3. You are 25 years old, and you want to save for the future.

You intend to deposit $1,000 in

the bank today. In each of the next 44 years, you intend to make a similar deposit. If the
interest rate is 5% annually, how much will you have when you reach the age of 70?

Annual Interest 5%
n 45
Annual Deposit 1000 <==Intial deposit and will continue for the next 44 year

Year Balance at the beginning Deposits Interest earned Total balance at the end
1 0 1000 0 1000
2 1000 1000 0 2000
3 2000 1000 0 3000
4 3000 1000 0 4000
5 4000 1000 0 5000
6 5000 1000 0 6000
7 6000 1000 0 7000
8 7000 1000 0 8000
9 8000 1000 0 9000
10 9000 1000 0 10000
11 10000 1000 0 11000
12 11000 1000 0 12000
13 12000 1000 0 13000
14 13000 1000 0 14000
15 14000 1000 0 15000
16 15000 1000 0 16000
17 16000 1000 0 17000
18 17000 1000 0 18000
19 18000 1000 0 19000
20 19000 1000 0 20000
21 20000 1000 0 21000
22 21000 1000 0 22000
23 22000 1000 0 23000
24 23000 1000 0 24000
25 24000 1000 0 25000
26 25000 1000 0 26000
27 26000 1000 0 27000
28 27000 1000 0 28000
29 28000 1000 0 29000
30 29000 1000 0 30000
31 30000 1000 0 31000
32 31000 1000 0 32000
33 32000 1000 0 33000
34 33000 1000 0 34000
35 34000 1000 0 35000
36 35000 1000 0 36000
37 36000 1000 0 37000
38 37000 1000 0 38000
39 38000 1000 0 39000
40 39000 1000 0 40000
41 40000 1000 0 41000
42 41000 1000 0 42000
43 42000 1000 0 43000
44 43000 1000 0 44000
45 44000 1000 0 45000

Future Value $167,685.16 <== when I reach 70 years old I will have $167685.16 in my deposit account
4. Your mom is 50 and wants to put away some money for retirement. She would like to
make monthly deposits in the bank, starting today and at the beginning of every month
between now and the month before her retirement at age 70. (To save you irritation: The
total number of deposits is 15*20 = 300.) Required: If the interest rate is 8% annually,
how much should she save each month in order to have $200,000 on the day she retires.
Use the PMT function.

Annual interest rate 0.08

monthly interest 0.007
rate
Total number of 300
deposits

Goal to have at 200000

retirement age
pv 44793.13599
pmt 357.672904
fv 363122.0611
5. You have taken a 20-year, $80,000 mortgage to finance the purchase of your new house.
The mortgage has an interest rate of 10% annually and requires monthly flat payments of
interest and principal (by “flat” we mean that all the payments are equal). Required: Use
PMT to compute the monthly payment.

year 20
Number of 120
monthly pmt
annual interest 10%
monthly interest 0.83%
80000
pv 29553.73
pmt $390.55

6. You are considering buying a bond, which pays $112.50 at the end of this and each of the
subsequent 10 years. The interest rate is 12%. Use the PV function to value the bond.

Annual 112.5
Payment
Number of 11
years
interest 12%
rate

PV of the $667.99
bond
 7. Your bank account pays 6%nterest annually, compounded continuously. You have
$25,000 in the account today, and you intend to withdraw this amount 3 years and 6
months from today. How much will you have in the account at that time?

Multiple Compounding Periods

Initial Deposit 25000
Interest Rate 6.00%
No. Of Compounding periods per year e
31027.55
Continuous Compounding with Exp 95

8. Compute the continuously compounded present value of the following set of cash flows,
using a discount rate of 20%.

Year Cash Flow Continously Discounted PV

1 15000 12280.9613
2 22000 14747.04101
3 14750 8094.971632 81.87308
4 3200 1437.852685
5 6333 2329.780501
6 18000 5421.495814
7 280000 69047.1499
Present Value $113,359.25
9. You have offered an asset costing $600 that has cash flows of $100 at the end of each of
the next 10 years.

A. If the appropriate discount rate for the asset is 8%, should you purchase it?
B. What is the IRR of the asset?

Number of years 10
Year Cashflow
0 -600
1 100
2 100
3 100
4 100
5 100
6 100
7 100
8 100
9 100
10 100
A
PV if r= 8% $671.01
if r=8%, NPV would be $71.01
Answer:- Yes I should purchase it
B
IRR 11%
10. You just took a $10,000, 5-year loan. Payments at the end of each year are f at (equal in
every year) at an interest rate of 15%. Calculate the appropriate loan table, showing the
breakdown in each year between principal and interest.

