FIN 301 Class Web Page, Fall ' 16
Instructor: Maggie Foley
Jacksonville University
Business Finance Online, an interactive learning tool for the Corporate
Finance Student https://www.zenwealth.com/BusinessFinanceOnline/index.htm
Weekly SCHEDULE, LINKS, FILES and Questions
Chapter 
Coverage, HW, Supplements 
Required 
References

Videos (optional) 

Chapter
1, 2 
Discussion: How to pick stocks (finviz.com) Daily earning announcement: http://www.zacks.com/earnings/earningscalendar IPO schedule: http://www.marketwatch.com/tools/ipocalendar Chapter 1: Introduction Flow of funds describes the financial assets flowing from
various sectors through financial intermediaries for the purpose of buying
physical or financial assets. *** Household, nonfinancial business, and our government Financial institutions facilitate exchanges of funds and
financial products. *** Building blocks of a financial system. Passing and
transforming funds and risks during transactions. *** Buy and sell, receive and deliver, and create and underwrite
financial products. *** The transferring of funds and risk is thus created. Capital
utilization for individual and for the whole economy is thus enhanced. Chapter 2 Introduction of
Financial Market Introduction to Capital
Markets  ION Open Courseware (Video)
How the stock market works (video) No homework for chapter 2 

Introduction
to Capital Markets  ION Open Courseware


Chapter 5 
Chapter 5 Time value of Money Time value of money
(Video) The time value of money  German
Nande (video)
Chapter 5 Homework (due on 9/22) 1.
1. You deposit $5,000 in a saving account at 10%
compounded annually. How much is your first year interest? How much is your second
year interest? (500, 550) 2.
What is the future value of $5,000 invested for 3 years
at 10% compounded annually? ( 6,655) 3.
3. You just bought a TV for $518.4 on credit card. You plan to pay back
of $50 a month for this credit card debt. The credit card charges you 12% of
interest rate on the monthly basis. So how long does it take to pay back your
credit card debt? (11 months) 4.
4. You are going to deposit certain amount in the next four years.
Your saving account offers 5% of annual interest rate. First year: $800 Second year: $900 Third year: $1000 Fourth year: $1200.
How much you can withdraw four years later? (4168.35) 5.
5. You are going to deposit certain amount in the next four years.
Your saving account offers 5% of annual interest rate. First year: $800 Second year: $900 Third year: $1000 Fourth year: $1200.
How much is the lump sum value as of today (NPV)?
(3429.31) 6.
6. Ten years ago, you invested $1,000. Today it is worth $2,000.
What rate of interest did you earn? (7.18%) 7.
7. At
5 percent interest, how long would it take to triple your
money? (22.52) 8.
8. What is the effective annual rate if a bank charges
you 12 percent compounded monthly? (12.68%) 9.
9. Your father invested a lump sum 16 years ago at 8%
interest for your education. Today, that account worth $50,000.00. How much
did your father deposit 16 years ago? ($14594.50) 10.
10. You are borrowing $300,000 to buy a house. The terms
of the mortgage call for monthly payments for 30 years at 3% interest. What
is the amount of each payment? ($1264.81) 11.
11. You deposit $200 at the beginning of each month into your
saving account every month. After two years (24 deposits total), your account
value is $6,000. Assuming monthly compounding, what is your monthly rate that
the bank provides? (1.74%) 12. You want to buy a fancy
car. For this goal, you plan to save $5,500 per year, beginning
immediately. You will make 4
deposits in an account that pays 8% interest.
Under these assumptions, how much will you have 4 years from today?
($26,766) 13. Citi card is giving you a good deal. You can transfer your
balance from your current credit card to Citi new
