Math-Based Quiz Questions Worked Out

Math-based quiz questions worked out:
Q1 Ch5
1 $ 1,494.52 Minutes/Point
2$ 73,926.72 2.5
$ 86,898.21
$ 12,971.49
7 8.68%
8 8.39%
Q2 Ch6
1 0.001538461538462 Annual Percentage Rate = rate/period x # of periods per year
$20,046.80
2 $ 1,250,000.00
3 EPR 0.002916666666667
PMT $2,002.49
Balance with 5 years/60 payments remaining
$110,077.09
4 EPR 0.00625
PMT $812.89
Total paid $243,867.09
Interest $133,867.09
Q3 Ch7
1 $1,025.32 $886.37
2 $765.71
3 6.24%
4 8.20%
Midterm
7 $ 80
8 $ 17,988
9 $ 421,000
$ 342,000
$ 33,000
$ 18,000
$ 28,000
$ 9,520
$ 18,480
10 $ 210,700
11 $ 362
13 7.14%
14 $484,938.92
$20,668.70
$4,331.30 *41 years, not 40
15 EPR1 0.050945336914063 23215.090354

EPR2 0.009950493836208 $30,650.45
EPR3 0.035566952945971 $30,833.94
18 $ 500.00
$ 481.76
$ 18.24
19 $ 10,166.40
20 $12,253.14
21 90,000 C
0.050 r - per year
0.020 g
40 t, in years
$2,059,072 = PVAG = (C/(r-g)) * (1-((1+g)/(1+r))^t)
22 8.30%
23 7.60%
25 $ 386.20
26 3.88%
31 $ 25.31
36-40, written answers solutions for these can be found in Canvas, when you review the midterm. Q36 and Q40 are
solved here because they are a bit tricky.
36 FV1-5 at 5 $488,408.00 FV at 50
FV 6-20 at 20 $3,018,385.76
FV21-50 $17,271,872.38
39 EPR 0.0038 0.0038

PMT $1,787.42 $1,627.83
Total paid $ 428,980 $ 390,678
Interest paid $ 148,980 $ 135,678
Interest saved $ (13,302)
40 5,000 C
0.072 r (per period) 0.0723
0.025 g 0.0252
35 t (in periods)
967,485 = FVAGROWTH = P * (((1+r)^n - (1+g)^n) / (r-g))

726,666 = FVA
rate/period x # of periods per year
Minutes/Point
3.1
Minutes/Point
3.1
Minutes/Point
2.0
*This is a bit tighter than I thought. I will make sure that you have more time per
point for the final exam.*
Math % of total points

53%
+g)/(1+r))^t)
e midterm. Q36 and Q40 are
$35,600,295.36
$52,669,027.35
$17,271,872.38
$105,541,195.08
n - (1+g)^n) / (r-g))
Links to recordings of live discussions in Zoom
Date Topic
4-Jan-22 Introduction, Ch1, Ch2
6-Jan-22 Ch5, Intro to Ch6
7-Jan-22 Ch6 conclusion and financial planning exercise
10-Jan-22 Ch7, Intro to Ch8
12-Jan-22 Ch12/13 lecture
13-Jan-22 Ch9 intro, things to watch for in Ch10, post midterm townhall
15-Jan-22 Ch9, Ch9 minicase - 9AM Saturday live discussion
Ch10, Ch10 minicase - 1pm Saturday live discussion
3:15pm Saturday
MBA825 Post - Midterm Schedule
Monday, January 17, 2022

4PM - 4:25PM Ch9 quiz Canvas
4:25PM - 5:20PM Ch18/19/20 recorded lecture Panopto
5:20PM - 5:45PM Time to work on problems Individual
5:45PM - 6PM Break
6PM - 8PM Ch18/19/20 live discussion Zoom
Saturday, January 15, 2022 *Tentative

9AM - 10:15AM Ch9 live discussion, intro Ch10 Zoom
10:15AM - 11:15AM Ch10 recorded lecture Panopto
11:15AM - 12PM Time to work on problems Individual
12PM - 1PM Lunch break
1PM - 2:15PM Ch10 live discussion Zoom

2:15PM - 3:00PM Ch11 recorded lecture Panopto
3:00PM - 3:15PM Break
3:15PM - 4:30 Ch11 live discussion Zoom
Comments re: Ch.18/19/20
Thursday, January 13, 2022

4pm - 6pm Midterm exam Canvas
6:15pm - 7:15pm Ch9 recorded lecture Panopto
7:30pm - 8pm Tutorial Zoom
Abby's Retail Limited
Income Statement
For the year ended December 31, 2021
Sales Revenue $ 1,000,000

less:
Cost of Goods Sold 575,000
Gross Profit $ 425,000
Expenses:
Operating Expenses $ 225,000
Marketing Expenses 25,000
Administrative Expenses 25,000
Total Expenses 275,000
EBIT $ 150,000
Interest Expense 15,000
EBT $ 135,000
Taxes 27,000
Net Income $ 108,000
Note: Depreciation Expense = $10,400

Statement of Changes in Retained Earnings
For the year ended December 31, 2021
Retained Earnings, January 1 $ 20,000

