Title Title Description

Topic

Content

1Q
1A

Question 1
Answer 1

Time Value of Money

Time Value of Money

Given:
Find:

2Q
2A

Question 2
Answer 2

Time Value of Money

Time Value of Money

Given:
Find:

3Q
3A

Question 3
Answer 3

Capital Budgeting
Capital Budgeting

Given:
Find:

4Q
4A

Question 4
Answer 4

Capital Budgeting Model

Capital Budgeting Model

Given:
Find:

5Q
5A

Question 5
Answer 5

Capital Budgeting Model

Capital Budgeting Model

Given:
Find:

6Q
6A

Question 6
Answer 6

Bonds
Bonds

Given:
Find:

7Q
7A

Question 7
Answer 7

Stocks
Stocks

Given:
Find:

8Q
8A

Question 8
Answer 8

Capital Asset Pricing Model

Capital Asset Pricing Model

Given:
Find:

9Q
9A

Question 9
Answer 9

Portfolios and Diversification

Portfolios and Diversification

Given:
Find:

Description
Deposit Information
Present value
Future value
Annual, quarterly, and continuous compounding values
Retirement information
Present value of a lump sum for a delayed annuity
Payment per year for a lump sum
Present value of a delayed perpetuity
Expected cash flows for mutually exclusive and independent projects
Net present value (NPV)
Internal rate of return (IRR)
Profitability index (PI)
Modified internal rate of return (MIRR)
Crossover rate
NPV profile
Which project should be accepted and why
Project's potential values
Cash outflow
Operating cash flows each year
Terminal cash flow
NPV
IRR
Project's potential values and MACRS table
Operating cash flows each year
The initial outlay
After tax salvage
NPV
IRR
PI
Scenario summary evaluating NPV, IRR, and PI
Semiannual bond values
Highest price to pay for that bond
Yield to maturity
Current yield
Yield to call
Stock paying annual dividend information
Expected dividend and value for a specific year
Current value of one share of that stock today
Expected price in a specific year
Treasury bill values
The risk premium on the market
Required return with different betas
Slope of the security market line
Expected rate of return using the dividend discount model

The required rate of return using the capital asset pricing model
Determining if the stock is over, under, or fair priced
Equilibrium price for the stock.
Funds probability and estimated return in different stages
Expected return and standard deviation for both
Covariance
Correlation
Covariance matrix
Minimum variance portfolio using solver
Variance
Standard deviation
Expected return

Eleven years ago your parents opened a savings account in your name. The balance today is $260,000

a) How much did they deposit 11 years ago at 8% annual interest rate
b) How much will be in your account in 7 years from today if you continue to earn 8% annual
interest?
c) How much would they have had to deposit 11 years ago so you can end up with $260,000 today
if they were ea
8% compounded quarterly rather than annually?
d) How much would they have had to deposit 11 years ago so you can end up with $260,000 today
if they were ea
8% compounded continuously rather than annually?
e) What was the account balance last year if your parents had been earning 8% compounded annually?

60,000

annual
interest?
0,000 today
if they were earning

0,000 today

if they were earning

nded annually?

a)

b)

c)

d)

e)

FV $
260,000.00
i 8%
n 11
PV $
260,000.00
i 8%
n7
FV $
260,000.00
i 8%
n 11
m4
FV $
260,000.00
i 8%
n 11
FV $260,000.00
i 8%
n1

PV(0)

$111,509.54

FV(7)

$445,594.31

PV(0)

$108,784.19

PV(0)

PV(10):

107,843.56

$240,740.74 or

PV $111,509.54
i 8%
n 10

PV(10):

Answers
a)
b)
c)
d) $
e)

$240,740.74

$111,509.54
$445,594.31
$108,784.19
107,843.56
$240,740.74

Suppose you wish to retire 35 years from today. You determine that you need $120,000 per year afte
with the first retirement funds withdrawn one year from the day you retire and that you will need to
withdrawals. Assuming that you can earn 5% per year on your retirement funds for the next 60:

a) How much must you deposit in an account today so that you may have enough funds for
b) If you cannot afford to make a single lump sum deposit today to support your retirement
must you deposit at the end of each year in an account so that you have enough funds for your
d
retirement? Assuming the last deposit will be made on the day you retire in 35 years.
c) What if you want to make a withdrawal of $120,000 after you retire but have these paym
forever?