card with $50 balance transfer fee. The new card charges at 5% a year. But your
old card charges at 12% a year. Your balance in your old card is $5,000. If
you can afford to pay back to the credit card of $250 a month. How much
quicker does it take you to pay back your debt with the new card? (Hint: for
the new card, your debt = 5000+50=5050; Assume monthly compounding by credit
card companies). (1.28 months) 14. Your girlfriend just won the Florida
lottery. She has the choice of
$40,000,000 today or a 20year annuity of $2,850,000, with the first payment
coming one year from today. If the mutual fund of hers provides 4% of return
each year for the next 20 years, which payment option is more attractive to
her? ($40million) 15. The
Thailand Co. is considering the purchase of some new equipment. The quote
consists of a quarterly payment of $4,740 for 10 years at 6.5 percent
interest. What is the purchase price of the equipment? ($138,617.88) 16. The
condominium at the beach that you want to buy costs $249,500. You plan to
make a cash down payment of 20 percent and finance the balance over 10 years
at 6.75 percent. What will be the amount of your monthly mortgage
payment? ($2,291.89) 18. Shannon
wants to have $10,000 in an investment account three years from now. The
account will pay 0.4 percent interest per month. If Shannon saves money every
month, starting one month from now, how much will she have to save each
month? ($258.81) 23.
Expansion, Inc. acquired an additional business unit for $310,000. The
seller agreed to accept annual payments of $67,000 at an interest rate of 6.5
percent. How many years will it take Expansion, Inc. to pay for this
purchase? (5.68 years) 30. Sky
Investments offers an annuity due with semiannual payments for 10 years at 7
percent interest. The annuity costs $90,000 today. What is the amount of each
annuity payment? ($6,118.35) 
Summary of math and excel equations Math Equations FV = PV *(1+r)^n PV = FV / ((1+r)^n) N = ln(FV/PV) / ln(1+r) Rate = (FV/PV)^{1/n} 1 Annuity: N = ln(FV/C*r+1)/(ln(1+r)) Or N = ln(1/(1(PV/C)*r)))/ (ln(1+r)) EAR = (1+APR/m)^m1 APR = (1+EAR)^(1/m)*m Excel Formulas To get FV, use FV function. =abs(fv(rate, nper, pmt, pv)) To get PV, use PV function = abs(pv(rate, nper, pmt, fv)) To get r, use rate
function = rate(nper, pmt, pv,
fv) To get number of years, use nper function = nper(rate, pmt, pv,
fv) To get annuity payment, use PMT function = pmt(rate, nper, pv, fv) To get Effective rate (EAR), use Effect function = effect(nominal_rate, npery) To get annual percentage rate (APR), use nominal function = nominal(effective ratge, npery) Study Guide Detailed Multiple
Choice (20*4=80) Q1: Calculate first year interest and principal
(like quiz 1). Q2. Calculate second year interest and principal
(like quiz 1) Q3. Given PV and calculate FV Q4. Calculate interest rate, given nper, pv and fv. Q5. Given nominal rate and npery,
calculate effective rate Q6. NPV calculation, given CFs and rate Q7. NFV
calculation, given CFs and rate Q8. Like quiz 2, mortgage rate question Q9. How long to double (triple or four times) of
your money as discussed in class Q10. Given APR, figure out effective rate Q11. Figure out PMT given FV, PV, Rate and Nper. Q12. Preferred stock (perpetuity)
dividend, return and price. Q13. Given PMT, FV, PV and rate,
figure out nper. Q14. NPV calculation question Q15. Given APR, calculate effective rate Q16. Car loan payment question (you can use
amortization template in excel) Q17. Mortgage payment question (you can use
amortization template in excel) Q18. Time value of money question Q19 and Q20.: two hard time value of money
questions. Short answer questions (10 points
each) 1.
Explain what is “time has value”. Show an example 2.
Explain what is “high risk and high return”. Show an
example One extra credit question (time value
of money question – hard) (5 points) 