Add:
Net Income 108,000
Total $ 128,000
less:
Dividends Declared and Paid 120,000
Retained Earnings, December 31 $ 8,000
Balance Sheet
As at December 31
Assets
2021 2020
Current Assets:
Cash $ 36,900 $ 16,000
Accounts Receivable 6,000 4,000
Inventory 44,000 50,000
Prepaid Expenses 2,000 2,000
Total Current Assets $ 88,900 $ 72,000
Fixed Assets:
Fixtures and Equipment $ 90,000 $ 80,000
less: Accumulated Depreciation 68,000 60,000
Net Fixtures and Equipment 22,000 20,000
Building $ 120,000 $ 120,000
less: Accumulated Depreciation 62,400 60,000
Net Building 57,600 60,000
Total Fixed Assets $ 79,600 $ 80,000
Total Assets $ 168,500 $ 152,000
Liabilities
2021 2020
Current Liabilities:
Accounts Payable $ 30,500 $ 19,000
Taxes Payable 35,000 8,000
Total Current Liabilities $ 65,500 $ 27,000
Long-term Liabilities:
Business Loan $ 25,000 $ 35,000
Mortgage on Building 57,500 60,000
Total Long-term Liabilities 82,500 95,000
Total Liabilities $ 148,000 $ 122,000
Shareholders' Equity
2021 2020
Contributed Capital (Common Shares) $ 12,500 $ 10,000
Retained Earnings 8,000 20,000
Total Shareholders' Equity $ 20,500 $ 30,000
Total Liabilities and Shareholder's Equity $ 168,500 $ 152,000

Building a Balance Sheet: Oakville Ostrich Farm has current assets of $4,000, NFA of $22,500, current liabilities of $3,400, and long-
term debt of $6,800. What is the value of the shareholders' equity account for this firm? How much is net working capital?
Balance sheet, as at December 31.
CA $ 4,000 CL $ 3,400
NFA 22,500 LTD 6,800
Total assets $ 26,500 Owner equity 16,300
TL & OE $ 26,500
NWC = CA - CL $ 600
Building an Income Statement: Roach Exterminators Inc. has sales of $634,000, costs of $305,000, depreciation expense of $46,000,
interest expense of $29,000, and a tax rate of 35 percent. What is the net income for this firm?
Sales 634,000 634,000
Costs 305,000 305,000
Depreciation 46,000 46,000
EBIT (Earnings before interest and tax 283,000 283000
Interest 29,000
EBT (Earnings before tax) 254,000 Tax rate:
Taxes 88,900 35%
Net income 165,100
Dividend declared & paid $ 86,000
Operating cash flow (OCF):

=EBIT + depreciation - tax 240,100
Dividends and Retained Earnings: Suppose the firm in the problem above paid out $86,000 in cash dividends. What is the addition to
retained earnings?
Net income = Dividends + Addition to Retained Earnings

Rearranging: Addition to retained earnings = Net income - Dividends = $165,100 - 86,000
$ 79,100 = Addition to retained earnings
Per-Share Earnings and Dividends: Suppose the firm in the problem above had 30,000 shares of common stock outstanding. What is
the earnings per share, or EPS, figure? What is the dividends per share figure?
EPS = Net income/shares $ 5.50 per share
DPS = Dividends/shares $ 2.87 per share
Market values and book values: Klingon Widgets Inc. purchased new cloaking machinery three years ago for $7 million. The
machinery can be sold to the Romulans today for $3.7 million. Klingon's current balance sheet shows net fixed assets of $2.6 million,
current liabilities of $1.3 million, and net working capital of $410,000. If all the current assets were liquidated today, the company
would receive $1.8 million cash. What is the book value of Klingon's assets today? What is the market value?
NWC = CA - CL CA = NWC + CL $ 1,710,000
*Sorry - the book value for CA is $1,710,000…argh! Mixed them up again!
Book value CA 1,710,000 Market value CA 1,800,000
Book value NFA 2,600,000 Market value NFA 3,700,000
Book value assets 4,310,000 Market value assets 5,500,000
Calculating OCF: Prather Inc. has sales of $14,200, costs of $5,600, depreciation expense of $1,200, and interest expense of $680. If
the tax rate is 35 percent, what is the operating cash flow, or OCF?
Sales 14,200
Costs 5,600
Depreciation 1,200
EBIT 7,400
Interest 680
EBT 6,720 Tax rate:
Taxes 2,352 35%
Net income 4,368
OCF = $ 6,248 =EBIT + Depreciation - taxes
Calculating Net Capital Spending: Two years ago, Mratz Driving School's balance sheet showed net fixed assets of $4.6 million, and
last year's balance sheet showed net fixed assets of $5.2 million. The company's income statement last year showed a depreciation
expense of $875,000. What was net capital spending last year?
Net capital spending = NFAEND - NFABEG + Depreciation
Net capital spending $ 1,475,000
Calculating Changes in NWC: Two years ago the balance sheet of Pop Star Records Inc. showed current assets of $1,400 and current
liabilities of $870. Last year's balance sheet showed current assets of $1,650 and current liabilities of $920. What was the company's
change in net working capital or NWC last year?
Change in NWC = NWCEND - NWCBEG
Change in NWC = (1,650 - 920) - (1,400 - 870)
Change in NWC: $ 200
Verifying that the cash flow identity holds:

Calculating total cash flows: Calculate the values for the cells highlighted in green, using the information supplied:
Sales 162,000
Costs 93,000
Depreciation 8,400
Other expenses 5,100
EBIT 55,500
Interest 16,500
EBT 39,000 Tax rate:
Taxes 14,820 38%
Net income 24,180
Dividends 9,400
Additions to retained earnings 14,780
Given: Long term debt repaid = 6,400

Cash flow to creditors (CFC) $ 22,900
Given: Net new equity = 7,350

Cash flow to shareholders (CFS) $ 2,050
Cash Flow from Assets (CFA).

