B02084: FOUNDATIONS OF FINANCE

CHAPTER 6: HOW TO CALCULATE PRESENT VALUES

EX1: An amount of $100 is invested in 3 years at annual interest rate of 7%. Simple interest
rate is applied.
Calculate the amount of money that will be received after 3 years.
EX2: An amount of $100 is invested in 3 years at annual interest rate of 7%. Compound
interest rate is applied.
Calculate the amount of money that will be received after 3 years.
EX3:
a) What is the one-year discount factor of $1 at an interest rate of 35% per year?
b) What is the discount rate/ interest rate per year of $1 if the two-year discount factor is
0.7222?
EX4: An amount of $2,000 was invested at the beginning of year 1 at annual interest rate
of 6%. Calculate the value of the investment at the end of year 3.
a) Compounding is done on annually basis.
b) Compounding is done on quarterly basis.
EX5: An amount of $100 was invested at the beginning of year 1. Calculate the value of
the investment at the end of year 6. Knowing that compounding is done on annually basis.
a) If the annual interest rate is 5%
b) If the annual interest rate is 10%
c) If the annual interest rate is 15%
EX6
a) You buy a smart phone for $1,100 but you don’t have to make the payment until next
year (it means, one year later). Suppose the interest rate is 5%, compounded annually.
What is the amount of money that you have to save at the present to pay for the smart
phone?
b) If the year of payment is deferred for 2 more years. What is the amount of money that
you have to save at the present to pay for the smart phone?
EX7: You has won the prize of $100,000 to be paid the whole amount after 3 years. At the
same time, you receive an offer of $80,000 to sell the right of receiving that prize. If the
market interest rate is 12% and the interest is compounded annually. Whether the offer
should be accepted or not?
EX8: Mr. Anh is planning to invest in a project that costs $9mil. The project is expected
to have a life of 4 years. The cash flows expected to receive at the end of each year are 0;
$3mil; $3mil; $5mil, respectively. Know that annual interest rate is 10%.
a) What is the present value of the uneven cash flows?
b) Should Mr. Anh invest in the project?

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EX9: Ms. Mai plans to deposit some amounts of money of $500, $800, $700 at the
beginning of each year. Know that the annual interest rate is 10%.
a) How much money will Ms. Mai receive at the end of year 3?
b) If Ms. Mai deposits money at the end of each year. How much money will she receive
at the end of year 3?
EX10: What is the present value of the following cash flows? Knowing that the discount
rate is 7%.
Year Cash flow

1 $3,000

2 0

3 - $4,000

4 $2,000

EX11:
Suppose that your farm land brings an amount of $40 million every end of the year forever,
the annual interest rate is 10%.
a) What is the present value of the perpetuity?
b) If you receive the income at the beginning of the year. What is the present value of the
perpetuity?
EX12:
Suppose that your farm land brings an amount of $40 million every end of the year forever
and it grows by 5% per year, the annual interest rate is 10%.
a) What is the present value of the perpetuity?
b) If you receive the income at the beginning of the year. What is the present value of the
perpetuity?
EX13:
What price would you be willing to pay for a preferred share of stock in the ABC
corporation, that promises to pay a cash dividend to you at the end of the year of $25, which
will increase every year by 1%, forever. Know that the interest rate is 4.75%?
EX14:
a) What is the present value of $1 billion every year, for all eternity, if you estimate the
perpetual discount rate to be 10%?
b) What if the investment does not start making money for 3 years?
EX15: Ms. Mai plans to deposit the same amounts of money of $100 at the beginning of
each 3 year, starting from year 1. Know that the annual interest rate is 15%.

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 a) How much money will Ms. Mai receive at the end of year 3?
b) If Ms. Mai deposits money at the end of each year. How much money will she receive
at the end of year 3?
EX16: You agree to lease a car for 4 years at $300 per month. You are not required to pay
any money up front or at the end of your agreement. If your opportunity cost of capital is
0.5% per month, what is the cost of the lease?
EX17: The state lottery advertises a jackpot prize of $295.7 million, paid in 25 installments
over 25 years, at the beginning of each year. If interest rates are 5.9% what is the true value
of the lottery prize?
EX18: Ms. Oanh has to pay school fee of $12,500 at the end of the next 6 years. Know that
the compounding annual interest rate is 8%.
a) How much should she set aside today to cover these amounts?
b) If she has $70,476 today. How much remaining money will she have after paying all
school fees?
EX19: What is the future value of $20,000 paid at the end of each of the following 5 years,
assuming your investment returns 8% per year?
EX20: An investment produces an income that grows by 4% each next 7 years. If the first
year’s income is $10,000 and interest rate is 11%, what is the present value of the
investment?
EX21: Given a monthly rate of 1%, what is the Effective Annual Rate (EAR)? What is the
Annual Percentage Rate (APR)?
EX22: Given the 10.25% EAR compounded monthly. What is the Annual Percentage Rate
(APR)?

