Scribd
Upload
243 views4 pages

Answer Key 1: Tri Vi Dang Columbia University Corporate Finance Fall 2012

This document contains solutions to practice questions about corporate finance. Solution 1 involves calculating present values of cash flows for Projects A and B and determining which has a higher PV based on the interest rate. Solution 2 compares the cash flows of Plans A and B over 10 years. Solution 3 values an entrepreneur's project using net present value. Solution 4 calculates the prices of AA-rated and B-rated bonds with different interest rates.

Uploaded by

sykim657
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
243 views4 pages

Answer Key 1: Tri Vi Dang Columbia University Corporate Finance Fall 2012

This document contains solutions to practice questions about corporate finance. Solution 1 involves calculating present values of cash flows for Projects A and B and determining which has a higher PV based on the interest rate. Solution 2 compares the cash flows of Plans A and B over 10 years. Solution 3 values an entrepreneur's project using net present value. Solution 4 calculates the prices of AA-rated and B-rated bonds with different interest rates.

Uploaded by

sykim657
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 4

Tri Vi Dang Columbia University

Corporate Finance Fall 2012

Answer Key 1

Remark

There are different approaches to solve the questions. Please regard the suggested solution as
one solution approach.

Solution 1(a)

t=1 t=2 t=3


r 1+r A 2 2 10
0,2 1,2 PV(A) 1,67 1,39 5,79 8,84

B 1 4 10
PV(B) 0,83 2,78 5,79 9,40

Solution 1(b)

2 2 10 1 4 10

1 r (1 r ) 2
(1 r ) 3
1 r (1 r ) 2
(1 r ) 3

2 2 1 4

1 r (1 r ) 2
1 r (1 r ) 2

2(1 r ) 2 (1 r ) 4

(1 r ) 2

r 1

For r>1, PVA>PVB.

1
Solution 1 (c)

PV as a function of r

16,00
14,00
Present value PV

12,00
10,00
PV(A)
8,00
PV(B)
6,00
4,00
2,00
0,00
0,0 1,0 2,0 3,0
Interest rate r

Solution 1 (d)

1 x 10
10
1.25 1.25 1.253
2

x=6.375

Solution 1(e)

2 2 10
10.22
1.1 1.1 1.2 1.1 1.2 1.1

2 2 10
10.22
(1 y ) (1 y) 2
(1 y) 3

Use e.g. Excel to find a solution of this cubic equation:

y=0.132

2
Solution 2(a)

Plan A Plan B
t=0 50000,0 50000,0 100000,0
t=1 53000,0 52000,0 102000,0
t=2 56180,0 54080,0 106080,0
t=3 59550,8 56243,2 114566,4
t=4 63123,8 58492,9 126023,0
t=5 66911,3 60247,7 127283,3
t=6 70926,0 62055,1 128556,1
t=7 75181,5 63916,8 129841,7
t=8 79692,4 65834,3 131140,1
t=9 84473,9 67809,3 132451,5
t=10 89542,4 69843,6 133776,0
159386,0 133776,0

Solution 2(b)

1+r Plan B
t=10 159386,0
t=9 1,01 157807,9
t=8 1,01 156245,5
t=7 1,01 154698,5
t=6 1,01 153166,8
t=5 1,01 151650,3
t=4 1,01 150148,8
t=3 1,1 136498,9
t=2 1,08 126387,9
t=1 1,04 121526,8
t=0 1,2153 100000,0

r1=21.53%

Solution 3(a)

t=0 t=1 t=2 t=3

Cash flow 10,00 12,00 40,00


Costs -20 -12,00 -10,00 -3,00
Net CF -2,00 2,00 37,00

NPV 27,63 -1,82 1,65 27,80


7,63

3
Solution 3(b)

The profit the entrepreneur can make has a PV of $7.63 million. He does not accept any price
less than this amount and the private equity firm is not willing to pay more than this amount.

Note, if the PE firm buys the whole project it has to finance all costs (setup cost and operating
costs) itself. Otherwise, the PE firm would just buy future cash flows.

Solution 4(a)

Price t=1 t=2 t=3 t=4


AA Bond 130,46 10,00 10,00 10,00 110,00
r=0,02

B Bond 115,77 10,00 10,00 10,00 110,00


r=0,055

Solution 4(b)

A firm with AA rating raises the total amount of $130.46 million.

A B rated firm raises $115.77 million and thus has to raise $14.69 million or about 126,890
more units of the bonds.

You might also like