CFA = $ 24,950
CFA is also equal to: OCF - Net capital spending - Change in NWC
Operating Cash Flow (OCF or CFO) 49,080 *OCF = EBIT + Depreciation - taxes
New information: NFA increased by $12,000 during the year

Net capital spending = Increase in NFA + Depreciation
$ 20,400
Cash flow from assets = Operating cash flow - Net capital spending - Net working capital spending, therefore:
Change in NWC = OCF - Net capital spending - Cash flow from assets
Solving for NWC: $ 3,730
Check: does it all work out? $ 24,950

Yes. OCF - NCS - NWC spending = CFA
From ch2 Table 2.5 page 38, progressive tax calculation

Take a taxpayer with $150,000 income Federal tax rates Tax owed:
Up to $42,707 15% $ 6,406
$42,708 - 85,414 22% $ 9,396
$85,415 - 132,406 26% $ 12,218
$132,407 and over 29% $ 5,102
Total Tax owed: $ 33,122 Incorrect: $ 43,500
Average tax rate 22%
Marginal tax rate: 29%
CCA table example

Year Beginning UCC 20%CCA Ending UCC Tax shields
1 1,000,000 100,000 900,000 1
2 900,000 180,000 720,000 2
3 720,000 144,000 576,000 3
4 576,000 115,200 460,800 4
5 460,800 92,160 368,640 5
This calculation can be initiated a little differently however the impact is the same. For example:
Capital Cost Allowance Schedule
Cost of Capital Asset $ 1,000,000

CCA Rate 20%
Half-year rule applies in year of acquisition.
Asset amortized using the declining balance method.
Year Beginning UCC Additions CCA

1 $ 1,000,000 $ 100,000
2 900,000 180,000
3 720,000 144,000
4 576,000 115,200
5 460,800 92,160
6 368,640 73,728
7 294,912 58,982
8 235,930 47,186
9 188,744 37,749
10 150,995 30,199
If the asset is sold in year 10 for more than $120,796, we would have a recapture; the difference between the selling price
and the closing UCC would be added to taxable income.
If the asset is sold in year 10 for less than $120,796, we would have a terminal loss; the difference between the selling price
and the closing UCC would be deducted from taxable income.
Closing
UCC Tax shield each year 25%
$ 900,000
720,000
576,000
460,800
368,640 23,040
294,912
235,930
188,744
150,995
120,796
Total:
ce between the selling price
ence between the selling price

7/5/Q1
Simple interest versus compound interest: Bank of Vancouver pays 6 percent simple interest on its savings account
balances, whereas Bank of Calgary pays 6 percent interest compounded annually. If you made a $5,000 deposit in
each bank, how much more money would you earn from your Bank of Calgary account at the end of 10 years?
1 After 10 years:
Bank of Vancouver $ 300 interest per year
$ 3,000 interest over 10 years $ 8,000 FV, bank of Vancouver
Bank of Calgary
1 2 3 4 5 6 7 8 9 10
5,000 5,300 5,618 5,955 6,312 6,691 7,093 7,518 7,969 8,447
5,300 5,618 5,955 6,312 6,691 7,093 7,518 7,969 8,447 8,954
8,954 Future value

8,954 Future value, by formula
8,954 By Excel
Calculating future values: For each of the following, compute the future value: 7/5/Q2
Future Value, by
PV Years Interest Rate Future Value formula FV = PV * (1 + r)t
$ 2,250 16 10% $10,339 $10,339 By formula
$ 8,752 13 8% $23,802 $23,802 By cell reference
$ 76,355 4 17% $143,081 $143,081 *Longhand, by calculator
$ 183,796 12 7% $413,944 $413,944 Entering nominal values
Calculating future values: You are scheduled to receive $25,000 in two years. When you receive it, you will invest it
for six more years at 7.9 percent per year. How much will you have in eight years? 7/5/Q19
PV Years Interest Rate Future Value
$ 25,000 6 7.90% $ 39,452 39,452
Calculating present values: For each of the following, compute the present value: 7/5/Q3
t
To find the PV of a lump sum: PV = FV/(1+r)
PV can also be found as: PV = FV(1+r) -t
PV, by formula PV, by Excel Years Interest Rate FV

