PLEASE COLLECT THE

MATERIALS ON THE CHAIR

BESIDE THE DOOR
FINA1310HIJ-CORPORATE
FINANCE
TUTORIAL TWO
BRIAN AND RAY
Contents
1. Core ideas review
2. Go with financial calculator
3. Quiz with bonus
4. Special arrangement
CORE IDEAS REVIEW
Chapter 6: Discounted Cash Flow Valuation

Annuities
Definition: A series of equal periodic cash flows that occur at regular interval.

Types: Ordinary Annuity: Each cash flow is at the end of each period
Annuity Due: Each cash flow is at the beginning of each period

Present Value of Annuity (PVA)

C  1 
PVA  1  (1  r ) n 
r  
Perpetuities
Definition: A stream of cash payments that never ends; Annuity that goes forever

Present Value of Perpetuities

C
PVP 
r
Growing Annuities
Definition: Annuities that have payments that grows over time. Growth rate: g
Growing Perpetuities

Definition: Payments get bigger every period and continue forever.

Conclusion: memorize the 4 formulation

Annuity
Perpetuity
Growing Annuity
Growing Perpetuity
GO WITH FINANCIAL
CALCULATOR
The keyboard
PMT=Annuity
Calculation
Input the variables including Annuity we already know regardless of the sequence
QUIZ WITH BONUS
Question 1 (Chapter 6: Annuity Present Value PVA)
You’ve just joined the Korat Investment Bank in Thailand. They’ve offered you two
different salary arrangements. You can have 3,000,000 baht per year for the
next two years, or you can have 2,000,000 baht per year for the next two years,
along with a 1,500,000 baht signing bonus today.

The bonus is paid immediately, and the salary is paid at the end of each year. If
the interest rate is 10% per annum, which do you prefer?
Mathematical computation
PVA = C({1 – [1/(1 + r)]t } / r)
Offer 1: PVA1 = ฿3,000,000 {[1 – (1 / 1.1)2] / 0.1} = ฿5,206,611.57
Offer 2: PVA2 = ฿1,500,000 + ฿2,000,000 {[1 – (1/1.1)2] / 0.1} = ฿
4,971,074.38
How to use calculator
Press 2nd CLR TVM
Press CE|C
Press 10 I/Y
Press 2 N
Press 3000000 PMT
Press CPT PV >> 5206611.57
Question 2 (Chapter 6: Annuity Present Value PVA)
Beginning three months from now, you want to be able to withdraw $2,300 each
quarter from your bank account to cover college expenses over the next four
years. The account pays 0.65% interest per quarter.

How much do you need to have in your bank account today to meet your
expense needs over the next four years?

Mathematical computation
PVA = C({1 – [1/(1 + r)]t } / r)
PVA = $2,300{[1 – (1/1.0065)16] / 0.0065} = $34,843.71
Question 3 (Chapter 6: Perpetuity Values PVP)
The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that
will pay you $25,000 per year forever. The required return on this investment is
7.2%.

How much will you pay for the policy?

Suppose a sales associate told you the policy costs $375,000. At what interest
rate would this be a fair deal?

Mathematical computation
PV = C / r
PV = $25,000 / 0.072 = $347,222.22

PV = C / r
$375,000 = $25,000 / r
r = $25,000 / $375,000 = 6.67%
You financial calculator will show 0.07 because it is corrected to 2 d.p.
Therefore you have to multiply it by 100 to get 6.67, i.e. in terms of %
‘Grades’ function on moodle common page for viewing tutorial
attendance and mid-term result.
*** Tutorial 1 attendance is ready for checking ***
*** It will be posted every Sunday. If students disagree
with the attendance, please send an email to Brian Tse
(briantcw@hku.hk) for checking WITHIN 1 WEEK.
For the group-based assignments, number of members should be 1-5
members. You are allowed to form your own groups as long as they are
from subclass H/I/J. Once group is formed, no change is allowed.

1. Download the file "FINA1310 assignment grouping form" on moodle.

2. Fill in required information
3. Only one student from the group is needed to send the form to Brian
(briantcw@hku.hk) by February 11, Sunday.

If you have any questions, please send an email to Brian

(briantcw@hku.hk).
 SPECIAL ARRANGEMENT
BRIAN WILL TAKE THE TUTORIAL ON FEB. 14TH (WEDNESDAY) INSTEAD OF RAY
 FOR THURSDAY TUTORIAL CLASS
BRIAN SHOULD HAVE ALREADY SENT YOU AN EMAIL ABOUT
YOUR ALLOCATION RESULT OF MAKE-UP TUTORIAL 3.
IF NOT, SEND AN EMAIL TO HIM AGAIN.

NOW, YOU ARE GOING TO GET THE TUTORIAL MATERIAL FOR

TUTORIAL 3.
PLEASE COLLECT THE QUIZ
MATERIALS IN THE FRONT
THANK YOU