Chapter 3 Financial
Statement Analysis Experts Explain: Financial Statements (well
explained, video) ******* Part I: Balance Sheet and Income Statement
************** Home Depot
(Ticker in the market: HD) reported the following information for the year
ended January 30^{th}, 2011 (expressed in millions). Sales: $67,977 Cost of goods
sold: $44,693 Marketing, general
and administrative expenses: $15,885 Depreciation
expenses: $1,616 Interest
expense: $530 Tax rate:
36.70% Number of
shares outstanding: 1,623 Dividends paid
to stockholders: $1,569. Use the above
information to try to prepare the income statement of
Home Depot for the year ended January 30^{th}, 2011 Home Depot
(Ticker in the market: HD) reported the following information for the year
ended January 30^{th}, 2011 (expressed in millions). Cash: $545 Accounts
receivables: $1,085 Inventories:
$10625 Other current
assets: $1,224 Gross fixed
assets: $38,471 Accumulated
depreciation: $13,411 Other fixed
assets: $1,586 Accounts
payable: $9,080 Short term
notes payable: $1,042 Long term debt:
$11,114 Total common
stock: $3,894 Retained
earnings: $14,995 Use the above
information to try to prepare the balance sheet of
Home Depot for the year ended January 30^{th}, 2011. 
Cash flow template (new and simple, my contribution) 

*********
Part II: Cash Flow Statement ******************

In Millions of USD (except for per share
items) 
52 weeks ending
20140202 
Net Income/Starting Line 
5,385.00 
Depreciation/Depletion 
1,757.00 
Amortization 
 
Deferred Taxes 
31 
NonCash Items 
228 
Changes in Working Capital 
289 
Cash from Operating Activities 
7,628.00 
Capital Expenditures 
1,389.00 
Other Investing Cash Flow Items, Total 
118 
Cash from Investing Activities 
1,507.00 
Financing Cash Flow Items 
37 
Total Cash Dividends Paid 
2,243.00 
Issuance (Retirement) of Stock, Net 
8,305.00 
Issuance (Retirement) of Debt, Net 
3,933.00 
Cash from Financing Activities 
6,652.00 
Foreign Exchange Effects 
34 
Net Change in Cash 
565 
Cash Interest Paid, Supplemental 
639 
Cash Taxes Paid, Supplemental 
2,839.00 
Discussion:
1. What are the three components of
cash flow statement?
2. What does net change in cash mean?
Now let’s learn how to calculate cash changes in each session
Source of cash
Use of Cash
Cash Flow from Operations: Five Steps
1. Add back depreciation.
2. Subtract (add) any increase (decrease) in
accounts receivable.
3. Subtract (add) any increase (decrease) in
inventory.
4. Subtract (add) any increase (decrease) in
other current assets.
5. Add (subtract) any increase (decrease) in
accounts payable and other accrued expenses
HW of chapter 3 (word file here)
Cash Flow Statement Answer 
calculation for changes 

Cash at the beginning of the year 
2060 

Cash from operation 

net income 
3843 

plus depreciation 
1760 

/+ AR 
807 
807 

/+ Inventory 
3132 
3132 

+/ AP 
1134 
1134 

net change in cash from operation 
2798 

Cash from investment 

/+ (NFA+depreciation) 
1680 
1680 

net change in cash from investment 
1680 

Cash from finaning 

+/ long term debt 
1700 
1700 

+/ common stock 
2500 
2500 

 dividend 
6375 
6375 

net change in cash from investment 
2175 

Total net change of cash 
1057 

Cash at the end of the year 
1003 
(The excel file of the
above cash flow statement is here)
Chapter 4: Ratio Analysis
Chapter 4 how to master analyzing financial statement (FYI
only)
Stock screening tools
FINVIZ.com
http://finviz.com/screener.ashx
We will focus on the following several ratios:
P/E (price per share/earning per
share, P/E < 15, a bargain)
PEG (PE ratio /
growth rate. PEG<1, undervalued stock)
EPS (earning per
share)
ROA (Return on Asset
= NI/TA, ROA>10% should be a nice benchmark)
ROE (return on
equity = NI/TE, ROE>15% should be good)
Current ratio (liquidity measure. = CA/CL, has to be greater than one)
Quick ratio (liquidity measure. = (CAInventory)/CL, has to be greater
than one)
Debt Ratio (Leverage measure. = TD/TA, need to be optimal, usually
between 30% and 40%)
Gross margin (profit measure. = EBITDA/sales, or = Gross margin/sales,
has to be positive)
Operating margin (profit measure. = EBIT/sales, or = operating income/sales, has
to be positive)
Net profit margin (profit measure. = NI/sales, has to be positive)
Payout ratio (= dividend / NI, measures distribution to shareholders.
No preferences. Usually value stocks have high payout ratio; Growth stocks
have low payout ratio).
Chapter 4 IN Class Exercise (excel file here) 