$ 12,211 $12,211 6 4% $ 15,451
$ 24,833 $24,833 7 11% $ 51,557
$ 13,375 $13,375 23 20% $ 886,073
$ 60,965 $60,965 18 13% $ 550,164
Calculating interest rates: Solve for the unknown interest rate in each of the following: 7/5/Q4
Interest Rate, by
PV Years Interest Rate FV Excel r=(FV/PV)(1/t)-1
$ 240.00 2 13.10% $ 307.00 13.10% 13.10%
$ 360.00 10 9.55% $ 896.00 9.55% 9.55%
$ 39,000.00 15 10.50% $ 174,384.00 10.50% 10.50%
$ 38,261.00 30 8.82% $ 483,500.00 8.82% 8.82%
Calculating the number of periods: Solve for the unknown number of years in each of the following: 7/5/Q5
PV Years Interest Rate FV Years, by Excel
$ 560.00 10.78 8.0% $ 1,284.00 10.78 10.78
$ 810.00 19.48 9.0% $ 4,341.00 19.48 19.48
$ 18,400.00 15.67 21.0% $ 364,518.00 15.67 15.67
$ 21,500.00 17.08 13.0% $ 173,439.00 17.08 17.08
t = ln(FV/PV)/ln(1+r)
Calculating interest rates: Solve for the unknown interest rate in each of the following: 7/5/Q6
50,000.00 18 10.04% 280,000.00 r = (FV/PV)^(1/t)-1
50,000.00 18 10.04% 280,000.00 r = (FV/PV)^(1/t)-1 *cell referencing
50,000.00 18 10.04% 280,000.00 By Excel
Calculating the number of periods: Solve for the unknown number of years in each of the following: 7/5/Q7
1 8.04 9.00% 2
Calculating interest rates: Solve for the unknown interest rate : 7/5/Q8
21,608 5 5.29% 27,958
PV Years Interest Rate Future Value 7/5/Q9

40,000 24.05 6.20% 170,000
PV Years Interest Rate Future Value 7/5/Q17

$59,871 10 11.00% 170,000
Example, with multiple level cash flows

The question here is: with deposits of $1,000 at times 1 through 5, what will the final balance in the account be?
0 1 2 3 4 5
1,000 1,000 1,000 1,000 1,000
8.00%
FV = $1,360 $1,260 $1,166 $1,080 $1,000
Total FV = $5,866.60
*In chapter 6 we see that this is an annuity. We can use the same "FV" function in excel, just enter $1,000 as the regular payment:
$5,866.60
Example
0 1 2 3 4 5
1,000 1,000 1,000 1,000 1,000
8%
PV, each separately $ 926 $ 857 $ 794 $ 735 $ 681
Total PV = $ 3,993
*In chapter 6 we see that this is an annuity. We can use the same "PV" function in excel, just enter $1,000 as the regular payment:
$ 3,993
Example from Chapter 5 slides:
0 1 2 3
400 889 432
12%
$1,373.34 $357.14 $708.71 $307.49
Total PV
Investment cost:
$ 1,243.00
Is this a good deal?
Present value and multiple cash flows: Seaborn Co. has identified an investment project with the following cash flows. If the
discount rate is 10 percent, what is the present value of these cash flows? What is the present value at 18 percent? At 24
percent? 7/6/Q1
Year Cash Flow
1 $ 1,100 $887.10 24% 18% 2619.72
2 720 $468.26 24% 2339.03
3 940 $493.02
4 1,160 $490.65
$2,339.03
FVA Example: Murray and Celina have an annuity where they receive $500 at the end of each year over 5 years. Calculate the future value, assuming they deposit each payment in
a bank account.
Time 0 1 2 3 4
Cash Flow 0 500 500 500 500
FVs $787 $702 $627 $560
12% Total FV
Present value and multiple cash flows: Investment X offers to pay you $7,000 per year for eight years. Investment Y offers to pay you $9,000 per year for five years. Which of these cash flow
streams has the higher present value if the discount rate is 5 percent? If the discount rate is 22 percent?
X: $7,000 per year, 5% annual, 8 years The PVA formula: PVA = C(1-(1/(1+r)t))/r
Y: $9,000 per year, 5% annual, 5 years
X@5%: $45,242.49 0 5%
Y@5%: $38,965.29 1 7,000 6,667
2 7,000 6,349
X@22%: $25,334.87 3 7,000 6,047
Y@22%: $25,772.76 4 7,000 5,759
5 7,000 5,485
6 7,000 5,224
7 7,000 4,975
8 7,000 4,738
45,242.49
Using a 22% discount rate:

0 22%
1 7,000 5,738
2 7,000 4,703
3 7,000 3,855
4 7,000 3,160
5 7,000 2,590
6 7,000 2,123
7 7,000 1,740
8 7,000 1,426
25,334.87
Calculating annuity future value: An investment offers $4,600 per year for 15 years, with the first payment occurring one year from now. If the required return is 8 percent, what is the value
investment? What would the value be if the payments occurred for 40 years? For 75 years?
# Periods Payment Rate per period FVA
15 4,600 8% 124,900
40 4,600 8% 1,191,660
75 4,600 8% 18,411,760
Annuity Future Values: Paradise Inc. has identified investments with the following cash flows. If the discount rate is .8 percent per period, what is the future value of these cash flows?
PV # Periods Payment Rate per period FVA
0 30 700 0.8% 23,628
0 20 950 0.8% 20,516
0 10 1,200 0.8% 12,441
Annuity present value: An investment offers $4,600 per year for 15 years, with the first payment occurring one year from now. If the required return is 8 percent, what is the value of the
investment? What would the value be if the payments occurred for 40 years? For 75 years? Forever?
PVA # Periods Payment Rate per period
39,374 15 4,600 8%
54,853 40 4,600 8%
57,321 75 4,600 8%
57,500 999 4,600 8%
*This last one is actually called a "Perpetuity". The PVPERPETUITY formula is: PVP = C/r
57,500 PV perpetuity, by formula.
Annuity present value: Your company will generate $65,000 in annual revenue each year for the next eight years from a new information database. If the appropriate interest rate is 8.5%, w
the present value of the savings?
PVA # Periods Payment Rate per period
366,547 8 65,000 9%
Calculating EAR: Find the EAR in each of the following cases:

Find the EAR in each of the following cases:
APR (stated rate) # of time compounded Effective Rate (EAR) Effective rate = (1 + APR/m)m/n - 1)
7% Quarterly 7.19%
18% Monthly 19.56%
10% Daily 10.52%
14% Infinite 15.03% *rough approximation (set m to a very large value)
15.03% EAR with infinite compounding: EAR = eq - 1
Calculating rates of return: An investment offers to triple your money in 12 months (don't believe it ;-) ). What rate of return per quarter are you being offered?
Hint: Since we are looking to triple our money, the PV and FV are irrelevant as long as the FV is three times as large as the PV. The number of periods is four, the number of quarters per year.
FV = $3 = $1(1+r)^(12/3) 31.61%
y deposit each payment in
5
500
$500
$3,176
$3,176
five years. Which of these cash flow
5%
9,000 8,571
9,000 8,163
9,000 7,775
9,000 7,404
9,000 7,052
38,965.29
22%
9,000 7,377
9,000 6,047
9,000 4,956
9,000 4,063
9,000 3,330
25,772.76
eturn is 8 percent, what is the value of the
ure value of these cash flows?
percent, what is the value of the

appropriate interest rate is 8.5%, what is
ffered?
ur, the number of quarters per year. So:

Mortgage Amortization Schedule
Principal $ 100,000 Total Paid

Interest rate 7.0% csa Interest
M: compounding periods 2
N: payments/year 12
Maturity 300 months
Rate per period 0.575% per month
Payment $700.42 per month
Opening
Period Principal Payment Interest Principal
1 100,000 700.42 575.00 125.41
2 99,875 700.42 574.28 126.13
3 99,748 700.42 573.56 126.86
4 99,622 700.42 572.83 127.59
5 99,494 700.42 572.09 128.32
6 99,366 700.42 571.36 129.06
7 99,237 700.42 570.61 129.80
8 99,107 700.42 569.87 130.55
9 98,976 700.42 569.12 131.30
10 98,845 700.42 568.36 132.05
11 98,713 700.42 567.60 132.81
12 98,580 700.42 566.84 133.58
13 98,447 700.42 566.07 134.34
14 98,312 700.42 565.30 135.12
15 98,177 700.42 564.52 135.89
16 98,041 700.42 563.74 136.68
17 97,905 700.42 562.95 137.46
18 97,767 700.42 562.16 138.25
19 97,629 700.42 561.37 139.05
20 97,490 700.42 560.57 139.85
21 97,350 700.42 559.77 140.65
22 97,209 700.42 558.96 141.46
23 97,068 700.42 558.14 142.27
24 96,926 700.42 557.33 143.09
25 96,782 700.42 556.50 143.91
26 96,639 700.42 555.68 144.74
27 96,494 700.42 554.84 145.57
28 96,348 700.42 554.01 146.41
29 96,202 700.42 553.16 147.25
30 96,055 700.42 552.32 148.10
31 95,906 700.42 551.47 148.95
32 95,757 700.42 550.61 149.81
33 95,608 700.42 549.75 150.67
34 95,457 700.42 548.88 151.53
35 95,305 700.42 548.01 152.41
36 95,153 700.42 547.13 153.28
37 95,000 700.42 546.25 154.16
38 94,846 700.42 545.37 155.05
39 94,691 700.42 544.47 155.94
40 94,535 700.42 543.58 156.84
41 94,378 700.42 542.68 157.74
42 94,220 700.42 541.77 158.65
43 94,061 700.42 540.86 159.56
44 93,902 700.42 539.94 160.48
45 93,741 700.42 539.02 161.40
46 93,580 700.42 538.09 162.33
47 93,418 700.42 537.16 163.26
48 93,254 700.42 536.22 164.20
49 93,090 700.42 535.27 165.14
50 92,925 700.42 534.32 166.09
51 92,759 700.42 533.37 167.05
52 92,592 700.42 532.41 168.01
53 92,424 700.42 531.44 168.97
54 92,255 700.42 530.47 169.95
55 92,085 700.42 529.49 170.92
56 91,914 700.42 528.51 171.91
57 91,742 700.42 527.52 172.89
58 91,569 700.42 526.53 173.89
59 91,395 700.42 525.53 174.89
60 91,220 700.42 524.52 175.89
61 91,045 700.42 523.51 176.91
62 90,868 700.42 522.49 177.92
63 90,690 700.42 521.47 178.95
64 90,511 700.42 520.44 179.97
65 90,331 700.42 519.41 181.01
66 90,150 700.42 518.37 182.05
67 89,968 700.42 517.32 183.10
68 89,785 700.42 516.27 184.15
69 89,601 700.42 515.21 185.21
70 89,415 700.42 514.14 186.27
71 89,229 700.42 513.07 187.35
72 89,042 700.42 511.99 188.42
73 88,853 700.42 510.91 189.51
74 88,664 700.42 509.82 190.60
75 88,473 700.42 508.72 191.69
76 88,281 700.42 507.62 192.79
77 88,089 700.42 506.51 193.90
78 87,895 700.42 505.40 195.02
79 87,700 700.42 504.28 196.14
80 87,504 700.42 503.15 197.27
81 87,306 700.42 502.02 198.40
82 87,108 700.42 500.87 199.54
83 86,908 700.42 499.73 200.69
84 86,708 700.42 498.57 201.84
85 86,506 700.42 497.41 203.00
86 86,303 700.42 496.25 204.17
87 86,099 700.42 495.07 205.34
88 85,893 700.42 493.89 206.53
89 85,687 700.42 492.70 207.71
90 85,479 700.42 491.51 208.91
91 85,270 700.42 490.31 210.11
92 85,060 700.42 489.10 211.32
93 84,849 700.42 487.88 212.53
94 84,636 700.42 486.66 213.75
95 84,423 700.42 485.43 214.98
96 84,208 700.42 484.20 216.22
97 83,991 700.42 482.95 217.46
98 83,774 700.42 481.70 218.71
99 83,555 700.42 480.45 219.97
100 83,335 700.42 479.18 221.24
101 83,114 700.42 477.91 222.51
102 82,891 700.42 476.63 223.79
103 82,668 700.42 475.34 225.07
104 82,443 700.42 474.05 226.37
105 82,216 700.42 472.75 227.67
106 81,989 700.42 471.44 228.98
107 81,760 700.42 470.12 230.30
108 81,529 700.42 468.80 231.62
109 81,298 700.42 467.46 232.95
110 81,065 700.42 466.13 234.29
111 80,830 700.42 464.78 235.64
112 80,595 700.42 463.42 236.99
113 80,358 700.42 462.06 238.36
114 80,119 700.42 460.69 239.73
115 79,880 700.42 459.31 241.10
116 79,639 700.42 457.93 242.49
117 79,396 700.42 456.53 243.89
118 79,152 700.42 455.13 245.29
119 78,907 700.42 453.72 246.70
120 78,660 700.42 452.30 248.12
121 78,412 700.42 450.87 249.54
122 78,163 700.42 449.44 250.98
123 77,912 700.42 447.99 252.42
124 77,659 700.42 446.54 253.87
125 77,405 700.42 445.08 255.33
126 77,150 700.42 443.62 256.80
127 76,893 700.42 442.14 258.28
128 76,635 700.42 440.65 259.76
129 76,375 700.42 439.16 261.26
130 76,114 700.42 437.66 262.76
131 75,851 700.42 436.15 264.27
132 75,587 700.42 434.63 265.79