CHAPTER 4: THE VALUE OF COMMON STOCKS

EX1: A firm has 100 outstanding common stocks selling at $60 per share. What is the
firm’s market capitalization?
EX2: ABC Company is expected to pay a dividend of $1.5 per share. Knowing that the
current stock price is $46 and the P/E is 10.2. Calculate the plowing back ratio.
EX3: A firm has an income statement of 2022 as below. The firm has 100 outstanding
common stocks selling at $60 per share. Calculate Earnings per Share and P/E ratio.
2022

Revenue $725
Cost of good sold $390
Selling, general, and administrative expenses $121

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 Depreciation $80
Earnings before interest and tax ?
Interest payment $37
Earnings before tax ?
Tax (20%) ?
Net income ?

EX4: Company A is expected to pay a dividend of $5 per share next year and stock A is
expected to sell for $110 one year from now. If the required rate on the stock is 15%, what
is the current price of the stock?
EX5: Company A is expected to pay dividend of $5 and $5.5 per share over the next 2
years, respectively. At the end of year two, the stock will be sold for $121. If the required
rate on the stock is 15%, what is the current price of the stock?
EX6: Company A is expected to pay dividend of $3 at the end of year one. The dividend
is expected to grow 5% each year until year three. At the end of year three, the stock will
be sold for $134. If the required rate on the stock is 12%, what is the current price of the
stock?
EX7: Company A is expected to pay dividend of $10 a share forever. If the required rate
on the stock is 7%, what is the current price of the stock?
EX8: Company B is expected to pay a dividend of $5 next year. Thereafter, dividend
growth is expected to be 4% a year forever. If the required rate on the stock is 7%, what is
the current price of the stock?
EX9: Company C is expected to pay a dividend of $5 next year. Thereafter, dividend
growth is expected to be 10% a year for 2 years and 3% thereafter. If the required rate on
the stock is 7%, what is the current price of the stock?
EX10: Northwest Natural Gas stock was selling for $42.45 per share at the start of 2009.
Dividend payments for the next year were expected to be $1.68 a share. What is the
dividend yield and required return, assuming no growth?
EX11: Northwest Natural Gas stock was selling for $42.45 per share at the start of 2009.
Dividend payments for the next year were expected to be $1.68 a share. What is the
dividend yield and required return, assuming a growth rate of 6.1%?
EX12: Northwest Natural Gas just reported earnings of $2 million and decided to pay out
60% of its earnings as dividends. The book value of equity is $10 million. What is the
dividend growth rate of the firm?

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 CHAPTER 7: PAYOUT POLICY
EX1: Corporate A has 30,000 shares of stock outstanding with a par value of $10 per share
and a market price of $45 a share. The balance sheet shows $300,000 in the common stock
account, $550,000 in the capital in excess of par value account, and $732,000 in the
retained earnings account. The corporate will have a 5-for-3 stock split. What will the
market price per share be after the split?

EX2: Corporate B has excess cash of 24 mil VND and other assets of 120 mil VND. Equity
is worth 60 mil VND. The firm has 500 shares of stock outstanding and net income of 120
mil VND. The firm has decided to spend all of its excess cash on a share repurchase
program. How many shares of stock will be outstanding after the stock repurchase is
completed? Knowing that corporate B has a market value equal to its book value.

CHAPTER 8: FINANCIAL ANALYSIS

EX1: Consider the following balance sheet of the Weston company:
Assets Liabilities and Owners’ Equity

2011 2012 2011 2012

Current assets $936 $1,015 Current liabilities $382 $416

Non-current assets $4,176 $4,896 Long-term debt $2,160 $2,477

a) What is owners’ equity for 2011 and 2012?

b) What is the net working capital in 2011 and 2012?

