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Worksheet 2

The document contains a worksheet with 12 practice questions on financial management topics. It also provides the answers and explanations for the questions. Additional context is given on bond valuation, common stock valuation, and preferred stock valuation.

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MISRA MUHUDIN
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14 views4 pages

Worksheet 2

The document contains a worksheet with 12 practice questions on financial management topics. It also provides the answers and explanations for the questions. Additional context is given on bond valuation, common stock valuation, and preferred stock valuation.

Uploaded by

MISRA MUHUDIN
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
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YARDSTICK INTERNATIONAL COLLEGE

Course Financial Management


Worksheet II

Worksheet 2 :
The following questions are designed to address some of the issues discussed in
the class and will prepare you for the exam.

1) The one year discount factor, at a discount rate of 12 % per year, is?
Answer : PRV= 1/(1.12)1 = 0.89
1.1. TRY THIS ONE
1.1.1. The one year discount fact, at a discount rate of 15 % per year is?
Answer= 0.869
2) With continuous compounding at 10 percent for 10 years, what is the approximate
future value of a $ 5,000 initial investment?
Answer: FV= 5,000 * ( (1.1)10 = $ 12,968.71
2.1. TRY THIS ONE
2.1.1. With continuous compounding at 15 percent for 10 years, what is the
approximate future value of a $ 15,000 initial investment?
Answer: $ 60,683.36
3) Assume the total expense for your current year in college equals $20,000.
Approximately how much would your parents have needed to invest 21 years ago
in an account paying 8% compounded annually to cover this amount?
Answer: FVA (future value of annuity)= $ 20,000
Time period (t) = 21 year
Interest rate= 8%
FVA= R[ (1 + �)� -1]/i ,required value is R(installment
payment/periodic payment)
$ 20,000= R [(1.08)21 - 1]/0.08
R= $ 20,000/50.42 = $ 396.67
3.1. TRY THIS ONE
3.1.1. Assume the total expense for your current year in college equals $10,000.
Approximately how much would your parents have needed to invest 15 years ago in
an account paying 10% compounded annually to cover this amount?
Answer: R= $ 314.76

4) How much will accumulate in an account with an initial deposit of $500, and
which earns 20% interest compounded quarterly for three years?
Answer: $ 897.928
5) For $ 1,000 you can purchase a 5 -year ordinary annuity which will pay you a
yearly payment of $ 263.80 for 5 years. What is the annual interest rate implicit
in this investment to the nearest whole percentage point?
Answer = 10%

6) What is the market value of a $ 1,000 face-value bond with a 10 percent coupon
rate and maturity period of 10 year, when the market’s rate of return is 9 percent?
Answer: By comparing the cupon rate with discount rate we can easily
determine the price is at a premium( since cupon rate is greater than discount rate).
To calculate the exact value use the bond formula with non-zero cupon paying
bond. ( For more of this type of questions see worksheet I and its answer sheet)

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YARDSTICK INTERNATIONAL COLLEGE
Course Financial Management
Worksheet II
7) What is the yield on a share of preferred stock, which has a $ 100 par value and is
currently selling for $ 140 in the market place?
Answer: The share of preferred stock pays a 14% annual dividend.

8) The ABC Ltd is considering an investment that will cost $ 45,000 and have a
useful life of 6 years. During the first 2 years, the net increment in net cash flows is
$ 20,000 per year and for the last two years they are $ 10,000 per year. What is the
payback period for this investment?
Answer : 2.5 years
9) What is the value of the common stock if the per share dividend is $5.5 and it will
grow with the rate of 5% forever? The effective rate of return is 12%.
Answer: $ 82.5

10) If the common stock of a given entity paid $ 10 per share. The total number of
shareholders in the Co. is around 23,000 and the dividend will grow at 5% for 5 years
and then it will grow at 5% in perpetuity; what is the value of the share at 10%
effective annual return? (see worksheet I for similar questions and its answer
sheet)
11) You are considering borrowing $ 100,000 for 30 years at a compound annual
interest rate of 9 percent. The loan agreement calls for 30 equal annual payments, to
be paid at the end of each of the next 30 years. (Payments include both principal and
interest). What it the annual payment that will fully amortize the loan?
(Hint: you are required to calculate the periodic installment payment for
ordinary annuity)

12) Invest $2,019.45 now, receive 3 yearly payments of $100 each, plus $2,500 in the
3rd year. Calculate the IRR (Internal Rate of Return) of this investment.
Answer: 12% (note you will find such answer via trial and error)

Note: 1) The valuation of a financial asset (long term security) is based on


determining: The present value of future cash flows. For example,
future cash flow of bond is cupon periodic payment plus the maturity
value for bond with limited life.
2) The price of a bond can be either of the following option: equal to par,
above par, and below par. The price will be equal to par when the coupon
rate on a bond is equal to the yield to maturity. And the price will be above
par (premium bond) when the cupon rate is above discount rate and will be
below par (discounted bond) when cupon rate is below the dicount rate.
3) Determining the value of security (See the example form worksheet I
and answer sheet attached)

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YARDSTICK INTERNATIONAL COLLEGE
Course Financial Management
Worksheet II
I) Bond value will be determined depending on its nature, and it might be
a) Zero cupon bond where the bond don’t pay periodic cupon and its value
is determined as present value of its maturity value VB = MB/(1 + �)� ,
where VB is the value of the bond, i= interest rate (discount rate) , n=
number of period b) Non-zero cupon paying bond VB = PV of cupon +
pv of maturity value,
C) Perpetual bond VB= cupon/discount rate
II) Common stock valuation
- using Dividend discount model , Capital Asset pricing Model
III) Preferred stock
VP = Divide the dividend amount by the rate of return

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YARDSTICK INTERNATIONAL COLLEGE
Course Financial Management
Worksheet II

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