Loan principal 10000

interest rate 0.15
loan term 5 <--- Number of years over which loan is repaid
annual payment 2983.155525 <--- ==PMT(B2,B3,-B1)

Year Principal at the beggnig

Paymentofatthe
theyear
interest
end of year Return of principal
1 10000 2983.16 1500 1483.16
2 8516.84 2983.16 1277.526 1705.634
3 6811.206 2983.16 1021.6809 1961.4791
4 4849.7269 2983.16 727.459035 2255.700965
5 2594.025935 2983.16 389.1038903 2594.05611
6 -0.03017475 0 -0.004526213 0.004526213
 11. In this exercise, we solve iteratively for the internal rate of return. Consider an
investment, which costs 800 and has cash flows of 300, 200, 150, 122, and 133 in years
1–5. Setting up the loan table below shows that 10% is greater than the IRR (since the
return of principal at the end of year 5 is less than the principal at the beginning of the
year):

Setting the IRR cell equal to 3% shows that 3% is less than the IRR, since the return of
principal at the end of year 5 is greater than the principal is at the beginning of year 5. By
changing the IRR cell, find the internal rate of return of the investment.

IRR 0.03
Loan Table Division Of Payment Between irr= r1 +NPv1(R2-R1)/NpV1-NPV2
Year Cash Flow Year Principal At Beg. of year Payment at end of year Interest Principal
1 -800 1 800 300 24 276
2 300 2 524 200 15.72 184.28
3 200 3 339.72 150 10.1916 139.8084
4 150 4 199.9116 122 5.997348 116.0027
5 122 5 83.908948 133 2.517268 130.4827
6 133 6 -46.57378356 Should Be zero for IRR

IRR 0.0506999
Loan Table Division Of Payment Between
Year Cash Flow Year Principal At Beg. of year Payment at end of year Interest Principal
1 -800 1 800 300 40.55992 259.4401
2 300 2 540.55992 200 27.40633 172.5937
3 200 3 367.9662539 150 18.65585 131.3441
4 150 4 236.6221062 122 11.99672 110.0033
5 122 5 126.6188233 133 6.419562 126.5804
6 133 6 0.038384962 Should Be zero for IRR approximately 5%
12. You have just taken a car loan of $25,000. The loan is for 48 months at an annual interest
rate of 16% (which the bank translates to a monthly rate of 15%/12 - 1.25%). The 48 payments
(to be made at the end of each of the next 48 months) are all equal.

A. Calculate the monthly payment on the loan.

B. In a loan table, calculate, for each month: the principal remaining on the loan at the
beginning of the month and the split of that month’s payment between interest and
repayment of principal.
C. Show that the principal at the beginning of each month is the present value of the
remaining loan payments at the loan interest rate (use either NPV or the PV functions).
principal 15000
number of payment 48
interest 0.0125