Assignment: Calculate ratios of AAPL 

Steps 
Inputs / Answers 

1 
P/E = price per
share / earning per share 

EPS  earning
per share = NI / Shares outstanding 
9.64 

NI 
53,394,000,000.00 

Shares
outstanding 
5,540,000,000.00 

Price per share 
98.98 

P/E 
10.27 

2 
PEG =PE /
Growth 

Assume growth
rate of apple is 15% every year, so growth = 15 

PEG =PE /
Growth 
0.68 

3 
ROA = NI/TA 
18.38% 
NI 
53,394,000,000.00 

TA 
290,479,000,000.00 

4 
ROE = NI/TE 
0.45 
NI 
53,394,000,000.00 

TE 
119,355,000,000.00 

5 
Current Ratio =
CA/CL 
0.45 
6 
Quick ratio =
(CA  inventory)/CL 
0.45 
Total Current
Assets 
89,378.00 

Total Current
Liabilities 
80,610.00 

Total Inventory 
2,349.00 

7 
Debt ratio =
TD/TA 
22.19% 
TA 
290,479,000,000.00 

Total Debt 
64,462,000,000.00 

8 
Gross margin =
EBITDA/sales 
40.06% 

Gross Profit (=
EBITDA) 
93,626.00 
Revenue 
233,715.00 

9 
Operating
margin = EBIT / sales 
30.48% 
Operating
Income 
71,230.00 

10 
Profit margin =
NI/Sales 
22.85% 
Net Income 
53,394.00 

11 
Payout ratio =
Total dividend / NI 
20.54% 
Dividend per
share 
1.98 

Total dividend
= dividend per share * total shares 
10,969,200,000.00 
HW
Calculate all ratios above of a stock in your
portfolio except PEG, using the most recent annual financial statement
Second Mid Term 10/20
Chapter
6
Chapter 6 Risk and Return
Chapter 6 In Class
Exercise(Word file here –
updated)
Use the following
information in the in class exercise
Month 
CSX return 
Apple Return 
Amazon Return 
Gold Return 
Sep16 
0.39% 
4.70% 
1.76% 
28.84% 
Aug16 
7.85% 
6.60% 
8.86% 
6.41% 
Jul16 
0.47% 
2.40% 
1.36% 
44.58% 
Jun16 
8.63% 
9.00% 
6.04% 
27.27% 
May16 
1.32% 
4.30% 
0.99% 
72.60% 
Apr16 
2.40% 
7.20% 
9.58% 
38.63% 
Mar16 
5.90% 
14.00% 
11.11% 
103.40% 
Feb16 
6.67% 
12.70% 
7.44% 
0.86% 
Jan16 
5.64% 
0.10% 
5.87% 
126.10% 
Dec15 
11.29% 
7.50% 
13.15% 
5.72% 
Nov15 
8.72% 
11.00% 
1.67% 
4.60% 
Oct15 
5.99% 
0.60% 
6.22% 
26.64% 
HW of chapter 6 (word file here)
Chapter 6 Homework
1) Stock A has the following returns for various states of the
economy:
State of
the
Economy Probability Stock
A's Return
Recession 10% 30%
Below
Average 20% 2%
Average 40% 10%
Above
Average 20% 18%
Boom 10% 40%
Stock A's expected return is?
2)
Joe purchased 800 shares of Robotics Stock at $3 per share on 1/1/09. Bill
sold the shares on 12/31/09 for $3.45. Robotics stock has a beta of 1.9, the
riskfree rate of return is 4%, and the market risk premium is 9%. Joe's
holding period return is?
3. You own a portfolio with the following expected returns
given the various states of the economy. What is the overall portfolio
expected return?
State of
economy probability
of state of economy rate
of return if state occurs
Boom 27% 14%
Normal 70% 8%
Recession 3% 11%
4) The prices for the Electric Circuit Corporation for the first
quarter of 2009 are given below. The price of the stock on January 1,
2009 was $130. Find the holding period return for an investor who
purchased the stock onJanuary 1, 2009 and sold
it the last day of March 2009.
Month
End Price
January $125.00
February 138.50
March 132.75
5) Collectibles Corp. has a beta of 2.5 and a standard deviation
of returns of 20%. The return on the market portfolio is 15% and the risk
free rate is 4%. What is the risk premium on the market?
6) An investor currently holds the following portfolio:
Amount
Invested
8,000 shares of
Stock A $16,000 Beta = 1.3
15,000 shares of
Stock B $48,000 Beta = 1.8
25,000 shares of
Stock C $96,000 Beta = 2.2
The beta for the portfolio is?
7) Assume that you have $165,000 invested in a stock that is
