-mail: hoclive@hku.hk
Phone:

2857 8514

Mailbox (To drop your assignment): Number A34,

9/F KKL Building


Office Hours: Monday 2:30-3:30pm; Wednesday 2:30-3:30pm; 5:30-6:30pm;
Thursday 2:30-3:30pm; 5:30-6:30pm; Friday 3:30-4:30pm; 5:30-6:30pm
Course Assessments

Weights

Class Participation

5%

Group Assignments 3 (2-5 members)

20%

Assignment Group List: 18 September (Friday) 6pm


Mid-term Examination (31 October, Saturday, 9-11am)

20%

Final Examination

55%

Tutorial Session

Time & Venue

Monday 10:30-11:20am KKL1105

Monday 12:30-1:20pm KKL925

Monday 1:30-2:20pm KKL1105

Monday 3:30-4:20pm KKL925

Monday 4:30-5:20pm KKL925

Tuesday 10:30-11:20am KKL925

Tuesday 11:30-12:20pm KKL925

Wednesday 1:30-2:20pm KKL830

Wednesday 3:30-4:20pm KKL830

10

Wednesday 4:30-5:20pm KKL1105

11

Friday 1:30-2:20pm KKL925

12

Friday 2:30-3:20pm KKL830

FINA1003/1310 Corporate Finance Tutorial 1

Mr. Clive Man Chung HO

Question 1 (Chapter 5: Future Value)

You have just made your first 4,000 contribution to your retirement account.
Assuming you earn an 11% rate of return and make no additional contributions, what
will your account be worth when you retire in 45 years? What if you wait 10 years
before contributing?

Question 2 (Chapter 5: Present Value)

Suppose you have just celebrated your 19th birthday. A rich uncle has just set up a
trust fund for you that will pay you $150,000 when you turn 30. If the relevant rate of
return is 9%, how much is this fund worth today.

Question 3 (Chapter 5: Rate of Return)

Although appealing to more refined tastes, art as a collectible has not always
performed so profitably. During 2003, Sothebys sold the Edgar Degas bronze
sculpture Petite Damseuse de Quatorze Ans at auction for a price of $10,311,500.
Unfortunately for the previous owner, he had purchased it in 1999 at a price of
$12,377,500. What was his annual rate of return on this sculpture?

FINA1003/1310 Corporate Finance Tutorial 1

Mr. Clive Man Chung HO

Question 4 (Chapter 5: Interest Rates and Future Value)

In 1895, the first U.S. Open Golf Championship was held. The winners prize money
was $150. In 2007, the winners check was $1,260,000. What was the percentage
increase per year in the winners check over this period? If the winners prize
increases at the same rate, what will it be in 2040?

Question 5 (Chapter 5: Present Value)

Prudential has an unfunded pension liability of $650 million that must be paid in 20
years. To assess the value of the firms stock, financial analysts want to discount this
liability back to the present. If the relevant interest rate is 7.4%, what is the present
value of this liability?

FINA1003/1310 Corporate Finance Tutorial 1

Mr. Clive Man Chung HO

 Lecture 3: Time Value of Money TVM (Chapter 5)


 Assumptions in Finance
Option (1): $1 billion now
Option (2): 50% chance of getting $0 and 50% chance of getting $2
billion now
As a rational investor, which choices would you pick? Risk-averse

 Drawing Timeline

 Present Value and Future Value


FV = PV (1+r)t
- Future Value Factor: (1+r)t
PV = FV/(1+r)t
Present Value (Discount) Factor = 1 / (1+r)t

 Relationship between PV, FV, Interest and Time


- Increasing interest rate and time increases FV
- Increasing interest rate and time decreases PV

FINA1003/1310 Corporate Finance Tutorial 1

Mr. Clive Man Chung HO

 Identifying the 4 Elements for Financial Calculator


(1) PV (Time 0 as of now)
(2) FV (Time T in the future)
(3) r (Rate of Return in %)
(4) N (Number of periods)
Financial Calculator Model: BAII Plus (Standard / Professional);
Hewlett Packard 12C