d $120,000 per year after you retire,

nd that you will need to make 25 such
nds for the next 60:

y have enough funds for retirement?

support your retirement, how much
ough funds for your
desire
35 years.
ire but have these payments come in

Delayed Annuity for 35 Years

Retire year
Withdrawal Year
pmt
n
i

35
36
$
120,000.00
25
5%
PVA(35) in delayed year-1
PV(0) of lump sum

$1,691,273.35
a)

Yearly Deposit for Lump Sum

n
PV(0)
i

35
$306,611.43
5%
PMT

b)

Delayed Perpetuity
n
i
pmt(36)
PV(35)
PV(0)

$
$

36
5%
120,000.00
2,400,000.00
$435,096.68
PV(0)

c)

$306,611.43

Sum

$18,725.28 per year

$435,096.68

You are considering projects A, B, and C. A and B are mutually exclusive and C is independent. Assum
rationing with a required rate of return of 11% for all 3 projects.

a) Calculate NPV for each project.

b) Calculate IRR(s) for each project.
c) Calculate PI for each project.
d) Using cost of capital, as a financing and reinvestment rate, calculate MIRR for each project.
e) If A&B profiles cross, calculate the exact crossover point between project A & B.
f) Which of the three projects, if any, should be accepted and why?
g) NPV profile showing all three projects
Year

Project A
Project B
Project C
0 $ (60,000.00) $ (40,000.00) $ (20,000.00)
1 $
- $ 40,000.00 $ 35,000.00
2 $ 82,000.00 $ 40,000.00 $ 30,000.00
3 $ 60,000.00 $ 20,000.00 $
2,000.00
4 $ 20,000.00 $ 10,000.00 $ (40,000.00)

s independent. Assume no capital

MIRR for each project.

ect A & B.

Year Project A
Project B
Project C
Project A-B
0 $
(60,000.00) $ (40,000.00) $ (20,000.00) $
1 $
- $
40,000.00 $ 35,000.00 $
2 $
82,000.00 $
40,000.00 $ 30,000.00 $
3 $
60,000.00 $
20,000.00 $
2,000.00 $
4 $
20,000.00 $
10,000.00 $ (40,000.00) $
I
11%
Answers
Project A
Project B
Project C
a)
NPV
$
63,599.14 $ 49,712.07 $
b)
IRR(s)
48.11%
76.98%
c)
d)
e)

f)
g)

PI
MIRR
Crossover Rate

2.06
32.98%
24.33%

NPV at
Crossover Rate $
32,645.84
Choose?
Choose Project A
Project A
-10% $ 154,022.25
0% $ 102,000.00
10% $
66,507.75
20% $
41,311.73
30% $
22,833.23
40% $
8,908.79
50% $
(1,827.16)
60% $ (10,268.55)
70% $ (17,019.19)
80% $ (22,498.09)
90% $ (27,003.02)
100% $ (30,750.00)
110% $ (33,898.74)
120% $ (36,569.22)
130% $ (38,852.99)

2.24
35.84%
24.33%

(20,000.00)
(40,000.00)
42,000.00
40,000.00
10,000.00

10,993.35
-8.19%
Err:523
1.24
17.07%

$ 32,645.84
because it has the highest NPV
Project B
Project C
$ 96,503.58 $
(2,296.91)
$ 70,000.00 $
7,000.00
$ 51,277.92 $
10,793.66
$ 37,507.72 $
11,867.28
$ 27,042.47 $
11,579.78
$ 18,871.30 $
10,622.66
$ 12,345.68 $
9,358.02
$
7,033.69 $
7,978.52
$
2,638.38 $
6,586.73
$ (1,050.14) $
5,236.24
$ (4,183.82) $
3,953.55
$ (6,875.00) $
2,750.00
$ (9,208.30) $
1,628.59
$ (11,248.55) $
587.73
$ (13,046.12) $
(376.54)