133 75,321 700.42 433.10 267.32
134 75,054 700.42 431.56 268.85
135 74,785 700.42 430.02 270.40
136 74,514 700.42 428.46 271.95
137 74,243 700.42 426.90 273.52
138 73,969 700.42 425.32 275.09
139 73,694 700.42 423.74 276.67
140 73,417 700.42 422.15 278.26
141 73,139 700.42 420.55 279.86
142 72,859 700.42 418.94 281.47
143 72,578 700.42 417.32 283.09
144 72,295 700.42 415.70 284.72
145 72,010 700.42 414.06 286.36
146 71,723 700.42 412.41 288.00
147 71,435 700.42 410.76 289.66
148 71,146 700.42 409.09 291.32
149 70,854 700.42 407.42 293.00
150 70,561 700.42 405.73 294.68
151 70,267 700.42 404.04 296.38
152 69,970 700.42 402.33 298.08
153 69,672 700.42 400.62 299.80
154 69,373 700.42 398.89 301.52
155 69,071 700.42 397.16 303.25
156 68,768 700.42 395.42 305.00
157 68,463 700.42 393.66 306.75
158 68,156 700.42 391.90 308.52
159 67,848 700.42 390.13 310.29
160 67,537 700.42 388.34 312.07
161 67,225 700.42 386.55 313.87
162 66,911 700.42 384.74 315.67
163 66,596 700.42 382.93 317.49
164 66,278 700.42 381.10 319.31
165 65,959 700.42 379.27 321.15
166 65,638 700.42 377.42 323.00
167 65,315 700.42 375.56 324.85
168 64,990 700.42 373.69 326.72
169 64,663 700.42 371.82 328.60
170 64,334 700.42 369.93 330.49
171 64,004 700.42 368.03 332.39
172 63,672 700.42 366.11 334.30
173 63,337 700.42 364.19 336.22
174 63,001 700.42 362.26 338.16
175 62,663 700.42 360.31 340.10
176 62,323 700.42 358.36 342.06
177 61,981 700.42 356.39 344.02
178 61,637 700.42 354.41 346.00
179 61,291 700.42 352.42 347.99
180 60,943 700.42 350.42 349.99
181 60,593 700.42 348.41 352.01
182 60,241 700.42 346.39 354.03
183 59,887 700.42 344.35 356.06
184 59,531 700.42 342.30 358.11
185 59,173 700.42 340.24 360.17
186 58,812 700.42 338.17 362.24
187 58,450 700.42 336.09 364.33
188 58,086 700.42 334.00 366.42
189 57,719 700.42 331.89 368.53
190 57,351 700.42 329.77 370.65
191 56,980 700.42 327.64 372.78
192 56,607 700.42 325.49 374.92
193 56,233 700.42 323.34 377.08
194 55,855 700.42 321.17 379.24
195 55,476 700.42 318.99 381.43
196 55,095 700.42 316.80 383.62
197 54,711 700.42 314.59 385.82
198 54,325 700.42 312.37 388.04
199 53,937 700.42 310.14 390.27
200 53,547 700.42 307.90 392.52
201 53,154 700.42 305.64 394.78
202 52,760 700.42 303.37 397.05
203 52,363 700.42 301.09 399.33
204 51,963 700.42 298.79 401.62
205 51,562 700.42 296.48 403.93
206 51,158 700.42 294.16 406.26
207 50,752 700.42 291.82 408.59
208 50,343 700.42 289.47 410.94
209 49,932 700.42 287.11 413.30
210 49,519 700.42 284.73 415.68
211 49,103 700.42 282.34 418.07
212 48,685 700.42 279.94 420.48
213 48,264 700.42 277.52 422.89
214 47,842 700.42 275.09 425.32
215 47,416 700.42 272.65 427.77
216 46,988 700.42 270.19 430.23
217 46,558 700.42 267.71 432.70
218 46,126 700.42 265.22 435.19
219 45,690 700.42 262.72 437.69
220 45,253 700.42 260.20 440.21
221 44,812 700.42 257.67 442.74
222 44,370 700.42 255.13 445.29
223 43,924 700.42 252.57 447.85
224 43,477 700.42 249.99 450.42
225 43,026 700.42 247.40 453.01
226 42,573 700.42 244.80 455.62
227 42,117 700.42 242.18 458.24
228 41,659 700.42 239.54 460.87
229 41,198 700.42 236.89 463.52
230 40,735 700.42 234.23 466.19
231 40,269 700.42 231.55 468.87
232 39,800 700.42 228.85 471.57
233 39,328 700.42 226.14 474.28
234 38,854 700.42 223.41 477.00
235 38,377 700.42 220.67 479.75
236 37,897 700.42 217.91 482.51
237 37,415 700.42 215.14 485.28
238 36,929 700.42 212.35 488.07
239 36,441 700.42 209.54 490.88
240 35,950 700.42 206.72 493.70
241 35,457 700.42 203.88 496.54
242 34,960 700.42 201.02 499.39
243 34,461 700.42 198.15 502.26
244 33,959 700.42 195.26 505.15
245 33,453 700.42 192.36 508.06
246 32,945 700.42 189.44 510.98
247 32,434 700.42 186.50 513.92
248 31,920 700.42 183.54 516.87
249 31,404 700.42 180.57 519.84
250 30,884 700.42 177.58 522.83
251 30,361 700.42 174.58 525.84
252 29,835 700.42 171.55 528.86
253 29,306 700.42 168.51 531.90
254 28,774 700.42 165.45 534.96
255 28,239 700.42 162.38 538.04
256 27,701 700.42 159.28 541.13
257 27,160 700.42 156.17 544.24
258 26,616 700.42 153.04 547.37
259 26,069 700.42 149.90 550.52
260 25,518 700.42 146.73 553.69
261 24,964 700.42 143.55 556.87
262 24,407 700.42 140.34 560.07
263 23,847 700.42 137.12 563.29
264 23,284 700.42 133.88 566.53
265 22,718 700.42 130.63 569.79
266 22,148 700.42 127.35 573.06
267 21,575 700.42 124.06 576.36
268 20,998 700.42 120.74 579.67
269 20,419 700.42 117.41 583.01
270 19,836 700.42 114.06 586.36
