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1、Nov.29,2011Review the time value of moneyQuestion 1n nThe following cash flows streams need to be analyzedThe following cash flows streams need to be analyzedn n End of year End of year n n 1 2 3 4 5 1 2 3 4 5 n nW$100$200$200$300$300W$100$200$200$300$300n nX 600 -X 600 -n nY -1200Y -1200n nZ 200 -5
2、00 -300Z 200 -500 -300n na.Calculate the future value of each stream at the end a.Calculate the future value of each stream at the end of year 5 with a compound annual interest rate of of year 5 with a compound annual interest rate of 10%10%(equation 4.3 on P89)(equation 4.3 on P89)n nb.Compute the
3、present value of each stream if the b.Compute the present value of each stream if the discount rate is 14%(equation 4.4 on the same page)discount rate is 14%(equation 4.4 on the same page)Question 2n nMuffin Megabucks is considering two different savings plans.Muffin Megabucks is considering two dif
4、ferent savings plans.The first plan would have her deposit$500 every six The first plan would have her deposit$500 every six months,and she would receive interest at a 7%percent months,and she would receive interest at a 7%percent annual rate,compounded semiannually.Under the second annual rate,comp
5、ounded semiannually.Under the second plan she would deposit$1000 every year with a rate of plan she would deposit$1000 every year with a rate of interest of 7.5%percent,compounded annually.The initial interest of 7.5%percent,compounded annually.The initial deposit with Plan 1 would be made six month
6、s from now deposit with Plan 1 would be made six months from now and,with plan2,one year hence.and,with plan2,one year hence.n na.What is the future value of the first plan at the end of 10 a.What is the future value of the first plan at the end of 10 years?years?n nb.What is the future value of the
7、 second plan at the end of b.What is the future value of the second plan at the end of 10 years?10 years?n nc.What plan should Muffin use,assuming that her only c.What plan should Muffin use,assuming that her only concern is with the value of her savings at the end of concern is with the value of he
8、r savings at the end of 10years?10years?n nd.Would your answer change if the rate of interest on the d.Would your answer change if the rate of interest on the second plan were 7 percent?second plan were 7 percent?Question 3n nOn a contract you have a choice of receiving$25000 On a contract you have
9、a choice of receiving$25000 six years from now or$500000 twelve years from six years from now or$500000 twelve years from now.at which compound annual interest rate should now.at which compound annual interest rate should your be indifferent between the two contracts?your be indifferent between the
10、two contracts?Question 4n nEmerson Cammack wishes to purchase an annuity Emerson Cammack wishes to purchase an annuity contract that will pay him$7000 a year for the rest contract that will pay him$7000 a year for the rest of his life.The Philo life insurance Company figures of his life.The Philo li
11、fe insurance Company figures that his life expectancy is 20 years,based on its that his life expectancy is 20 years,based on its actuary tables.The company imputes a compound actuary tables.The company imputes a compound annual interest rate at 6 percent in its annuity annual interest rate at 6 perc
12、ent in its annuity contracts.contracts.n na.How much will Cammack have to pay for the a.How much will Cammack have to pay for the annuity?annuity?n nb.How much would he have to pay if interest?b.How much would he have to pay if interest?Question 5n nYou borrow$10000 at 14%compound annual You borrow$
13、10000 at 14%compound annual interest for four years.The loan is repayable in four interest for four years.The loan is repayable in four equal annual installments payable at the end of equal annual installments payable at the end of each year.each year.n na.What is the annual payment that will comple
14、tely a.What is the annual payment that will completely amortize the loan over four years?amortize the loan over four years?n nb.Of each equal payment,what is the amount of b.Of each equal payment,what is the amount of interest?The amount of loan principal?(Hint:in interest?The amount of loan princip
15、al?(Hint:in early years,the payment is composed largely of early years,the payment is composed largely of interest,whereas at the end it is mainly principal)interest,whereas at the end it is mainly principal)Question 6n nYour late Uncle Verns entitles you to receive$1000 Your late Uncle Verns entitl
16、es you to receive$1000 at the end of every other year for the next two at the end of every other year for the next two decades.The first cash flow is two years from now.decades.The first cash flow is two years from now.at a 10%compound annual interest rate,what is at a 10%compound annual interest ra
17、te,what is the present value of this unusual cash-flow pattern?the present value of this unusual cash-flow pattern?(try to solve this problem in as few steps as you(try to solve this problem in as few steps as you can.)can.)Question 7n nXu Lin recently obtained a 10-year,$50000 loan.Xu Lin recently
