CHAPTER 2 How to Calculate Present Values Answers to Problem Sets 1. If the discount factor is .507‚ then .507*1.126 = $1 2. 125/139 = .899 3. PV = 374/(1.09)9 = 172.20 4. PV = 432/1.15 + 137/(1.152) + 797/(1.153) = 376 + 104 + 524 = $1‚003 5. FV = 100*1.158 = $305.90 6. NPV = -1‚548 + 138/.09 = -14.67 (cost today plus the present value of the perpetuity) 7. PV = 4/(.14-.04) = $40 8. a. PV = 1/.10 = $10 b. Since the perpetuity will be worth $10 in year
Premium Time value of money
if debt carries no market risk 1.5 Cost of Debt rD = rf + Credit Spread 1.6 Cost of Equity CAPM: rE = rf + βE(rm-rf) 1.7 Cost of Capital (WACC) • Capital structure components should be measured on a market value basis‚ not a book value or historic basis • Use a target capital structure rather than the current or historic capital structure • T always means the incremental tax-rate • Debt includes long-term debt‚ financing leases‚ short-term debt‚ operating
Premium Net present value Finance Discounted cash flow
building site and building a new building on the property. The projected cost for the new building is $14 million‚ according to the vice president of marketing. The problem with the vice president’s proposal is that he does not take into account time value of money. The Executive Vice President has an argument for the vice president of marketing‚ stating that Guardian Insurance is willing to purchase the building site‚ construct the building‚ and install all fixtures to Wyndham Store’s specifications
Premium Net present value Investment Time value of money
Your test grade is 92 percent | The professor has configured this test to allow students to review: * Questions answered incorrectly. * Questions answered correctly. * Students answers. * Correct answers. Question 1 - Multiple Choice ID: 5129112 | Correct | | Question: The most commonly quoted interest rate for Eurodollar overnight lending is known as | | | | FIBOR | | LIBOR | | PIBOR | | None of the above | | | Question 2 - Multiple Choice ID:
Premium Net present value Bond Cash flow
THE PRINCIPLES OF CORPORATE FINANCE CHAPTER 1: The time value of money We are going to link the present and the future by using the notion of interest rate that could be called discount rate‚ required rate of return or cost of capital. Finance is all about cash flows but more precisely about the exact date of the realization of the cash flow. I) PRESENT VALUE Example 1: What is the value today of $110 to be received in one year? - suppose the interest rate ‚ r =10%
Premium Net present value Time value of money Internal rate of return
FIN 600 – Lecture 3 Discounted Cash Flow Valuation Chapter Outline Time Value of Money Valuation: The One-Period Case The Multiperiod Case Compounding Periods Simplifications What Is a Firm Worth? Time Value of Money A dollar received today is worth more than a dollar received in the future. Interest - is the return you receive for investing your money. The interest rate is the basis for a test that any proposed investment must pass. Example: Putting
Premium Time value of money Net present value Compound interest
6 1 =(250‚0 00*1/21 )=11‚90 5 138‚095. 00 0 8.6% 2.a. Explain the mechanism of calculating the present value of cash flows.What is annuity due? How can you calculate the present and future values of an annuity due? Illustrate Ans. Money has time value: e.g. Rs 1‚000 received today is not the same after year Present value of cash flow: It shows the value of expected amount at current value. Discount rate = Inflation rate + required rate of return + risk free premium rate Details required
Premium Time value of money Net present value Rate of return
4-5‚ Market Value = $20 X 1.2 = $24 P/E = $24 / $2 = 12.0 4-14‚ EBIT = $1‚000‚000 -Interest $300‚000 EBT $700‚000 Tax @ 34% $238‚000 Net Income $462‚000 Asset turnover ratio = total revenue / total assets 2 = $10000000 / total assets Total Assets = $5000000 Equity ratio = 1 – debt ratio Equity ratio = 40% Total Equity = equity ratio x total assets Total equity = 40% x $5000000 Total equity = $2000000 Return on Equity = $462000 / $2000000 Return on Equity = 23.10% 4-18
Premium Time value of money Financial ratios Financial ratio
ACC4053 | Financial Analysis CONTENTS 1. Introduction 2. Valuation of the Company 2.1 An evaluation of BAE Systems’ current position and its future prospects 2.2 Assessment of the value of BAE Systems based on the application of suitable cash flow based valuation techniques 2.3 Assessment of the value of BAE Systems based on the application of suitable accounting based valuation techniques 3. Comparison of the valuation with the ‘market’ valuation 4. Appendices 4.1 Appendix 1: PEST
Premium Dividend yield Investment Lockheed Martin
supporting calculations where appropriate. If you provide alternative answers to Questions 3‚ 4‚ 5‚ or 6‚ only the first answer will be marked. If you wish to change your answer‚ you must cross out the answer you do not wish to submit for marking. Time: 4 Hours 2. 3. 12 Question 1 Note: 2 marks each a. Which of the following is least likely to increase market efficiency? 1) Governments relax restrictions on foreign investment. 2) Corporations disseminate more information to investors
Premium Net present value Rate of return Cash flow