Tri Vi Dang

Corporate Finance

Columbia University
Fall 2013

Answer Key 1
Solution 1(a)

r
0,2

1+r
1,2

A
PV(A)

t=1
3
2,50

t=2
1
0,69

t=3
10
5,79

8,98

B
PV(B)

2
1,67

4
2,78

10
5,79

10,23

Solution 1(b)

3
1
10
2
4
10

2
3
2
1 r (1 r )
(1 r )
1 r (1 r )
(1 r ) 3

3
1
2
4

2
1 r (1 r )
1 r (1 r ) 2

3(1 r ) 1 2(1 r ) 4

(1 r ) 3

r2

For r>200%, PVA>PVB.

Solution 1 (c)
PV as a function of r
18,00

Present value PV

16,00
14,00

12,00
10,00

PV(A)

8,00

PV(B)

6,00
4,00
2,00

0,00
0,0

1,0

2,0

3,0

Interest rate r

Solution 1 (d)

10

2
x
10

2
1.25 1.25 1.253

x=5.125

Solution 1(e)

3
1
10

10.037
1.1 1.1 1.2 1.1 1.2 1.1

10.037

3
1
10

2
(1 y ) (1 y )
(1 y ) 3

Use e.g. Excel to find a solution of this cubic equation:

y=0.1298

Solution 2(a)

t=0
t=1
t=2
t=3
t=4
t=5
t=6
t=7
t=8
t=9
t=10

Plan A
50000,0
53000,0
56180,0
59550,8
63123,8
66911,3
70926,0
75181,5
79692,4
84473,9
89542,4
159386,0

Plan B
100000,0
102000,0
106080,0
114566,4
137479,7
138854,5
140243,0
141645,5
143061,9
144492,5
145937,5
145937,5

50000,0
52000,0
54080,0
56243,2
58492,9
60247,7
62055,1
63916,8
65834,3
67809,3
69843,6

Investor can consume 13,448.5 more.

Solution 2(b)
1+r
t=10
t=9
t=8
t=7
t=6
t=5
t=4
t=3
t=2
t=1
t=0

1,01
1,01
1,01
1,01
1,01
1,01
1,2
1,08
1,04
1,1140

Plan B
159386,0
157807,9
156245,5
154698,5
153166,8
151650,3
150148,8
125124,0
115855,6
111399,6
100000,0

r1=11.40%

Solution 3(a)

Cash flow
Costs
Profit
PV
NPV

t=0

t=1

t=2

t=3

-20

10,00
-12,00
-2,00

20,00
-10,00
10,00

40,00
-3,00
37,00

-1,82

8,26

27,80

34,24
14,24

Solution 3(b)
The profit the entrepreneur can make has a PV of $14.24 million. He does not accept any
price less than this amount and the private equity firm is not willing to pay more than this
amount.

Solution 4(a)

AA Bond
r=0,014

Price
133,23

t=1
10,00

t=2
10,00

t=3
10,00

t=4
110,00

117,73

10,00

10,00

10,00

110,00

B Bond
r=0,05

Solution 4(b)
A firm with AA rating raises the total amount of $133.23 million.
A B rated firm raises $117.73 million and thus has to raise $15.50 million or about 131,657
more units of the bonds.