returning 11.50%, $85,000 invested in a stock that is returning 22.75%, and
$235,000 invested in a stock that is returning 10.25%. What is the expected
return of your portfolio?
8) If you hold a portfolio made up of the following stocks:
Investment
Value Beta
Stock
A $8,000 1.5
Stock
B $10,000 1.0
Stock
C $2,000 .5
What is the beta of the portfolio?
9. The
riskfree rate of return is 3.9 percent and the market risk premium (r_{m} –r_{f})
is 6.2 percent. What is the expected rate of return on a stock with a beta of
1.21?
10. You own a portfolio consisting of the stocks
below.
Stock Percentage
of
portfolio Beta
1. 20% 1
2. 30% 0.5
3. 50% 1.6
The risk free
rate is 3% and market return is 10%.
a. Calculate the portfolio beta.
b. Calculate the expected return of your portfolio.
11. Computing holding
period return for Jazman and Solomon for
period 1 through 3 (bought in period 1 and sold in period 3). Show the
holding period returns for each company.
Period Jazman Solomon
1 $10 $20
2 $12 $25
3 $15 $15
12. Calculate expected return
State of the economy 
Probability of the states 
% Return (Cash Flow/Inv. Cost) 
Economic Recession 
30% 
5% 
Strong and moderate Economic Growth 
70% 
15% 
13. Calculate the expected returns of the
following cases, respectively
1) Invest $10,000 in Treasury bill with
guaranteed return of 4%.
2) Investment $10,000 in Apple. 50% possibility
to earn 20% return and 50% possibility to lose 10% of investment.
3) Investment $10,000 in WalMart. 50% possibility
to earn 5% return and 50% possibility to earn 0% of investment.
14. Rank the risk of the
following cases, from the least risky one the most risky one
1) Invest $10,000 in Treasury bill with
guaranteed return of 4%.
2) Investment $10,000 in Apple. 50% possibility
to earn 20% return and 50% possibility to lose 10% of investment.
3) Investment $10,000 in WalMart. 50%
possibility to earn 5% return and 50% possibility to earn 0% of investment.
15. An investor currently holds the following
portfolio:
Amount
Invested
8,000 shares of
Stock A $10,000 Beta = 1.5
15,000 shares of
Stock B $20,000 Beta = 0.8
25,000 shares of
Stock C $20,000 Beta = 1.2
Calculate the beta for the portfolio.
16. Joe
purchased 800 shares of Robotics Stock at $5 per share on 1/1/13. Bill sold
the shares on 4/18/13 for $6. Robotics stock has a beta of 1.2, the riskfree
rate of return is 1%, and the market risk premium is 10%. Joe's holding
period return is how much?
Excel Command:
sumproduct(array1, array2)
stdevp(observation1, obv2, obv3,….)
correl(stock 1’s return, stock 2’s return)
beta = slope(stock return, sp500 return)
Chapter 7 Bond pricing
Simplified Balance Sheet of WalMart
In Millions of USD 
As of 20140131 
Total Assets 
204,751.00 
Total Current Liabilities 
69,345.00 
Long Term Debt 
41,771.00 
Other liabilities 
17,380.00 
Total Liabilities 
128,496.00 
Total Equity 
76,255.00 
Total Liabilities & Shareholders' Equity 
204,751.00 
For discussion:
· What is this “long term debt”?
· Who is the lender of this “long term debt”?
So this long term debt is called bond in the
financial market. Where can you find the pricing information and other
specifications of the bond issued by WMT?
How Bonds Work (video)
FINRA – Bond market information
http://finramarkets.morningstar.com/BondCenter/Default.jsp
Chapter 7 Study guide (word file here)
1. Go to http://cxa.gtm.idmanagedsolutions.com/finra/BondCenter/Default.aspx , the bond market data website of FINRA to
find bond information. For example, find bond sponsored by IBM
Or, just go to www.finra.org, č Investor
center č market data č bond č corporate
bond
Corporate Bond

