Midterm test

Chapter 1 to chapter 5

Chapter 1 : introduction
Chapter 2,3: Time value of money

FV = PV ( 1+r)^n
FV = PV (1+ r.n)

 PV , r , n
Chapter 4: bond valuation
BP = C (1/r – 1/r (1+r) ^n) +FV/(1+ r)^n
Current yield = r = C/BP
YTM
Rate of return = ( Coupon income + Price change ) /Inv
Price change = Psell – Pbought
Investment = Pbought
Chapter 5: Stock valuation
P0 = D (1/r – 1/r(1+r)^n) + Pn/(1+r) ^n
P0 = D1/ (1+r) + D2/(1+r)^2+...+ Dn/(1+r)^n+Pn/(1+r)^n
Expect return =r = (D1 +price change)/ P0
Price change = Psell – Pbought (P0)
Perpertuity without growth: P0 = D1/r
With growth: P0 = D1/(r-g)

Chapter 6
NPV : net present value = FV – PV of CF => NPV = -PV +FV
WACC = Weighted Average Cost of Capital
TA = L + E
= % L + %E
P0 = D1/ (1+r) + D2 / (1+r)^2+ ....... + Dn/ (1+r)^n + Pn/ (1+r)^n
WAC = r
IRR : internal rate of return
PI : profitability index
Payback : pay the money back to you : how many years ( months) dose the money
back to
WACC = ( weight of Equi x Cost of Equity ) + (Weight of Debt x Cost of Debt x
( 1-T))
WACC = %We x %Ce + %Wd x %Cd ( 1-T)

Equity : 400m
Debt : 200m
We and Wd ?
We = 400/600 = 0.67
Wd= 200/600 = 0.33
Ce = 6% , Cd = 15%
WACC?
WACC= %We x %Ce +%Wd x %Cd ( 1- T)
WACC= 0.67x 6%+ 0.33 x 15% =12%/ year

Invest : $50
Receive : $60 in one year
Simple : profit = $10 => rate of returen = 10/50 = 20%

Profit = -50 + 60/(1+r) = $4.55 => rate of return = 4.55/50 < 10%
NPV = -I0 +C1/(1+r) +C2/ (1+r)^2 + ..... + Cn/ (1+ r) ^n
NPV = -350000 +400000/ (1+ 7%) = ? > 0 => accept the project
<0 => reject the project
Higher rick , higher expected return
NPV = -I0 +C1/(1+r ) + C2/(1+r )^2+ ....+ Cn/ (1+r)^n

A house :
$ 16,000/year => 3 years
Sell : $450,000
7% opportunity cost
Buliding payment?
$ 409, 323
Pay $350,000 (-I0)
NPV =
 1.
WACC= %We x %Ce + %Wd x%Cd (1-T)
= 40%/100% x10% + 60%/100% x 15%(1-35%)
= 0,0985
2.
NPV= -100000+ 20000/(1+10%) +30000/(1+10%)+40000/(1+10%)+
40000/(1+10%) +40000/(1+10%)= $25185.2 > 0
 Accept project