EX2: Travis, Inc., has sales of $387,000, costs of $175,000, net fixed assets of $27,000,
depreciation expense of $40,000, long-term debt of $12,900, interest expense of $21,000,
and a tax rate of 35 percent. What is the net income for the firm? Suppose the company
paid out $30,000 in cash dividends. What is the addition to retained earnings?

EX3: Complete the Income Statement

Income statement 2023

Sales 800 mil VND

Cost of good sold 290 mil VND
Selling, general, and administrative expenses 121 mil VND
Depreciation 80 mil VND
EBIT ?

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 Interest 25 mil VND
EBT ?
Tax rate 20%
Net income ?
Addition to retained earnings (60%) ?

Dividend paid (40%) ?

EX4:
a) Filling in the blank (?)
Income Statement 2023
Net sales ?
Cost of goods sold 31,729
Selling, general, and administrative 11,158
expenses
Depreciation 1,539
Earning before interest and taxes (EBIT) ?
Interest expense 298
Earning before taxes (EBT) ?
Tax (20%) ?
Net Income ?

Dividends 841.44
Addition to retained earnings 1,963.36

b) What is the sale for 2023?

Income statement 2023

Cost of good sold 390 mil VND
Addition to retained earnings 152 mil VND
Interest 37 mil VND
Dividend paid 48 mil VND
Selling, general, and administrative expenses 121 mil VND
Tax rate 20%
Depreciation 80 mil VND
Sales ?

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EX5:

Balance sheet
ASSETS 2023 2022
Current assets
Cash and marketable securities 661 530
Accounts receivable 166 247
Inventories 8,209 7,611
Other current assets 215 298
Total current assets 9,251 8,686

Non-current assets
Tangible fixed assets
Property, plant, and equipment 31,477 28,836
Less accumulated depreciation 8,755 7,475
Net tangible fixed assets 22,722 21,361
Long-term investments 253 509
Other long-term assets 460 313
Total non-current assets 23,435 22,183
Total assets 32,686 30,869

LIABILITIES AND SHAREHOLDERS’ 2023 2022

EQUITY
Current liabilities
Debt due for repayment 1,021 1,104
Account payable 4,543 4,137
Other current liabilities 2,458 2,510
Total current liabilities 8,022 7,751

Long-term debt 5,039 5,576

Deferred income taxes 660 670
Other long-term liabilities 910 774
Total liabilities 14,631 14,771

Common stock 735 729

Retained earnings and capital surplus 17,320 15,369
Total shareholders’ equity 18,055 16,098
Total liabilities and shareholders’ equity 32,686 30,869

Income statement 2023

Net sales 90,000
Cost of goods sold 60,000

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 Selling, general, and administrative expenses 15,000
Depreciation 2,000
Earning before interest and taxes (EBIT) ?
Interest expense 500
Earning before taxes (EBT) ?
Tax (20%) ?
Net Income ?

Dividends (20%) ?
Addition to retained earnings (80%) ?

a) Fill in the blank (?) of the Income statement.

b) Calculate the following financial ratios:
• Return on asset (ROA), return on equity (ROE), profit margin
• Current ratio, quick ratio, cash ratio
• Debt ratio, Debt-to-equity ratio, Long-term debt ratio, times-interest-earned,
cash coverage ratio
c) Calculate: Average inventory period, Average collection period, Average payment
period, Cash cycle

CHAPTER 9: WORKING CAPITAL MANAGEMENT

EX1: High-Rise Building Company uses 400,000 tons of stone per year. The carrying costs
are $100/ton. The cost per order is $500. Calculate the optimal order size.
EX2: ABC Company sells 6,760 machines per month. The carrying costs are $30/unit. The
cost per order is $50. Calculate the optimal number of orders per year. Know that company
operates 360 days a year.
a) Calculate EOQ
b) How many times does the company reorder?
c) How long does an order last?
d) Calculate total inventory cost
EX3:
On a $100 sale, with terms 5/10 net 60, what is the implied interest rate on the credit given?
EX4: The default rate of Don’s new customers has been running at 8%. The average sale
for each new customer amounts to $1,500, generating a profit of $350. What is the expected
profit from each new customer?
EX5: The default rate of Don’s new customers has been running at 8%. The average sale
for each new customer amounts to $1,500, generating a profit of $350 and 50% chance of
a repeat order next year. The default rate on repeat orders is only 3%. If interest rate is 6%,
what is the expected profit from each new customer?