A
Monthly Payment 417.461224

B
Loan Table
Month Principal at the beginnigof year monthly payment
Interest Principal PV
1 15000 417.461224 187.5 229.961224 14954.66426
2 14770.03878 417.461224 184.6254847 232.8357393 14954.66426
3 14537.20304 417.461224 181.715038 235.746186 14954.66426
4 14301.45685 417.461224 178.7682106 238.6930134 1236.985773
5 14062.76384 417.461224 175.784548 241.676676 1639.175568
6 13821.08716 417.461224 172.7635895 244.6976345 2036.400056
7 13576.38953 417.461224 169.7048691 247.7563549 2428.720539
8 13328.63317 417.461224 166.6079146 250.8533093 2816.197559
9 13077.77986 417.461224 163.4722483 253.9889757 3198.890911
10 12823.79089 417.461224 160.2973861 257.1638379 3576.859655
11 12566.62705 417.461224 157.0828381 260.3783859 3950.162118
12 12306.24866 417.461224 153.8281083 263.6331157 4318.855908
13 12042.61555 417.461224 150.5326943 266.9285297 4682.997924
14 11775.68702 417.461224 147.1960877 270.2651363 5042.644358
15 11505.42188 417.461224 143.8177735 273.6434505 5397.850714
16 11231.77843 417.461224 140.3972304 277.0639936 5748.671805
17 10954.71444 417.461224 136.9339305 280.5272935 6095.161773
18 10674.18714 417.461224 133.4273393 284.0338847 6437.374086
19 10390.15326 417.461224 129.8769157 287.5843083 6775.361556
20 10102.56895 417.461224 126.2821119 291.1791121 7109.176341
21 9811.389839 417.461224 122.642373 294.818851 7438.869956
22 9516.570988 417.461224 118.9571373 298.5040867 7764.493279
23 9218.066901 417.461224 115.2258363 302.2353877 8086.096561
24 8915.831513 417.461224 111.4478939 306.0133301 8403.729433
25 8609.818183 417.461224 107.6227273 309.8384967 8717.44091
26 8299.979686 417.461224 103.7497461 313.7114779 9027.279407
27 7986.268209 417.461224 99.82835261 317.6328714 9333.292737
28 7668.635337 417.461224 95.85794171 321.6032823 9635.528125
29 7347.032055 417.461224 91.83790069 325.6233233 9934.032212
30 7021.408732 417.461224 87.76760914 329.6936149 10228.85106
31 6691.715117 417.461224 83.64643896 333.814785 10520.03017
32 6357.900332 417.461224 79.47375415 337.9874699 10807.61448
33 6019.912862 417.461224 75.24891077 342.2123132 11091.64837
34 5677.700549 417.461224 70.97125686 346.4899671 11372.17566
35 5331.210581 417.461224 66.64013227 350.8210917 11649.23965
36 4980.38949 417.461224 62.25486862 355.2063554 11922.88311
37 4625.183134 417.461224 57.81478918 359.6464348 12193.14824
38 4265.5367 417.461224 53.31920874 364.1420153 12460.07677
39 3901.394684 417.461224 48.76743355 368.6937904 12723.70989
40 3532.700894 417.461224 44.15876117 373.3024628 12984.08827
41 3159.398431 417.461224 39.49248039 377.9687436 13241.25211
42 2781.429687 417.461224 34.76787109 382.6933529 13495.24109
43 2398.736335 417.461224 29.98420418 387.4770198 13746.0944
44 2011.259315 417.461224 25.14074143 392.3204826 13993.85075
45 1618.938832 417.461224 20.2367354 397.2244886 14238.54839
46 1221.714344 417.461224 15.27142929 402.1897947 14480.22506
47 819.5245489 417.461224 10.24405686 407.2171671 14718.91807
48 412.3073817 417.461224 5.153842272 412.3073817 14954.66426
49 -3.06954E-11
13.ABC Corp. has a stock price P 0 = 100. The firm has just paid a dividend of $3 per share, and
intelligent shareholders think that this dividend will grow by a rate of 5% per year. Use the
Gordon dividend model to calculate the cost of equity of ABC.

Price 100
Dividend 3
Growth rate 0.05
Answer
Cost of equity 0.08

14 .ABC, Inc., has just paid a dividend of $5 per share. This dividend is anticipated to
increase at a rate of 15% per year. If the cost of equity for ABC is 20%, what should be
the market value of a share of the company?

Dividend (Div 0 ) $ 5.00

Growth rate (g ) 15%
Cost of equity (r e ) 20%

Stock price (P 0 ) $ 28.60

15. Dismal.Com is a producer of depressing Internet products. The company is currently not
paying dividends, but its chief financial officer thinks that starting in 3 years it can pay a
dividend of $15 per share, and that this dividend will grow by 10% per year. Assuming
that the cost of equity of Dismal.Com is 35%, value a share based on the discounted
dividends.
D= $15
k= 35%
g= 10%
n= 3
P= 1.524158
16. Consider the following dividend and price data for Chrysler and by using the Gordon
model to calculate Chrysler’s cost of equity at end-1996 based on dividends only.

