FIN 300 Study Guide - Final Guide: Capital Asset Pricing Model, Net Present Value, Weighted Arithmetic Mean

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18 Apr 2012
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Detailed answers for selected problems from sample final exam
(Spring 2006, Version #4)
2. Convert rate to weekly, result is 5.9151
Use this rate, fv=0, pv = -150000, p/yr=52, n=1300 to get pmt=221.05.
Note n is measured as number of weeks in 25 years.
4. Using the perpetuity growth formula, 10 = 2.12/(r-6%)
Solving for r gives 27.2%.
9. OCF = D + NI = 10 + 100 = 110
CFFA = OCF + NCS + ChangeNWC = 110 + 10 + 0 = 120.
11. Using CAPM, the E(R) formula for A is
13.5% = 7% + [E(RM) – 7% ] * 1.2 so the E(R) for the market is 12.417%
Apply the CAPM to B
E(R) = 7% + [12.417% - 7%] * 0.8 = 11.33%
But the expected return given for B is 10.5%, which is too low. So the price of B is too high.
12. Solve for PV using fv=200000, p/yr=4, n=80, i=16% and pmt=0.
13. Convert rate to monthly compounding = 8.111676%
Use this an pv=-100000, n=360, fv=0, p/yr = 12 and compute pmt.
14. When the calculator is displaying the correct payment from the problem above, enter the
amortization mode. Tell your calculator you want the sum of interest between payment number 1
and payment number 360.
16. Profitability index = PV cash inflows / Initial investment
Note that PV cash inflows = NPV + initial investment
A: 130,000 / 100,000 = 1.3
B: 105,000 / 80,000 = 1.3125
C: 57,000 /40,000 = 1.425
Higher values are better, so the order is C, B, A.
17. EAC is calculated by taking the NPV over the entire life, and then finding the equivalent level
annuity
The PV of operating cost over 8 years is based on N=8, i=15%, pmt=15,000, CPT PV is 67,309.
Add to this the -200,000 at time 0 for a total PV of -200,000 -67,309 = -267,309.
Calculate the equivalent annual annuity based on
N=8, i=15%, pv=-267,309 CPT PMT is -59,570.
18. Convert rate to compounding of 3 times per year = 18.797%
Compute the fv using this rate, p/yr =3, n=36, pv=0, pmt 100.
19. Compute I using pv=-10000, fv=100000, n=20, pmt=0, p/yr = 1.
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