FIN 502 Chapter Notes - Chapter 2: Effective Interest Rate, Annual Percentage Rate, Compound Interest

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greyporcupine303

29 Nov 2017

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Fin chapter 2 time value of money. Time value of money (interest mathematics) how to compare monetary amounts that you pay or receive at different times: rate of return compare different investment and loans. When referring to rate of return, it is almost always an annual rate. Initial called the principal or present value (pv) Most calculators treat percentages as numbers, not as fractions. Most calculators require either the pv or the fv to be entered as a negative number. Must reset calculator from frequency of 12 times per period so you can set frequency of compounding to once per period. Income tax these rules apply different rates to different sources of income and allow some expenses to be deducted from taxable income. Important rule of discounting: use after tax discount rates for after tax cash flows, and use before tax rates for before tax cash flows: marginal tax rate rate that applies to the next dollar of income.

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Please show calcutor buttons to press if apllicable

1.You are reviewing a new project and have estimated the following cash flows:

Year 0: CF = -165,000

Year 1: CF = 63,120; NI = 13,620

Year 2: CF = 70,800; NI = 3,300

Year 3: CF = 91,080; NI = 29,100

Average Book Value = 72,000

Your required return for assets of this risk level is 12%.

a. Please calculate the NPV of the project.

b.IRR of this project is( )

c.Please calculate payback periods: solution Year 1

d.Please calculate AAR.

e.Calculate PI=?

2. An investment project has the following cash flows: CF0 = -1,000,000; C01 â C08 = 200,000 each

If the required rate of return is 12%, what decision should be made using NPV?

How would the IRR decision rule be used for this project, and what decision would be reached?

How are the above two decisions related?

3.You bought a stock for $35, and you received dividends of $1.25. The stock is now selling for $40. What is your percentage return?

4.The risk free rate is 4%, and the required return on the market is 12%.

5. What is the required return on an asset with a beta of 1.5?

Consider an asset with a beta of 1.2, a risk-free rate of 5%, and a market return of 13%.

What is the reward-to-risk ratio in equilibrium?

6. Consider the following information on returns and probabilities:

State Probability X Z

Boom .25 15% 10%

Normal .60 10% 9%

Recession .15 5% 10%

What are the expected return and standard deviation for a portfolio with an investment of $6,000 in asset X and $4,000 in asset Z?

7. Suppose we have a bond issue currently outstanding that has 25 years left to maturity.

The coupon rate is 9%, and coupons are paid semiannually.

The bond is currently selling for $908.72 per $1,000 bond.

What is the cost of debt?

8. Your company has preferred stock that has an annual dividend of $3.

If the current price is $25, what is the cost of preferred stock?

cerisemammoth397

Period	CF
	0	-100,000
	1	13,000
	2	50,000
	3	31,000
	4	34,000
	5	18,000
	6	16,000
	7	12,000

Suppose you have the following initial outlay and free cash flow information on a potential investment project where upper management requires a payback period of 4 or fewer years (i.e. required payback period â¤ 3.99999 years) and that investors' Required Rate of Return is 15%. Also, suppose that you will make project acceptance or rejection decisions for each problem independently of decisions made in other problems. Assuming that we want to find the project's Internal Rate of Return(IRR), what value must we set the project's Net Present Value (NPV) to?

sapphirecoyote376

Problem 1

All Techniques- Decision among mutually exclusive investments. Pound industries is attempting to select the best of three mutually exclusive projects. The initial investment and after tax cash inflows associated with these projects are shown in the following table

Cash flow Project A Project B Project C

Initial investment (CF) $80,000 $110,000 $110,000

Cash inflows (CF), T=1 to 5 $25,000 $37,000 $38,500

Calculate the payback period for each project

Calculate the net present value (NPV) of each project, assuming that the fimrm has a cost of capital equal to 11%

Calculate the internal rate of return (IRR) for each project

Indicate which project you would recommend

A-the payback period of project A is ___years

the payback period of project B is ___years

the payback period of project C is ___years

B-the NPV of project A is $____

the NPV of project B is $____

the NPV of project C is $____

C- The IRR of project A is _____

The IRR of project B is _____

The IRR of project C is _____

D- which project would you recommend?

Project A

Project B

Project C

Problem 2

IRR, investment life, and cash inflows Oak enterprise accepts projects earning more than the firms 15% cost of capital. Oak is currently considering a 10 year project that provides annual cash inflows of $50,000 and requires an initial investment of $328,300

Deter the IRR of the project is it acceptable

Assuming that the cash inflos continue to be $50,000 per year how many additional years would the flows have to continue to make the project acceptable (that is, to make it have an IRR of 15%?

A. the project IRR is ___%

Is the project acceptable?

Yes or no

B. assuming that the cash inflows continue to be $50,000 per year the number of additional years the flows would have to continue to make the project acceptable at the 15% discount rate is ____ additional years

C) with the given life, initial investment and cost of capital the minimum annual cash inflow that the firm should accept is $______

greyswan843

FIN 502 Chapter Notes - Chapter 2: Effective Interest Rate, Annual Percentage Rate, Compound Interest

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