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 CHAPTER 10: FINANCIAL PLANNING
EX1: The financial statements in 2022 and 2023 of the company ABC included the
following items. What was ABC’s cash cycle? The unit currency is dollar million.
2022 2023

Inventory $15,547 $12,625

Receivables $20,113 $18,729

Payables $14,969 $14,417

2023

Sales $55,656

Cost of good sold $41,454

EX2: A company has accounts receivable of $50,000, inventory of $65,000, sales of

$450,000, and cost of goods sold of $330,000. How long does it take the company to sell
its inventory and collect payment on the sale?
EX3: Construct a table sources of cash. Know that the sales in the last quarter of year 2022
were $150 million and receivables at the start of the 1st quarter in 2023 is $200 million.
The sales (in millions) in 4 quarters of 2023 are expected to be $800; $900; $700; $500,
respectively. Assume that 55% of sales are cashed in the immediate quarter and the
remaining of sales are cashed in the following quarter.
EX4: A company has forecast sales in the first 3 months of the year as follows (figures in
millions): January, $60; February, $80; March, $100. 60% of sales are usually paid for in
the month that they take place and 40% in the following month. Receivables at the end of
December were $24 million. What are the forecasted collections on accounts receivable in
March?
EX5: A company has forecast sales in the first 3 months of the year as follows (figures in
millions): January, $80; February, $60; March, $40. 70% of sales are usually paid for in
the month that they take place, 20% in the following month, and the final 10% in the next
2 month. Receivables at the end of December were $23 million. What are the forecasted
collections on accounts receivable in March?

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EX6: Company A has forecast sales in the 3 months of the year as follows: June: 120 mil
VND; July: 130 mil VND; August: 180 mil VND. 60% of sales are usually paid for in the
month that they take place and 40% in the following month. Receivables at the end of May
were 60 mil VND.
a) What are the forecasted collections on accounts receivable in August?
b) What are the receivables at the end of August?
EX7:

1st quarter 2nd quarter 3rd quarter 4th quarter

Receivables at start
200
of period (mil VND)

Sales (mil VND) 500 900 700 400

We assume that sales in the last quarter of the previous year were 100 mil VND.
Assume that 65% of sales are cashed in in the immediate quarter and 35% are cashed in
the following quarter.
• Use of cash:
1st quarter 2nd quarter 3rd quarter 4th quarter

Payment on AP 250 280 320 260

Increase in inventory 150 150 170 180

Labor and other expenses 110 110 110 110

Capital expenditures 70 20 35 49

Taxes, interest and dividends 66 66 66 66

Total uses 646 626 701 665

a) Calculate receivables at the end of period?

b) Construct table showing cumulative financing requirement in this year.
We assume that minimum operating cash balance is 100 million VND and cash at start of
the period is 110 million VND.

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EX8: On Jun 1st, a firm had a beginning cash balance of $300. May sales were $780 and
Jun sales were $610. During Jun the firm had cash expenses of $160 and payments on
accounts payable of $320. The accounts receivable period is 30 days. What is the firm's
beginning cash balance on July 1st?
EX9: A company has net cash inflow for the quarter of $1,500. Knowing that the beginning
cash balance is $450 and the minimum cash in each quarter is $150. The company has a
short-term debt of $1,000 with the quarter interest rate of 4%. How much does the firm
borrow or repay on its loan to have a zero cumulative cash surplus for the quarter?
EX10: Complete the Cash Budgeting (Unit: dollar)
Sales Purchases
May 180 May 50

Credit 1 month Credit 1 month

Sales policy:
+ For cash: 60%
+ For credit: 40%
June July August
1. Total sales 300 320 280
2. Purchases of
materials
+ For cash 70 80 60
+ For credit 40 30 40
3. Other expenses 30 30 30
4. Taxes, interest… 10 10 10
5. Capital investment 100 0 0
Assume that minimum cash for each month is $100. The cash at start of June is $60.

EX11: Half the company’s sales are for cash on the nail; the other half are paid for with a
one-month delay. The company pays all its credit purchases with a one-month delay. Credit
purchases in January were $30, and total sales in January were $180. Complete the cash
budget.
Assume that minimum cash for each month is $100.

Feb Mar Apr

Total sales $200 $220 $180

Purchase of materials
+ For cash $70 $80 $60
+ For credit $40 $30 $40

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Other expenses $30 $30 $30

Taxes, interest, and dividends $10 $10 $10

Capital investment $100 0 0

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