2. 2. Understand what is coupon, coupon rate,
yield, yield to maturity, market price, par value, maturity, annual bond,
semiannual bond, current yield.
3. 3. Understand how to price bond
Bond price = abs(pv(yield, maturity,
coupon, 1000)) – annual coupon
Bond price = abs(pv(yield/2,
maturity*2, coupon/2, 1000)) – semiannual coupon
Also change the yield and observe the price changes. Summarize
the price change pattern and draw a graph to demonstrate your findings.
Again, when yield to maturity of this semi_annual coupon
bond is 3%, how should this WMT bond sell for?
4. Understand how to calculate bond returns
Yield to maturity = rate(maturity, coupon, market
price, 1000) – annual coupon
Yield to maturity = rate(maturity*2, coupon/2, market
price, 1000)*2 – semiannual coupon
For example, when the annual coupon bond is selling for $1,200,
what is its return to investors?
For example, when the semiannual coupon bond
is selling for $1,200, what is its return to investors?
5. Current yield: For the above bond, calculate
current yield.
6. Zero coupon bond: coupon=0 and treat it as
semiannual coupon bond.
Example: A ten year zero coupon bond is selling for $400. How much is its yield to
maturity?
A ten year zero coupon bond’s yield to
maturity is 10%. How much is its price?
7. Understand what is bond rating and how to read those ratings.
a. Who are Moody, S&P and Fitch?
b. What is IBM’s rating?
c. Is the rating for IBM the highest?
d. Who earned the highest rating?
Chapter 7 Home Work
1. IBM 5 year 2% annual coupon bond is selling for $950. How much this IBM bond’s
YTM? 3.09%
2. IBM 10 year 4% semi_annual coupon bond is
selling for $950. How much is this IBM bond’s YTM? 4.63%
3. IBM 10 year 5% annual coupon bond offers 8% of return. How much is the price of this
bond? 798.7
4. IBM 5 year 5% semiannual coupon bond offers 8% of return. How much is the price of this
bond? $878.34
5. IBM 20 year zero coupon bond offers 8% return. How much is the
price of this bond? 208.29
6. Collingwood Homes has a bond issue outstanding that pays an 8.5
percent coupon and matures in 18.5 years. The bonds have a par value of
$1,000 and a market price of $964.20. Interest is paid semiannually. What is
the yield to maturity? 8.9%
7. Grand Adventure Properties offers a 9.5 percent coupon bond with
annual payments. The yield to maturity is 11.2 percent and the maturity date
is 11 years from today. What is the market price of this bond if the face
value is $1,000? 895
8. The zero coupon bonds of D&L Movers have a market price of
$319.24, a face value of $1,000, and a yield to maturity of 9.17 percent. How
many years is it until these bonds mature? 12.73 years
9. A zero coupon bond with a face value of $1,000 is issued with an
initial price of $212.56. The bond matures in 25 years. What is the implicit
interest, in dollars, for the first year of the bond's life? 6.29%
The bonds issued by Stainless Tubs bear a 6 percent
coupon, payable semiannually. The bonds mature in 11 years and
have a $1,000 face value. Currently, the bonds sell for $989. What is the
yield to maturity? 6.14%
Summary of bond pricing excel functions
To calculate bond price (annual coupon bond):
Price=abs(pv(yield
to maturity, years left to maturity, coupon rate*1000, 1000)
To calculate yield to maturity (annual coupon
bond)::
Yield to maturity = rate(years left to
maturity, coupon rate *1000, price, 1000)
To calculate bond price (semiannual
coupon bond):
Price=abs(pv(yield
to maturity/2, years left to maturity*2, coupon rate*1000/2,
1000)
To calculate yield to maturity (semiannual
coupon bond):
Yield to maturity = rate(years left to
maturity*2, coupon rate *1000/2, price, 1000)*2
To calculate number of years left(annual
coupon bond)
Number of years =nper(yield
to maturity, coupon rate*1000, price, 1000)
To calculate number of years left(semiannual
