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Final

samplefinalexam_detailedanswers.doc

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Department
Finance
Course
FIN 300
Professor
Mike Inglis
Semester
Fall

Description
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 = 1.22. P0 = D1 / (r-g). We have D0 and need to find D1. D1 = 3 * 1.05 = 3.15. P0 = 3.15/(15% - 5%) = 31.5 24. Convert rate to monthly compounding = 7.8698% First, get the FV of the 30000 in 11 months. i=7.8698%, pv=30000, n=11, pmt=0, p/yr=12 to get fv=32,236.59 Then, calculate payments pv=-32,236.59, fv=0, n=180, p/yr=12, i=7.8698% to get pmt=305.65 25. Set calculator to begin mode. fv=0, pv=-10000, pmt=250, i=24%, p/yr=12 and compute n Note that rate = 2% per month, so need to multiply by 12. 26. CFFA = cash paid to bondholders + cash paid to shareholders 5000 – 1000 = 4000 27. The 2000 investment grows to 2000 * 1.11 = 2220 The loan amount to repay is 1000 * 1.05 = 1050 So the amount remaining after loan repayment is 2220 – 1050 = 1170 I invested 1000 of my money and ended up with 1170. I earned 1170/1000 -1 = 17% 29. The price will be based on two components. The first component is D4 to infinity, discounted at 8% and the second component is D1 to D3, discounted at 6%. The first component starts with P3=D4/8% = 2.5/8% = 31.25. Take the present value of this to get P0 using a 6% discount rate. Get 31.25/1.06^3 = 26.238 The second component is the present value of D1, D2 and D3. Using a financial calculator, pmt=2.5, I=6, n=3, fv=0, p/yr =1 to get pv =6.6825. Add these two co
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