Project B-A
Project C Cash Inflow
$ 20,000.00 $
$ 40,000.00 $
35,000.00
$ (42,000.00) $
30,000.00
$ (40,000.00) $
2,000.00
$ (10,000.00) $
$
57,342.59

Project C Cash Outflow

$
20,000.00
$
$
$
$
40,000.00
$
46,349.24

$200,000.00

$150,000.00

$100,000.00

Project A
Project B
Project C

$50,000.00

$-20%

0%

$(50,000.00)

20%

40%

60%

80%

100%

120%

140%

Project A
Project B
Project C

Consider the following project being evaluated by your company:

* Initial price of the asset is $200,000 and will require $15,000 transportation and $5,000
installation
* Will be straight line depreciated over 4 years to a $5,000 salvage
* Market value for the asset at end of 5 years is expected to be $12,000 (the asset will be
operated for 5 years)
* Net investment in net working capital in year 0 of $30,000
* Sales, first year, expected to be generated by the project will be $130,000
* Annual cost of goods sold is 60% of sales
* Annual sales growth rate is 4%
* Marginal tax rate is 30%
* Cost of capital is 10%
a) Calculate the project cash outflow in year 0
b) Calculate annual operating cash flows for i for years 1-5
c) Calculate the project's terminal cash flow in year 5
d) Calculate the project's NPV, IRR

on and $5,000

e asset will be

year
Revenues
Less COGS
EBDT
Less Dep
EBT
Less Taxes
Net Income
Plus dep
OCF
Asset
Change in NWC
Cash from project

0
$
$
$
$
$
$
$
$
$
$ (220,000.00)
$ (30,000.00)
$ (250,000.00) $

Price of asset
Transportation Cost
Installation Cost
S/L
Salvage
Market Value
Economic Life
First Year Sales
Sales Growth
Cost of Goods Sold
Tax Rate
WACC

$
$
$

Cost of Asset
Annual Depreciation
Change in NWC

$
$

220,000.00
$53,750.00
30,000.00

Accumulate Depreciation
Book Value
Gain
Tax Consumption
Market Value
After Tax Salvage

$
$
$
$
$
$

215,000.00
5,000.00
7,000.00
2,100.00
12,000.00
9,900.00

$
$
$

1
130,000.00
78,000.00
52,000.00
53,750.00
(1,750.00)
(525.00)
(1,225.00)
53,750.00
52,525.00

$
$
$
$
$
$
$
$
$

2
135,200.00
81,120.00
54,080.00
53,750.00
330.00
99.00
231.00
53,750.00
53,981.00

52,525.00

53,981.00

200,000.00
15,000.00
5,000.00
4 years
5,000.00
12,000.00 at end of 5 years
5 years
130,000.00
4%
60%
30%
10%

Dep base-salvage
dep base-accumulated depreciation
market value-book value
gain/loss*Tax rate
market value-tax consumption

$
$
$
$
$
$
$
$
$

3
140,608.00
84,364.80
56,243.20
53,750.00
2,493.20
747.96
1,745.24
53,750.00
55,495.24

$
$
$
$
$
$
$
$
$

55,495.24

depreciation

4
146,232.32
87,739.39
58,492.93
53,750.00
4,742.93
1,422.88
3,320.05
53,750.00
57,070.05

$
$
$
$
$
$
$
$
$
$
$
57,070.05 $

5
152,081.61
91,248.97
60,832.65
60,832.65
18,249.79
42,582.85
42,582.85
9,900.00
30,000.00
82,482.85

Answers
a)
b)

c)
d)

Answers
CO (0)
OCF(1)
OCF(2)
OCF(3)
OCF(4)
OCF(5)
TCF (5)
NPV
IRR
PI

$(250,000.00)
$ 52,525.00
$ 53,981.00
$ 55,495.24
$ 57,070.05
$ 42,582.85
$ 39,900.00
($25,748.24)
6.14%
$
0.90