coupon bond)
Number of years =nper(yield
to maturity/2, coupon rate*1000/2, price, 1000)/2
To calculate coupon (annual coupon bond)
Coupon = pmt(yield to maturity, number of
years left, price, 1000)
Coupon rate = coupon / 1000
To calculate number of years left(semiannual
coupon bond)
Coupon = pmt(yield to maturity/2, number of
years left*2, price, 1000)*2
Coupon rate = coupon / 1000
Math Formula (FYI)
C: Coupon, M: Par, $1,000; i: Yield to
maturity; n: years left to maturity
For Semiannual, F=2 for semiannual coupon
M: Par, $1,000; i:
Yield to maturity; n: years left to maturity
Third Mid Term Exam Study
Guide
Multiple Choices (25*4=100)
Issuer Callable
Coupon _rate Maturity Moody
Rating Price Yield
GE Yes
5% 07/15/2015 A 95.38 _____
Use the above information to answer the following
questions (17)
12. Calculate expected return using sumproduct.
13. Compare several investment choices based on returns and probability
14. Calculate expected return using sumproduct.
15. Calculate expected return using sumproduct.
1619 CAPM and SML questions, such as slope, intercept,
market return, risk free rate, etc.
20. Systematic risk vs. unsystematic risk
21.
Calculation of holding period return
22. Concept of diversification.
23. SML and CAPM concept question
24. Diversification, risk and return concept question
25. Diversification,
risk and return concept question
DEC 1^{st},
Third Mid Term
Chapter 10 Capital Budgeting
NPV, IRR, and Payback period template in Excel
Chapter 10 In Class Exercise
Question 1: Project with an initial cash outlay of
$20,000 with following free cash flows for 5 years.
Year Cash flows
1 $8,000
2 4,000
3 3,000
4 5,000
5 10,000
1) How much is the payback
period (approach one)?
· Does
this method consider time value of money?
· Easy
to explain to outsiders?
2) If the firm has a 10%
required rate of return. How much is NPV (approach 2)?
· What
does NPV means? NPV>0 indicates what? Otherwise?
· Does
this method consider time value of money?
· Easy
to explain to outsiders?
3) If the firm has a 10%
required rate of return. How much is IRR (approach 3)?
· What
does IRR mean? IRR > 10% indicates what? Otherwise?
· Does
this method consider time value of money?
· Easy
to explain to outsiders?
Question 2: Project with an initial cash outlay of $60,000
with following free cash flows for 5 years.
Year FCF
Initial
outlay –60,000
1 25,000
2 24,000
3 13,000
4 12,000
5 11,000
The firm has a 15% required rate of return.
Calculate payback period, NPV, IRR. Analyze
your results.
Question 3: Mutually Exclusive Projects
1) Consider the following
cash flows for oneyear Project A and B, with required rates of return of
10%. You have limited capital and can invest in one but one project. Which
one?
§ Initial Outlay: A = $200; B = $1,500
§ Inflow: A
= $300; B = $1,900
2) Example: Consider two
projects, A and B, with initial outlay of $1,000, cost of capital of 10%, and
following cash flows in years 1, 2, and 3:
A:
$100 $200 $2,000
B:
$650 $650 $650
Which project should you choose if they are
mutually exclusive? Independent? Crossover rate?
Chapter 10 In Class Exercise II
1. Consider the
following two projects, calculate the NPVs of the
two projects. If the two projects are mutually exclusive, which one should
you choose? What about they are independent projects?
Project 
Year 0 Cash Flow 
Year 1 Cash Flow 
Year 2 Cash Flow 
Year 3 Cash Flow 
Year 4 Cash Flow 
Discount Rate 
A 
100 
40 
40 
40 
N/A 
.15 
B 
73 
30 
30 
30 
30 
.15 
2. You are considering an investment with the following cash
flows. If the required rate of return for this investment is 15.5 percent,
should you accept the investment based solely on the internal rate of return
rule? Why or why not?
3. It will cost $6,000 to acquire an ice cream cart. Cart
sales are expected to be $3,600 a year for three years. After the three
