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    Question 1 A: (2 Marks) (1 Mark)

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    shaneice_lewis
    The document provides information to solve multiple questions regarding bond yields, WACC calculation, and other corporate finance concepts. It includes the necessary variables, formulas, and steps to: 1) Calculate the yield to maturity on a bond and tax the cost of debt; 2) Determine the cost of equity using CAPM and calculate WACC with market weights; 3) Present a net present value calculation.

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    Question 1 A: (2 Marks) (1 Mark)

    Uploaded by

    shaneice_lewis
    17 views3 pages
    The document provides information to solve multiple questions regarding bond yields, WACC calculation, and other corporate finance concepts. It includes the necessary variables, formulas, and steps to: 1) Calculate the yield to maturity on a bond and tax the cost of debt; 2) Determine the cost of equity using CAPM and calculate WACC with market weights; 3) Present a net present value calculation.

    Original Description:

    Financial Management 1

    Original Title

    Answer_key_2009-2010_Semester_II_final_student

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    The document provides information to solve multiple questions regarding bond yields, WACC calculation, and other corporate finance concepts. It includes the necessary variables, formulas, and steps to: 1) Calculate the yield to maturity on a bond and tax the cost of debt; 2) Determine the cost of equity using CAPM and calculate WACC with market weights; 3) Present a net present value calculation.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    17 views3 pages

    Question 1 A: (2 Marks) (1 Mark)

    Uploaded by

    shaneice_lewis
    The document provides information to solve multiple questions regarding bond yields, WACC calculation, and other corporate finance concepts. It includes the necessary variables, formulas, and steps to: 1) Calculate the yield to maturity on a bond and tax the cost of debt; 2) Determine the cost of equity using CAPM and calculate WACC with market weights; 3) Present a net present value calculation.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    of 3

    Question 1 A

    First calculate YTM on bond. Variables are:

    PV- students need to identify that 86% par is the current price:
    860

    FV-$1,000

    PMT - students need to calculate this and also factor in that it is semi-annual payments
    60

    N - this will be 40 since it is a semi-annual coupon bond

    YTM is then calculated as:


    7.0571% which needs to be doubled to give an annual yield of 14.1142%

    This then needs to be taxed:


    8.46852 is the after tax cost of debt

    Question 1 B
    Cost of equity using CAPM:

    ke=Rf +B(Rm-Rf)

    In addition to knowing the formula students must realize that the T-bill rate is the risk free rate given
    and the risk premium is
    10%+1.4(5) 17%

    Question 1 C

    This is where students have to identify the need to use market weights instead of book weights and
    know how to calculate the market weights

    MV of equity 140000 61.9%


    MV of debt 86000 38.1%
    Total value of firm 226000 100%

    Students now need to know the formula for finding WACC and also remember that the after-tax
    cost of debt should be used here
    WACC = (61.9%*17)+(38.1%*8.4685) 13.75376425 %

    Question 1 D

    0 1-9 10
    Initial Investment -600000
    Investment in working capital -150,000
    Net income (3,000,000*.3) 900,000 900,000
    Depreciation (600,000/10) 60,000 60,000
    Recovery of working capital 150,000
    Net cash flows -750000 960000 1110000

    NPV $4,348,072.60

    Question 1 E
    The interest on debt is tax deductible and this creates a tax shield on earnings, hence reducing the effective cost of debt (2 marks)
    The dividends on equity are however not deductible for tax purposes and therefore gives no additional benefit to the company's WACC (1 mark)

    Question 1 E
    The firm's WACC should only be used if the project being undretaken is an overall company's project.
    If the project is divisional it is howver more appropriate to use the divisional WACC because the
    cashflows under consideration should have similar characteristics to the division's current cashflows.

    Question 1 G
    If a firm does not pay dividends, it will retain the earnings in the business. Shareholders will therefore require that the
    earnings which have been retained earn atleast their required rate of return, otherwise the company could pay these
    earnings over to the shareholders as dividends.
    Question 1

    Students must identify that the rate to be used in finding the annuity is implied in the returns which will
    equate the upfront lump sum to the full lottery winnings and is a point which is often missed.

    Rate implied on upfront lump sum payment:

    PV 10.5 million
    FV 25 million
    N 40
    rate implied 2.1924%

    Applying this rate to the annuity payments (Note the future value to be attained will still be $10 million:

    The annuity is $396,910.65

    Question 2

    PV 200000
    PMT -1000
    I/Y 0.58 (7/12)
    N 300 (12*25)
    FV 335,011.95 Balloon payment

    b) You can negotiate to pay the balloon payment upfront if possible. The balloon payment today would be $58,513 and may be more attainable
    OR
    Yoou can negotiate to increase the duration of the term so that you can avoid having to raise the balloon payment

    Question 3
    Answer: n= (36*12) 432; PMT= $352.89-123.87=229.02; I/Y=11/12; CPT FV=$1,262,178.909
    Therefore: $1,262,178.91 - $131,000 = $1,131,178.91

    Question 4
    Bank loan
    Monthly income = 48,000 / 12 = 4,000
    Maximum payment = .30(4,000) = 1,200
    30*12 = 360 N
    7/12 I/Y
    1,200 PMT
    CPT PV = 180,369.08
    Total Price
    Closing costs = .04(180,369.08) =7,214.76
    Down payment = 50,000 – 7,214.76 = 42,785.24
    Total Price = 180,369+42,785.24 = 223,154.24

    Question 5

    Calclate the cost of the house in 10 years:


    1.2M PV
    4% I/Y
    10 N
    1,776,293.14 FV

    Calculate deposit needed


    (1,776,293.14*.20) 355,258.63

    Calculate annuity needed


    FV 355,258.63
    I/Y 5%
    N 10
    PMT -28,244.69
    1C
    2 Error in options. Give mark
    3B
    4A
    5A
    6B
    7A
    8B
    9B
    10 A
    11 B
    12 B
    13 C
    14 C
    15 C

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