18、obtained a 10-year,$50000 loan.The loan carries an 8%compound annual interest The loan carries an 8%compound annual interest rate and calls for annual installment payments of rate and calls for annual installment payments of$7451$7451.47 at the end of each of the next 10 years.47 at the end of each
19、of the next 10 years.n na.How much(in dollars)of the first years payment a.How much(in dollars)of the first years payment is principal?is principal?n nb.How much total interest will be paid over the life b.How much total interest will be paid over the life of the loan?of the loan?Question 1n nFast a
20、nd loose company has outstanding an 8%,Fast and loose company has outstanding an 8%,four-year,$1000-par-value bond on which interest is four-year,$1000-par-value bond on which interest is paid annually.paid annually.n na.if the market required rate of return is 15%,what a.if the market required rate
21、 of return is 15%,what is the market value of the bond?is the market value of the bond?n nIf the coupon rate were 15%percent instead of 8%,If the coupon rate were 15%percent instead of 8%,what would be the market value?If the required what would be the market value?If the required rate of return dro
22、pped to 8%,what would happen rate of return dropped to 8%,what would happen to the market price of the bond?to the market price of the bond?Question 2n nJames Consol Company currently pays a dividend of James Consol Company currently pays a dividend of$1.6 per share on its common stock.The company$1
23、.6 per share on its common stock.The company expects to increase the dividend at a 20%annual expects to increase the dividend at a 20%annual rate for the first four years and at a 13%rate for rate for the first four years and at a 13%rate for the next four years,and then grow the dividend at a the n
24、ext four years,and then grow the dividend at a 7%rate thereafter.This phased-growth pattern is in 7%rate thereafter.This phased-growth pattern is in keeping with the expected life cycle of earnings.keeping with the expected life cycle of earnings.Your require a 16%percent return to invest in this Yo
25、ur require a 16%percent return to invest in this stock.What value should you place on a share of stock.What value should you place on a share of this stock?this stock?Question 3n nA$1000-face-value bond has a current market A$1000-face-value bond has a current market price of$935,an 8%coupon rate,an
26、d 10years price of$935,an 8%coupon rate,and 10years remaining until maturity.Interest payments are remaining until maturity.Interest payments are made semiannually.Before you do any made semiannually.Before you do any calculations,decide whether the yield to calculations,decide whether the yield to
27、maturity is above or below the coupon rate.maturity is above or below the coupon rate.Why?Why?n na.What is the implied market-determined a.What is the implied market-determined semiannual discount rate(ie,semiannual yield to semiannual discount rate(ie,semiannual yield to maturity)on this bond?matur
28、ity)on this bond?n nb.Using your answer to Part(a),what is the b.Using your answer to Part(a),what is the bonds(bonds()(nominal annual)yield to)(nominal annual)yield to maturity?(maturity?()(effective annual)yield to)(effective annual)yield to maturity?maturity?Question 4n nA zero-coupon,$1000-par-v
29、alue bond is A zero-coupon,$1000-par-value bond is currently selling for$312 and matures in currently selling for$312 and matures in exactly 10 years.exactly 10 years.n na.What is the implied market-determined a.What is the implied market-determined semiannual discount rate on this bond?semiannual d
30、iscount rate on this bond?n nb.Using your answer to Part(a),what is the b.Using your answer to Part(a),what is the bonds yield to maturity and yield to bonds yield to maturity and yield to maturity?maturity?Question 5 n nJust today,Acme Rocket,Inc.s common stock paid a Just today,Acme Rocket,Inc.s c
31、ommon stock paid a$1 annual dividend per share and had a closing$1 annual dividend per share and had a closing price of$20.assume that the market expects this price of$20.assume that the market expects this companys annual dividend to grow at a constant companys annual dividend to grow at a constant
32、 6%rate forever.6%rate forever.n na.Determine the implied yield on this common a.Determine the implied yield on this common stock.stock.n nb.What is the expected dividend yield?b.What is the expected dividend yield?n nc.What is the expected capital gains yield?c.What is the expected capital gains yi
33、eld?Question 6n nPeking Duct Tape company has outstanding a Peking Duct Tape company has outstanding a$1000-face-value bond with a 14%coupon rate and$1000-face-value bond with a 14%coupon rate and 3 years remaining until final maturity.Interest 3 years remaining until final maturity.Interest payment