years, the cart is expected to be worthless as the expected life of the
refrigeration unit is only three years. What is the payback period?
4. An investment project provides cash flows of $1,190 per
year for 10 years. If the initial cost is $8,000, what is the payback
period?
5. A firm evaluates all of its projects by using the NPV decision
rule. At a required return of 14 percent, the NPV for the following project
is _____ and the firm should _____ the project.
6. Consider the following two mutually exclusive projects:
What is the NPV of each project? What is the IRR of each project?
What is the crossover rate for these two projects?
7. Cash Flow in
Period
Initial
Outlay 1 2 3 4
$4,000,000 $1,546,170 $1,546,170 $1,546,170 $1,546,170
The Internal Rate of Return (to nearest whole percent) i?
8. Welltran Corp. can purchase a new machine for $1,875,000
that will provide an annual net cash flow of $650,000 per year for five
years. The machine will be sold for $120,000 after taxes at the end of year
five. What is the net present value of the machine if the required rate of
return is 13.5%.
9. Compute
the discounted payback period for a project with the following cash flows
received uniformly within each year and with a required return of 8%:
Initial Outlay = $100
Cash Flows: Year 1 = $40
Year
2 = $50
Year
3 = $60
10. A project
requires an initial investment of $389,600. The project generates free cash
flow of $540,000 at the end of year 4. What is the internal rate of return
for the project?
NPV Excel syntax
Syntax
NPV(rate,value1,value2, ...)
Rate is the rate of
discount over the length of one period.
Value1, value2,
...
are 1 to 29 arguments representing the payments and income.
· Value1, value2, ... must
be equally spaced in time and occur at the end of
each period. NPV uses the order of value1, value2, ... to interpret the order of cash flows. Be
sure to enter your payment and income values in the correct sequence.
IRR Excel syntax
Syntax
IRR(values, guess)
Values is an array or a reference to cells that contain
numbers for which you want to calculate the internal rate of return.
Guess is a number that
you guess is close to the result of IRR.
https://www.youtube.com/watch?v=7FsGpi_W9XI
https://www.youtube.com/watch?v=YgVQvn51noc
Dec 15^{th}, Final Exam
(Chapter 10, Chapter 5)
Final study guide
Multiple Choices (40*2.5=100)
1.
Calculate the NPV of project X.
2.
Calculate the NPV of project Y.
3.
Calculate IRR of project X.
4.
Calculate IRR of project Y.
5.
Calculate the payback period of project X
6.
Calculate the payback period of project Y
7.
Consider the two projects are mutually exclusive, which project shall
you choose.
8.
Consider the two projects are independent, which project shall you
choose.
9.
Calculate the crossover rate.
10. Imagine that discount is 5%,
and the two projects are mutually exclusive, which project shall you choose?
11. Imagine that discount is 25%,
and the two projects are mutually exclusive, which project shall you choose?
12. Given cash flows of each year,
calculate the payback period.
13. Given cash flows of each year,
calculate the IRR
14. Given two projects’ cash
flows, calculate crossover rate.
15. True/false question about
payback period.
16. True/false question about NPV
17. True/false question about NPV
18. True/false question about NPV
/ IRR
19. True/false question about NPV
20. Given cash flows of each year,
calculate the payback period.
21. A hard question about NPV and
IRR (Maybe, maybe not)
22. Mutually exclusive projects’
NPV and IRR relationship
23. Mutually exclusive projects’
NPV and IRR relationship
24. Mutually exclusive projects’
NPV and IRR relationship
25. Relationship between IRR and
NPV
1.
2640: time value of money (chapter 5) – just
calculation of PV, FV, PMT, NPER, rate, 12 questions and two are the conceptual questions.