A company is considering the purchase of a new machine that will enable it to increase its expected
addition, the machine must be installed and tested. The costs of the installation and testing will amo
using 5-years MACRS. (Use MACRS table provided)

The equipment will, be operated for 5 years. The sales for the first year of operation are expected to
The annual operating costs (before depreciation) will consist of fixed operating costs of $25,000 plus

To support the increased level of production, the inventory of raw materials will have to be increased
purchased. The additional inventory will be carried until the machine is scrapped following the 5 yea

At the end of the 5 year operating life of the project, it is assumed that the equipment will be sold fo
weighted average cost of capital is 9.5%. Build a capital budgeting model to answer the following qu
a) What is the operating cash flow in year 1-5?
b) What is the initial outlay in year 0?
c) What is the after tax salvage at the terminal year?
d) Calculate NPV, IRR, and PI for the project.
e) Generate a scenario summary showing NPV, IRR, and PI for this project using the following
Best Case: Variable cost is 50% and Cost of capital is 6%
Expected case: Variable cost is 75% and Cost of capital is 9.5%
Worst case: Variable cost is 85% and Cost of capital is 12%

to increase its expected sales. The machine will have a price of $120,000. In
tion and testing will amount to $30,000. The machine will be depreciated

peration are expected to be $260,000. Then, sales will grow by 5% a year.

ng costs of $25,000 plus variable operating costs equal to 75% of sales.

will have to be increased from $40,000 to $50,000 when the machine is

pped following the 5 years of operation.

equipment will be sold for $50,000. The tax rate is 40% and the company's
answer the following questions:

oject using the following information:

0
Revenues
Less COGS
Less Fixed Costs
EBDT
Less Dep
EBT
Less Taxes
Net Income
Plus dep
OCF
Asset
Change in NWC
Cash from project
NPV
IRR
PI

$
$
$
$
$
$
$
$
$
$
$ (150,000.00)
$ (10,000.00)
$(160,000.00) $
$ (54,682.29)
-1.03%
0.66

Price of Asset
Installation/Testing
S/L
Operating Life
First Year Sales
Sales Growth
Annual Fixed Costs
COGS
Inventory
Market Value
Tax Rate
WACC

$
$

Depreciable Base
Accumulated Dep
Book Value (Salvage)
Change in NWC

$
$
$
$

$
$
$
$

1
260,000.00
221,000.00
25,000.00
14,000.00
30,000.00
(16,000.00)
(6,400.00)
(9,600.00)
30,000.00
20,400.00

$
$
$
$
$
$
$
$
$
$

2
273,000.00
232,050.00
25,000.00
15,950.00
48,000.00
(32,050.00)
(12,820.00)
(19,230.00)
48,000.00
28,770.00

20,400.00

28,770.00

120,000.00
30,000.00
5 years
5 years
260,000.00
5%
25,000.00
85% of Sales
10,000.00 increase
50,000.00
40%
12.00%
150,000.00
141,300.00
8,700.00
10,000.00

Accumulated Dep
Market Value
Book Value
Gain/Loss
Tax Consequence
After Tax Salvage

Inv. Before
$
40,000.00

$
$
$
$
$
$
$
$
$
$

3
286,650.00
243,652.50
25,000.00
17,997.50
28,800.00
(10,802.50)
(4,321.00)
(6,481.50)
28,800.00
22,318.50

22,318.50

$
$
$
$
$
$
$
$
$
$

4
300,982.50
255,835.13
25,000.00
20,147.38
17,250.00
2,897.38
1,158.95
1,738.43
17,250.00
18,988.43

$
$
$
$
$
$
$
$
$
$
$
$
18,988.43 $

$ 141,300.00 $ 141,300.00
$ 50,000.00
$
8,700.00 $
8,700.00
$ 41,300.00 Gain
$ 16,520.00
$ 33,480.00

