Finance

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