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Lahore School of Economics Financial Management II Review of FM I - 1

This document contains a review of financial management concepts from FM I including: 1) Questions calculating present and future value using the basic time value of money formula for various interest rates and time periods. 2) Questions calculating unknown values (PV, FV, rate) in annuity situations. 3) Questions calculating yields on bonds for premium, discount, and par bonds. 4) Questions calculating dividend growth models and expected returns. 5) Questions requiring calculation of required rates of return using the capital asset pricing model and dividend growth models.

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31 views3 pages

Lahore School of Economics Financial Management II Review of FM I - 1

This document contains a review of financial management concepts from FM I including: 1) Questions calculating present and future value using the basic time value of money formula for various interest rates and time periods. 2) Questions calculating unknown values (PV, FV, rate) in annuity situations. 3) Questions calculating yields on bonds for premium, discount, and par bonds. 4) Questions calculating dividend growth models and expected returns. 5) Questions requiring calculation of required rates of return using the capital asset pricing model and dividend growth models.

Uploaded by

Daniyal Ali
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Lahore School of Economics

Financial Management II
Review of FM I – 1

Q1) 0 1 2 3 4

PV = $10,000 FV = ?

I = 5% n = 4 FV = $12,155.063

Q2) 0 3

PV = ? FV = $115.76

n=3 I = 5% PV = $100

Q3) 0 10

PV = $585.43 FV = $1,000

n = 10 I = 5.5%

Q4) 0 n=?

PV = $1,000 FV = $2,000

I = 6%, n = 11.9 years

Q5) N = 8; I = YTM = 9%; PMT = 70; FV = 1000; PV = VB = $889.30 - DISCOUNT BOND

N = 12; I = YTM = 8%; PMT = 0.10  1,000 = 100; FV = 1000; PV = VB = $1,150.72 - PREMIUM BOND

Q6) N = 7; PV = VB = -$975; PMT = 90; FV = 1000; YTM = I = 9.51%.

Q7) 0 1 2 ……………………………… 47

1,825 1,825 . . . . . . . . 1,825


FV = ?

n = 47 PMT = $1,825 I = 8% FV = $826,542.78

Q8) 0 1 2 ……………………………… 10

100 100 . . . . . . . . . . 100


PV = ?

n = 10 I = 8% PMT = $100 PV = $671.09


beginning:
0 1 2 ………………………………..9 10

100 100 . . . . . . . . . . . . 100


PV = ?

n = 10 I = 8% PMT = $100 PV = $724.69


or
PV (at 8% from above) x (1 + 0.08) = $671.09 x (1.08) = $724.69

Q9) 0 1 2 3 4

PMT PMT PMT PMT


FV = $10,000

I = 6% n = 4 FV = $10,000 PMT = $2,285.91

Q1) N = 20; PV = -1275; PMT = 120; FV = 1000; I = YTM = 8.99%.

For YTC:
N = 5; PV = -1275; PMT = 120; FV = 1120; I = YTC = 7.31%.

Q2) N = 2  20 = 40; I = 7/2 = 3.5; PMT = (0.08/2) × 1,000 = 40; FV = 1000; PV = $1,106.78.

Q3) D1 = $1; g = 5%; rs = 11%

D1 $1
Pˆ0    $16.67.
rs  g 0.11  0.05

Q4) Expected price = P1 = P0(1 + g) = 40(1 + 0.06) = $42.4

Expected return = r^ s = Dividend yield + Capital Gains Yield


D1 P1  P0

P P0
= 0
= 2/40 + (42.4 – 40)/40
= 5% + 6%
= 11%

Q5) D1 = $2, b = 0.9, rRF = 5.6%, RPM = 6%, P0 = $25.


Required rate of return:
rs = rRF + (rM – rRF)b = 5.6% + (6%)0.9 = 11%.

To calculate g:
D1
P̂0 rs  g
=
D1
rs = P0 +g
$2
0.11  g
$25

g  0.03  3%.

Dp $10
Vp    $125 .
rp 0.08
Q6)

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