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EXAM III REVIEW

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Ch 5 Example 1

• You need 40,000 in 5 years, you can invest at 8%, how much do you need to invest today?

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Ch 5 Example 2

• You invest $100. In 50 years your investment is worth $4,000. What annual return will you have earned?

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Ch 6 Example 1

Consider the following cash flow:

Year 1 2 3

CF 50 60 70

What is FV at the end of year 3 at 10%?

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Ch 6 Example 2

At the end of each of the next 3 years you will receive $200. If the appropriate rate is 5%, how much is this investment worth today?

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Ch 6 Example 3

You just deposited $50,000. How much can you withdraw at the most at the beginning of each of the next 5 years if the interest rate is 5%?

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Ch 7 Example 1

What is the price of a bond with 20 years left to maturity. The YTM (quoted as an APR) is 10%, the face value is $1000, and the semi-annual coupons are $60.

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Ch 7 Example 2

A bond makes semi-annual payments, has 5 years to maturity, an 8% coupon rate (APR), a $1,000 face value. If the price is $800, what is the YTM (quoted as an APR)?

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Ch 8 Example

A stock pays a dividend of $1 in 1 year, $2 in 2 years and then grows at 5% after that. What is the value of the stock today if the required rate of return is 8%?

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Ch 9 Example

What is the IRR of the following CF? What is the NPV at 5%?Time 0 1 2 3 4

CF: -1000 -300 400 400 600

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Ch 10 Example

Calculate the NPV, given the following information: Assume straight-line depreciation. The annual operating cash flow (OCF) is $2,000 per year, the life of the project is 3 years, the initial investment is $5,000, the initial NWC requirement is $3,000 and increases to $4,000 after the first year, the salvage value at the end of year 3 is $3,500, the tax rate is 35%, and the required rate of return is 12%.

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Ch 12 Example 1

If the average return is 10% and the SD is 15%, in what range do returns fall 95% of time?

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Ch 12 Example 2

These are the returns for the past 2 years. What is the average and SD of the returns?

Year Return

2001 .15

2002 .30

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Ch 13 Example 1

Given the following return information what is the portfolio variance if 30% is invested in A and 70% is invested in B?

state P R A (w A =.3) R B (w B =.7)

boom .60 .2 .08

bust .40 .1 .20

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Ch 13 Example 2

What is the estimated cost of equity for a stock that has a beta of .9 if the market risk premium is 6% and the T-bill rate is 5%?

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Ch 14 Example 1

• If the cost of equity is 8% and the cost of debt is 5%, the tax rate is 35% and the D/E ratio is 30%, what is WACC?

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Ch 14 Example 2

What is the WACC, given the following information?

The company has 1,000 shares outstanding at $90 per share and 100 bonds with a market value of 1,100 each. The firm’s beta is 1.2, the market risk premium is .06, the risk-free rate is 4%, and the tax rate is 35%. The bonds mature in 10 years, pay annual coupons and the coupon rate is 7%.

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Ch 14 Example 3

A project requires an initial investment of $10 million. The target D/E ratio is 0.5. Flotation costs for equity are 9% and flotation costs for debt are 4%. What is the true cost (in dollars) of the project when you consider flotation costs?

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Ch 16 Example 1

A firm has perpetual annual EBIT of $5,000, its tax rate is 35%, the cost of unleveraged equity is 8%. If the firm has $50,000 in debt, what is the value of the firm according to Miller & Modigliani’s proposition I with taxes?

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Ch 16 Example 2

Currently a firm uses no debt but considers restructuring. After restructuring, debt will be $200,000 (interest on debt is 4%). The firm has currently 100,000 shares outstanding, the price per share is $20. What is the minimum level of EBIT that the firm must earn so that the restructuring will increase EPS?