Inv. After
$ 50,000.00

5
316,031.63
268,626.88
25,000.00
22,404.74
17,250.00
5,154.74
2,061.90
3,092.85
17,250.00
20,342.85
33,480.00
10,000.00
63,822.85

ANSWER
a)

b)
c)
d)

CF(1)
CF(2)
CF(3)
CF(4)
CF()
IO(0)
ATS
NPV
IRR
PI

$ 20,400.00
$ 28,770.00
$ 22,318.50
$ 18,988.43
$ 20,342.85
$160,000.00
$ 33,480.00
$(54,682.29)
-1.03%
0.66

e)

Scenario
Changing Cells:
COGS
WACC
Result Cells:
NPV
IRR
PI

MACRS Table

Year
1
2
3
4
5
6
7
8
9
10
11

3-year
0.333
0.445
0.148
0.074

5-year
0.2
0.32
0.192
0.115
0.115
0.058

ANSWERS

Scenario Summary
Best
50%
6.00%

Expected

Worst

75%
9.50%

85%
12.00%

$ 249,055.69 $ 48,987.32 $ (24,682.29)

57.62%
21.66%
5.10%
2.92
1.38
0.81

7-year
0.143
0.245
0.175
0.125
0.089
0.089
0.089
0.045

10-year
0.1
0.18
0.144
0.115
0.092
0.074
0.066
0.066
0.065
0.065
0.033

As an investor, you are considering buying a bond that pays 7% semiannual coupon. This bond
has a $1,000 face value and will mature in 25 years.
a) If your required rate of return is 5.5% for bonds in this risk class, what is the highest
price you would be willing to pay?

On Aug 15th, 2016 you are offered the following bond:

*Face value $400 (par value)
*Coupon rate 6%
*Coupon frequency semiannual (8/15 & 2/15)
*Maturity date Aug 15, 2049
*First call date February 15, 2023
*Call premium 4% of the face value
*Bond current market price $460
b) Calculate the yield to maturity.
c) What is the current yield
d) Calculate Yield to call

coupon. This bond

at is the highest

SD
MD
Par
CR
Years
YTM
Freq
100s in par

1/1/2010
1/1/2035
1000
7%
25
5.50%
2 Semiannual
10
Price
$
1,202.48

SD
8/15/2016
MD
8/15/2049
Par
$
400.00
CR
6%
PMT
$
24.00
Callable Date
2/15/2023
Freq
2 Semiannual
Market Price
$
460.00
100s in par
4
PR (in yield func)
115
Call Premium
4%
YTM
5.06%
Current Yield
5.22%
YTC
3.91%

a)
b)
c)
d)

Answers
P
$1,202.48
YTM
5.06%
CY
5.22%
YTC
3.91%

Wheat Inc. has just paid its annual dividends of $2.10. The company is expected to pay
the same $2.10 dividend for year 1 and 2. After that, dividends are expected to grow at
an annual rate of 18% for 3 years then at 12% for 2 years, then it will grow at a constant
rate of 5% indefinitely. Required rate of return ion Wheat Inc. stock is 14%
a) What is the expected dividend in year 5?
b) What is the expected value for the stock in year 7?
c) What is the current value of one share of Wheat Inc. stocks today?
d) Calculate the expected stock price in year 14.

pected to pay
ed to grow at
w at a constant

D(0)
k
g

$ 2.10
14%
5%

Year
1
Growth
Dividend $ 2.10 $
V(7)
Total $ 2.10 $
V(0)
$32.32
V(14)

2
2.10 $
2.10 $

3
4
5
6
7
8
18%
18%
18%
12%
12%
5%
2.48 $ 2.92 $ 3.45 $ 3.86 $ 4.33 $ 4.54
$ 50.49 $ 53.02
2.48 $ 2.92 $ 3.45 $ 3.86 $ 54.82

D(15)
V(14)

$ 6.39 D(8)*(1+g)^(15-8)
$ 71.05 D(15)/(K-G)

V(14)

$ 71.05 V(7)*(1+5%)^(15-8)

V(14)

$ 71.05 V(8)*(1+g)^(14-8)