34、s are made semiannually.payments are made semiannually.n na.What value should you place on this bond if your a.What value should you place on this bond if your nominal annual required rate of return is 12%,14%nominal annual required rate of return is 12%,14%and 16%respectively?and 16%respectively?n
35、nb.Assume that we are faced with a bond similar to b.Assume that we are faced with a bond similar to the one described above,except that it is a zero-the one described above,except that it is a zero-coupon,pure discount bond.What value should you coupon,pure discount bond.What value should you place
36、 on this bond if your nominal annual required place on this bond if your nominal annual required rate of return is 12%,14%and 16%respectively?rate of return is 12%,14%and 16%respectively?(assume semiannual discounting)(assume semiannual discounting)Dec.6 2011Review 3Question 1n nJerome J.Jerome is c
37、onsidering investing in a security Jerome J.Jerome is considering investing in a security that has the following distribution of possible one-year that has the following distribution of possible one-year return.return.n nProbability of Probability of n noccurrence 0.1 0.2 0.4 0.2 0.1 occurrence 0.1
38、0.2 0.4 0.2 0.1 n nPossible return -0.1 0.05 0.2 0.35 0.5Possible return -0.1 0.05 0.2 0.35 0.5n na.What are the expected return and standard deviation?a.What are the expected return and standard deviation?n nb.Assume that the parameters that you just determined b.Assume that the parameters that you
39、 just determined pertain to a normal probability distribution.What is the pertain to a normal probability distribution.What is the probability that return will be zero or less?Less than probability that return will be zero or less?Less than 10%?More than 40%?10%?More than 40%?Question 2n nSorbond In
40、dustry has a beta of 1.45.The risk-free Sorbond Industry has a beta of 1.45.The risk-free rate is 8%and the expected return on the market rate is 8%and the expected return on the market portfolio is 13%.The company currently pays a portfolio is 13%.The company currently pays a dividend of$2 a share,
41、and investors expect it to dividend of$2 a share,and investors expect it to experience a growth in dividends of 10%per annum experience a growth in dividends of 10%per annum for many years to come.for many years to come.n na.What is the stocks required rate of return a.What is the stocks required ra
42、te of return according to the CAPM?according to the CAPM?n nb.What is the stocks present market price per b.What is the stocks present market price per share,assuming this required return?share,assuming this required return?n nc.What would happen to the required return and to c.What would happen to
43、the required return and to market price per share if the beta were 0.8(assume market price per share if the beta were 0.8(assume that all else stays the same)?that all else stays the same)?Question 3n nAssuming that the CAPM approach is appropriate,Assuming that the CAPM approach is appropriate,comp
44、ute the required rate of return for each of the compute the required rate of return for each of the following stocks,given a risk-free rate of 0.07 and following stocks,given a risk-free rate of 0.07 and an expected return for the market portfolio of 0.13.an expected return for the market portfolio
45、of 0.13.n nStock A B C D EStock A B C D En nBeta 1.5 1.0 0.6 2.0 1.3 Beta 1.5 1.0 0.6 2.0 1.3 n nWhat implications can you draw?What implications can you draw?Question 4n nCurrently,the risk-free rate is 10%and the expected return Currently,the risk-free rate is 10%and the expected return on the mar
46、ket portfolio is 15%,market analysts return on the market portfolio is 15%,market analysts return expectations for four stocks are listed here,together with expectations for four stocks are listed here,together with each stocks expected beta.each stocks expected beta.n nStock expected return expecte
47、d betaStock expected return expected betan n1.stillman zinc Co.17.0%1.3 1.stillman zinc Co.17.0%1.3 n n2.Union paint company 14.5 0.82.Union paint company 14.5 0.8n n3.National automobile 3.National automobile n nCompany 15.5 1.1Company 15.5 1.1n n4 Parker electronic,inc.18 1.74 Parker electronic,in
48、c.18 1.7n na.if the analysts expectation are correct,which stocks(if a.if the analysts expectation are correct,which stocks(if any)are overvalued?Which(if any)are undervalued?any)are overvalued?Which(if any)are undervalued?n nb.If the risk-free rate were suddenly to rise to 12%and the b.If the risk-
49、free rate were suddenly to rise to 12%and the expected return on the market portfolio to 16%,which expected return on the market portfolio to 16%,which stocks(if any)would be overvalued?Which(if any)stocks(if any)would be overvalued?Which(if any)undervalued?(assume that the market analysts return an
50、d undervalued?(assume that the market analysts return and beta expectations for our four stocks stay the same)beta expectations for our four stocks stay the same)Question 5 n nSalt Lake City Services,Inc.provides maintenance Salt Lake City Services,Inc.provides maintenance services for commercial bu