CHRYSLER CORPORATION (C)

Year Year-end stock price Dividend per
Growth
share rate
1986 0.4
1987 0.5 0.25
1988 0.5 0
1989 0.6 0.2
1990 0.6 0
1991 0.3 -0.5
1992 0.3 0
1993 0.33 0.1
1994 0.45 0.3636
1995 1 1.2222
1996 35 1.4 0.4

Cost of equity 0.456

17. ABC Corp. has just paid a dividend of $4 per share. You—an experienced analyst—feel
quite sure that the growth rate of the company’s dividends over the next 10 years will be
15% per year. After 10 years, you think that the company’s dividend growth rate will
slow to the industry average, which is about 5% per year. If the cost of equity for ABC is
12%, what is the value today of one share of the company?
current dividend, Div0 3
Growth rate (g1) year 1-m "supernormal" 0.15
Growth rate (g2) year 11-∞ 0.05
Number of supernormal 10
Cost of equity (re) 0.12

Year PV of m year of high growth

PV of
g1remaining
dividends normal growth g2 dividends
1 3.080357143
2 3.162866709
3 3.247586353
4 3.334575273
5 3.423894254
6 3.515605707
7 3.609773717
8 3.706464085
9 3.805744373
10 3.907683954
Total 34.79455157 34.1422346
Share value today 68.93678616

div 3
growth rate 0.15
Cost of equity 0.12

year dividend growth rate stock price

1 3.45 3.080357
2 3.9675 0.15 3.542411
3 4.562625 0.15 4.073772
4 5.24701875 0.15 4.684838
5 6.034071563 0.15 5.387564
6 6.939182297 0.15 6.195698
7 7.980059641 0.15 7.125053
8 9.177068588 0.15 8.193811
9 10.55362888 0.15 9.422883
10 12.13667321 0.15 10.83632
18. Consider a company which has equity = 1.5 and debt = 0.4. Suppose that the risk-free rate
of interest is 6%, the expected return on the market E (rm ) 20 %, and that the corporate
tax rate is 40%. If the company has 50% equity and 50% debt in its capital structure,
calculate its weighted average cost of capital using both the classic CAPM and the tax-
adjusted CAPM.
E= 50%
D= 50%
B equity = 1.5
B debt = 0.4
Rf = 6%
E(rm) = 20%
Tc = 40%
Re = 0.27
Rd = 0.116
Rd(1-T) = 0.0696
WACC = 16.9800%
 19. Use the given below and prepare the requirements. Assume the current year is 2011 and
sales level for this year is $60, 138.

2 Sales growth 5%
3 Current assets/Sales 6%
4 Current liabilities/Sales 33%
5 Net fixed assets/Sales 30%
6 Cost of goods sold/Sales 84%
7 Long-term receivables, growth 5%
8 Depreciation rate 14%
9 Pension liabilities, growth 20%
1
0 Other liabilities, growth 9%
1
1 Cash/Sales 5%
1
2 Debt/Assets 42%
1
3 The interest rate on debt 1.6%
1
4 Interest paid on cash & marketable securities. 0.00%
1
5 Tax rate 20%
1
6 Dividend growth 8%

Additional balance sheet accounts will be constant for the next four years given below

Current Year (2011)

Land 753
Construction in progress 1,996
Investments affiliated companies 133
 Noncurrent deferred and refundable income tax 2,157
13,55
Intangibles and other 5
Redeemable non-controlling interest 473
Stock 2,744

Required:

A. Develop the pro-forma Income statement of the company for the next four years (2012-
2015).
B. Develop the proforma balance sheet of the company for the next four years (2012-2015).
C. Determine the free cash flow of the company for the next four years (2012-2015).
D. Compute the enterprise value if the WACC is 10.84% and long term FCF growth rate is
9%.
 20. Based on below data prepare pro-forma financial statement and value of the company.

A B
1 PRO FORMA FINANCIAL MODEL
2 Sales growth 15%
3 Currents assets/Sales 10%
4 Current liability /Sales 8%
5 Net fixed assets/Sales 77%
6 Costs of goods sold/Sales 50%
7 Depreciation rate 10%
8 Interest rate on debt 10%
9 Interest paid on cash and marketable securities 8%
10 Tax rate 40%
11 Dividend payout ratio 40%
13 Year 0 1 2 3 4 5
14 Pro forma Income statement
15 Sales 1,200
16 Costs of goods sold
17 Interest payments on debt
Interest earned on cash and
18 marketable securities
19 Depreciation
20 Profit before tax
21 Taxes
22 Profit after tax
23 Dividends
24 Retained earnings
Pro forma Balance sheet
27 Cash and marketable securities
28 Current assets
29 Fixed assets
30 At cost
31 Depreciation
32 Net fixed assets
33 Total assets
35 Current liabilities
36 Debt 520 520 520 520 520 520

37 Stock 350 350 350 350 350 350

38 Accumulated retained earnings
39 Total liabilities and equity