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    Finance Exam Nr. 9 PDF

    Uploaded by

    Greta
    This document contains practice problems from a finance exam. Problem 1 calculates effective annual rate (EAR), present value (PV) of cash flows, and compares the PV of two investment contracts over 3 years. Contract 2 has a higher total PV. Problem 2 calculates share prices using dividend growth models, compares investments based on growth rates, and finds the fair price of a share. Problem 3 calculates expected returns and standard deviations of equity portfolios. Problem 4 calculates cost of equity using the capital asset pricing model (CAPM), weights assets to find the weighted average cost of capital (WACC), and references the valuation model that incorporates WACC.

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    Finance Exam Nr. 9 PDF

    Uploaded by

    Greta
    23 views3 pages
    This document contains practice problems from a finance exam. Problem 1 calculates effective annual rate (EAR), present value (PV) of cash flows, and compares the PV of two investment contracts over 3 years. Contract 2 has a higher total PV. Problem 2 calculates share prices using dividend growth models, compares investments based on growth rates, and finds the fair price of a share. Problem 3 calculates expected returns and standard deviations of equity portfolios. Problem 4 calculates cost of equity using the capital asset pricing model (CAPM), weights assets to find the weighted average cost of capital (WACC), and references the valuation model that incorporates WACC.

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    Finance Exam nr. 9.pdf

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    This document contains practice problems from a finance exam. Problem 1 calculates effective annual rate (EAR), present value (PV) of cash flows, and compares the PV of two investment contracts over 3 years. Contract 2 has a higher total PV. Problem 2 calculates share prices using dividend growth models, compares investments based on growth rates, and finds the fair price of a share. Problem 3 calculates expected returns and standard deviations of equity portfolios. Problem 4 calculates cost of equity using the capital asset pricing model (CAPM), weights assets to find the weighted average cost of capital (WACC), and references the valuation model that incorporates WACC.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    23 views3 pages

    Finance Exam Nr. 9 PDF

    Uploaded by

    Greta
    This document contains practice problems from a finance exam. Problem 1 calculates effective annual rate (EAR), present value (PV) of cash flows, and compares the PV of two investment contracts over 3 years. Contract 2 has a higher total PV. Problem 2 calculates share prices using dividend growth models, compares investments based on growth rates, and finds the fair price of a share. Problem 3 calculates expected returns and standard deviations of equity portfolios. Problem 4 calculates cost of equity using the capital asset pricing model (CAPM), weights assets to find the weighted average cost of capital (WACC), and references the valuation model that incorporates WACC.

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    Download as PDF, TXT or read online from Scribd
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    of 3

    Exam nr.

    : 9
    Finance Exam

    Problem 1
    Maturity 3 year = 36 months (m)
    R: 1% pr. month

    a) EAR
    Effective annual rate: ((1+0.01)^12)-1 = 0,12 = 12%

    b) Calculate PV

    Equation used to calculate PV of CF´s: CF/(1+r)^t

    Time Contract 1 PV of CF Contract 2 PV of CF


    0 0 0,00 200.000 200.000,00
    1 700.000 625.000,00 575.000 513.392,86
    2 700.000 558.035,71 575.000 458.386,48
    3 2.000.000 1.423.560,50 2.000.000 1.423.560,50
    2.606.596,21 2.595.339,83

    I will choose Contract 2 because it has I higher NPV of 2.606.596,21 DKK

    c)
    Yes, because the PV´s will be the following where Contract 2 has a higher total PV in DKK.

    Time Contract 1 PV of CF Contract 2 PV of CF


    0 0 0,00 200.000 200.000,00
    1 700.000 583.333,33 575.000 479.166,67
    2 700.000 486.111,11 575.000 399.305,56
    3 2.000.000 1.157.407,41 2.000.000 1.157.407,41
    2.226.851,85 2.235.879,63

    d)
    Total payment will be 2.235.879,63 DKK in the end of year 5.

    = 2.235.879,63*(1/1,20)^5= 898.549,877

    e)
    The time value of money concept is reflecting the relationship the initial interest r, and the
    initial value of the investment. This closely relates to the concept of compounding.

    Problem 2

    a)
    𝐷1 20 ∗ 1,00
    𝑃𝑎 = = = 250 𝐷𝐾𝐾 𝑝𝑟. 𝑠ℎ𝑎𝑟𝑒
    𝑅 − 𝑔 0,08 − 0

    1
    b)
    𝐷1 10 ∗ 1,04
    𝑃𝑏 = = = 260 𝐷𝐾𝐾 𝑝𝑟. 𝑠ℎ𝑎𝑟𝑒
    𝑅 − 𝑔 0,08 − 0,04

    c)
    Yes, depending on my situation. If I wanted to make a long-term investment, I would invest
    in share in Company B because it has an annual growth of 4%.

    d)
    10 ∗ 1,044 ∗ 1,02
    = 298,3139
    0,08 − 0,04
    10 ∗ 1,04 10 ∗ 1,044 298,3139
    + + = 237,4980
    1,08 (1,08)4 (1,08)4

    The fair price will be 237,4980 𝐷𝐾𝐾

    e)

    The discount rate risk depends on the maturity. The longer time= the higher is the risk. It
    would only be fair to use the same discount rate of 8% of everything else was equal.

    Problem 3

    a)
    𝐸𝑞𝑢𝑖𝑡𝑦 1 = (0,30 ∗ 0,01) + (0,70 ∗ 0,30) = 0,213 = 23,3%
    𝐸𝑞𝑢𝑖𝑡𝑦 2 = (0,30 ∗ −0,25) + (0,70 ∗ 0,30) = 0,205 = 20,5%
    Total expected return on equity= ((1/2)*0,213)+((1/2)*0,205)= 0,209= 20,9 %

    b)
    (0,01+0,30)
    𝑅= = 0,115
    2
    0,115^2
    Var(R)= = 0,00666
    2
    𝑆𝐷(𝑅) = √0,00666 = 0,0816

    (−0,25 + 0,40)
    𝑅= = 0,075
    2
    0,075^2
    Var(R)= = 0,0028
    2
    𝑆𝐷(𝑅) = √0,0028 = 0,0529

    c)

    d)

    Problem 4

    2
    a)
    𝑅𝑒 = 𝑅 𝑓 + 𝛽(𝑅𝑚 − 𝑅𝑓 )
    𝑒
    𝑅 = 0,01 + 3(0,10 − 0,01)
    𝑅𝑒 = 0,28 = 28%

    b)

    𝐷 400
    =4=
    𝐸 100
    𝐷 400 4
    = = = 0,8 = 8%
    𝐷 + 𝐸 400 + 100 5

    E D
    WACC = * Re + * (1 - t ) * R d
    D+E D+E
    100 400
    =400+100 ∗ 0,28 + 400+100 ∗ (1 − 0) ∗ 0,05 =0,096

    WACC= =0,096= 9,6%

    c)
    V = VU + t D

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