10

5%
$
4.77 $
$ 55.67 $

11

12

13

14

5%
5%
5%
5%
5%
5.01 $
5.26 $
5.52 $
5.80 $
6.09 $
58.45 $ 61.38 $ 64.45 $ 67.67 $ 71.05

Answers
a) D(5)
$
3.45
b) V(7)
$ 50.49
c) V(0)
$32.32
d) V(14)
$ 71.05

15
5%
6.39

The Treasury bill rate is 4%, and the expected return on the market portfolio is 12%. On the basis of
model:
a) What is the risk premium on the market?
b) What is the required return on an investment with a beta of 1?
c) What is the required return on an investment with a beta of 0?
d) What is the required return on an investment with a beta of 1.6?
e) What is the slope of the SML?

The Treasury bill rate is 4% and the expected return on the market portfolio is 12%. Consider a stock
selling for $50 and is expected to pay year end dividend of $5. Dividend is expected to grow at a
indefinitely.
f1) Based on the current price of the stock and using the DDM, what is the expected rate of re
stock?
On the basis of the capital asset pricing model:
f2) What is the required rate of return for this stock?
f3) Is this stock fairly priced, overpriced, or underpriced?
f4) What is the equilibrium price for this stock?

is 12%. On the basis of the capital asset pricing

is 12%. Consider a stock with a beta of 1.2 that is

is expected to grow at a
constant rate of 3%

s the expected rate of return for this

DDM
CAPM

Km=(D1/V0)+g
Km=Rf+B(Rm-Rf)
Answer

Rf
E(Rm)
B
B
B

4%
12%
1
0
1.6

a)
b)
c)
d)
e)

Risk Premium
Required Return B(1)
Required Return B(0)
Required Return B(1.6)
Slope SML

8.00%
12.00%
4.00%
16.80%
8%

Rf
Rm
V(0)
D(1)
g
B

4%
12%
$ 50.00
$
5.00
3%
1.2

f1)
f2)
f3)
f4)

Expected rate
Required Rate
Stock is:
Equilibrium Price

13.00%
13.60%
Overpriced
$
47.17

Consider the following two funds and their estimated returns under different states of the economy:

State of economy
Probability
Est. Return (Fund A)
Est. Return (Fund B)
Great
30%
10%
25%
Average
30%
15%
11%
Poor
40%
20%
15%

Calculate the following:

a) Expected return for fund A and for fund B
b) Standard deviation of returns for fund A and fund B
c) Covariance between returns of fund A and fund B
d) Correlation between returns of fund A and fund B
If you invest $2,000 in Fund A and $6,000 in Fund B, Calculate the following:
e) Portfolios Expected Return
f) Portfolios Standard Deviation
g) Construct the complete covariance matrix for A and B
h) Find the min variance portfolio using solver and report its variance, standard deviation, an

t states of the economy:

rn (Fund B)

g:

, standard deviation, and expected return

State
Great
Average
Poor
Invest amt
Weight

a) Exp R

Probability
Rtrn Fund A Dv(Ai-EA))
Sqrt
Rtrn Fund B
30%
10%
-5.50% 0.003025
25%
30%
15%
-0.50% 0.000025
11%
40%
20%
4.50% 0.002025
15%
$ 2,000.00 $ 6,000.00
25%
75%
Answers
Fund A
Fund B
15.50%
16.80%
0.001725
0.003156
4.15%
5.62%

Var
b) Std Dev
c) Covar
-0.00159
d) Correl
-0.68145
e) E(Rp)
16.48%
Var (P)
0.00129
f) St Dev(P)
3.59%
g) Covarience Matrix for A and B
A
B
A
0.001725
-0.00159
B
-0.00159 0.003156
h) Solver to find Min Var:
W(A)
58.88%
W(B)
Sum
1.00
Var
0.00036174
Std Dv
1.90%
E(R)
16.03%

41.12%

Dv(Bi-E(B)) Sqrt
8.20% 0.006724
-5.80% 0.003364
-1.80% 0.000324