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FIN 401 Study Guide - Monte Carlo Method, Annual Percentage Rate, Effective Interest Rate


Department
Finance
Course Code
FIN 401
Professor
Alan Kaplan

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Miscellaneous Problems (stuff about Ethics, and stuff that just doesn’t seem to fit
anywhere else…)
Multiple Choice
1. Douglas Corp. has issued a perpetual bond. The annual coupon rate is 6.2% based on a
nominal par value of the bond of $1000. The bond is currently selling for 91% of par
value. What is the annual rate of return on the bond?
a).08578
b) .09314
c).05722
d).06813
e)None of the above
r = cf/p = 62/910 = .06813
There are three kind of return that can be quoted. The annual return (also called
the current yield in bonds), the effective return, and the annual percentage rate, or
APR. In bond calculations, the YTM is an APR. The problem is, you may see all
three types on a M/C question. I’ve noticed quite a few instances where effective
yields are given instead of YTM’s. You need to be able to switch back and forth. See
page 154 of the 5th edition or page 160 in the 6th ed. for a review of how to switch
back and forthIn this problem, they want the annual (current) return. It is the
easiest to get- just the coupon divided by the price.
2. Fill in the blank. In order to perform ______________ we change one of the inputs
while keeping the others constant.
a) Sensitivity analysis
b) Simulation analysis
c)Scenario analysis
d) None of the above
From our first week review of FIN 300 topics. It is covered in Chapter 11. I
wouldn’t worry about it too much. You have enough new material to worry
about.
3. Fill in the blank. A firm has to make a decision between two projects. It cannot
choose both, even if they are both positive NPV projects, because the firm does not have
enough money to fund both. This is an example of _________.
a)Break-even Analysis
b) Monte Carlo Simulation
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c)Managerial Options
d) Capital Rationing
From Chapter 10. See comment above.
4. Stern Stewart Corp. has $100 million in assets, a WACC of 12.5%, and cash flows this
year of $15 million. What is Stern Stewart’s EVA?
a)$1,875,000
b)$2,500,000
c)-$2,500,000
d) $15,000,000
e)None of the above
We didn’t cover this. It is in an Appendix to Chapter 14. If you get time, there is a
simple example you can review at the end of the Appendix.
EVA = ($15 million) – (.125 * $100 million) = $2.5 million
Use the following information to answer the next TWO questions. Oyvey Inc. has
expected before-tax operating cash flows of $72,000 each year for the next ten years from
a planned project. The Corporate Tax rate is 20% but it has a special deal with the
government so that it pays tax for the first four years, but then does not pay tax for the
rest of the life of the project. The appropriate discount rate is 20%.
5. What is the Present Value as of now of the AFTER-TAX operating cash flows from
the first four years of the project?
a)$115,469
b) $121,732
c)$136,427
d)$149,111
e)None of the above
N = 4,
PMT = $57,600,
(72,000*.8),
r = .2,
Solve PV = $149,111
6. What is the Present Value as of now of the AFTER-TAX operating cash flows from
the last six years of the project? (Hint: If a firm is does not pay tax, what is its tax rate?)
a) $115,469
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b) $136,427
c)$194,231
d) $239,437
e)None of the above
A bit trickier. You need to get the PV using your calculator. The problem that is the
PV at Year 4, not Year 0. Discount it back to today and you’ll have the right
answer.
N = 6, PMT = 72,000, r = .2, PV as of the end of year 4 = $239,437
To get it back to Year 0, either calculate 239,437/ 1.204 = $115,469 or use your
financial calculator to get the present value:
N = 4,
FV = $239,437,
r = .2,
Solve PV as of now = $115,469.
Use the following information for the next 9 questions (number 7 to 15).
It is 1898 and you are in Dawson City, Yukon, Canada. You sit down beside the Yukon
River for a picnic lunch. You look at the water, and see a glitter of yellow. It’s gold; ten
tons of it. You plan to mine five tons of it per year for two years. Gold sells for $5 per
ounce, there are 16 ounces in a pound, and 2000 pounds in a ton.
It will cost you $1 per ounce to mine the gold, and there is a $60,000 one time up-front
fee for equipment and permits and stuff. The equipment will be worthless after the ore is
mined.
In 1898, the Government still hasn’t gotten around to the idea of taxes on business
income. You can borrow money for 8% per year and investors will buy shares in your
new Corporation if they receive on average at least 18% per year. You think that you
will finance your firm with equal amounts of debt and equity. All variable revenues and
expenses occur at the end of each year.
7. What are your firm’s annual revenues?
a)$160,000
b)$800,000
c)$1,600,000
d) None of the Above
5 tons * $5 per ton * 2000 pounds per ton * 16 ounces per pound
8. Which of the following statements is NOT true?
a)The project has a positive NPV
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