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Date Submitted: 05/06/2014 01:55 PM
Principles of Finance review class
BONDS
FV of a bond is 1000
Hw problem in chapter 4:
Bond with 10% coupon = 100
Par @ 1000
3 years to maturity
Required rate of return is 14%
PV = coupon x (PVIFA kd, n) + 1000 (PVIF kd, n)
= 100*2.322 + 1000 * 0.675
= 232.2 + 675
= 907.2
Or (discounted flows)
1 100 x 0.877 = 87.70
2 100 x 0.769 = 76.9
3 1100 x 0.675 = 742.5
907.1
Semi-annual bond
2x3years = 6 periods
Kd = 14/2 = 7%
Coupon = 100/2 = 50
Practice bonds
Time value of money problems
Practice problems when you have to find interest rate/periods/factor
Practice calculating cash flows for homework
| 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
Savings | -20000 | 5000 | 5000 | 6000 | 6000 | 7000 | -- | -- |
Depreciation | | -4000 | -6400 | -3840 | … | … | … | … |
PBT | | 1000 | -1400 | 2160 | … | … | … | … |
TAX 34% | | -340 | 476 | -734 | … | … | … | … |
PAT | | 660 | -924 | 1426 | … | … | … | … |
Depreciation | | 4000 | 6400 | 3840 | … | … | … | … |
Net cash | | 4660 | 5476 | 5266 | … | … | … | … |
*the only cash flow are savings and tax (which is an outflow)
NPV = 4660/(1+0.14) +
Common share: P0 = D1/Ke – g
Ke = D1/P0 + g
Standard deviation
Expected return 20% (in the middle)
St. dev. 15%
a) what is the probability of less than zero (left side)
z = (r – rbar)/standard dev = (0 – 0.2)/0.15 = -1.33
p = 9%
b) what is the probability of more than 10%
z = (.1 – 0.2) / .15 = -0.666
= 25%
100 – 25% is the probability for more than 10%
Exercise 6 chapters 4:
Bond will pay dividend of 1.5 dollars next year
G = 9%
Ke = 13%
Find P0
P0 = D1/(Ke-g) = 1.5/(0.13-0.09) = 37.5
D1 = D0 (1+g)
8) V = Dp/Kp = 100*0.09/0.12 = 9/0.12 = 75