271 19,249 700.42 110.68 589.73
272 18,660 700.42 107.29 593.12
273 18,066 700.42 103.88 596.53
274 17,470 700.42 100.45 599.96
275 16,870 700.42 97.00 603.41
276 16,267 700.42 93.53 606.88
277 15,660 700.42 90.04 610.37
278 15,049 700.42 86.53 613.88
279 14,435 700.42 83.00 617.41
280 13,818 700.42 79.45 620.96
281 13,197 700.42 75.88 624.53
282 12,573 700.42 72.29 628.12
283 11,944 700.42 68.68 631.73
284 11,313 700.42 65.05 635.37
285 10,677 700.42 61.39 639.02
286 10,038 700.42 57.72 642.70
287 9,396 700.42 54.03 646.39
288 8,749 700.42 50.31 650.11
289 8,099 700.42 46.57 653.85
290 7,445 700.42 42.81 657.61
291 6,788 700.42 39.03 661.39
292 6,126 700.42 35.23 665.19
293 5,461 700.42 31.40 669.01
294 4,792 700.42 27.55 672.86
295 4,119 700.42 23.69 676.73
296 3,442 700.42 19.79 680.62
297 2,762 700.42 15.88 684.54
298 2,077 700.42 11.94 688.47
299 1,389 700.42 7.99 692.43
300 696 700.42 4.00 696.41
Mortgage functio
$210,125 Principal
$110,125 Interest rate
2.1 M: compounding periods
N: payments/year
Maturity
Rate per period
Closing
Principal Period
99,875 10
99,748 20
99,622 50
99,494 300
99,366
99,237
99,107
98,976 TD Mortgage: early payout penalty example
98,845
98,713 Compensation Amounts
98,580 If you wish to make a prepayment of more than 15% of the or
98,447
98,312 1. To estimate the Three Months' Interest Costs:
98,177 Example Numbers:
98,041 50,000
97,905 0.0675
97,767 3,375
97,629 $ 844
97,490
97,350 2. To estimate the Interest Rate Differential Amount:
97,209 0.0675
97,068 0.0475
96,926 0.02
96,782 50,000
96,639 160
96,494 $ 13,333
96,348
96,202 Mortgage break fees: The banks' gain is your pain. Globe & M
96,055 Flexible mortgage payment features. TD
95,906 -Viewed September 29, 2020
95,757
95,608
95,457
95,305
95,153 Paid Interest Principal
95,000 25,215 20,215 5,000
94,846
94,691
94,535
94,378
94,220
94,061
93,902
93,741
93,580
93,418
93,254
93,090
92,925
92,759
92,592
92,424
92,255
92,085
91,914
91,742
91,569
91,395
91,220
91,045
90,868
90,690
90,511
90,331
90,150
89,968
89,785
89,601
89,415
89,229
89,042
88,853
88,664
88,473
88,281
88,089
87,895
87,700
87,504
87,306
87,108
86,908
86,708
86,506
86,303
86,099
85,893
85,687
85,479
85,270
85,060
84,849
84,636
84,423
84,208
83,991
83,774
83,555
83,335
83,114
82,891
82,668
82,443
82,216
81,989
81,760
81,529
81,298
81,065
80,830
80,595
80,358
80,119
79,880
79,639
79,396
79,152
78,907
78,660
78,412
78,163
77,912
77,659
77,405
77,150
76,893
76,635
76,375
76,114
75,851
75,587
75,321
75,054
74,785
74,514
74,243
73,969
73,694
73,417
73,139
72,859
72,578
72,295
72,010
71,723
71,435
71,146
70,854
70,561
70,267
69,970
69,672
69,373
69,071
68,768
68,463
68,156
67,848
67,537
67,225
66,911
66,596
66,278
65,959
65,638
65,315
64,990
64,663
64,334
64,004
63,672
63,337
63,001
62,663
62,323
61,981
61,637
61,291
60,943
60,593
60,241
59,887
59,531
59,173
58,812
58,450
58,086
57,719
57,351
56,980
56,607
56,233
55,855
55,476
55,095
54,711
54,325
53,937
53,547
53,154
52,760
52,363
51,963
51,562
51,158
50,752
50,343
49,932
49,519
49,103
48,685
48,264
47,842
47,416
46,988
46,558
46,126
45,690
45,253
44,812
44,370
43,924
43,477
43,026
42,573
42,117
41,659
41,198
40,735
40,269
39,800
39,328
38,854
38,377
37,897
37,415
36,929
36,441
35,950
35,457
34,960
34,461
33,959
33,453
32,945
32,434
31,920
31,404
30,884
30,361
29,835
29,306
28,774
28,239
27,701
27,160
26,616
26,069
25,518
24,964
24,407
23,847
23,284
22,718 Paid Interest Principal
22,148 25,215 2,497 22,718
21,575
20,998
20,419
19,836
19,249
18,660
18,066
17,470
16,870
16,267
15,660
15,049
14,435
13,818
13,197
12,573
11,944
11,313
10,677
10,038
9,396
8,749
8,099
7,445
6,788
6,126
5,461
4,792
4,119
3,442
2,762
2,077
1,389
696
(0)
Mortgage functions in Excel
$ 100,000
7.0% csa
2
12
300 months
0.58%
Cumulative Cumulative Mortgage

PMT Interest Principal Balance Total Paid
$700.42 5,717 1,287 98,713 7,004
700.42 11,358 2,650 97,350 14,008
700.42 27,780 7,241 92,759 35,021
700.42 110,125 100,000 - 210,125
ayout penalty example
prepayment of more than 15% of the original borrowed amount in any single year, there will be a compensation charge. The compensatio
ree Months' Interest Costs:
Step 1: ________ (A) amount you want to prepay

Step 2: ________ (B) the Interest Rate under your Mortgage
Step 3: ________ (C) A x B = C
Step 4: ________ (D) C ÷ 4 = D, D is your estimated Three Months' Interest Costs
terest Rate Differential Amount:

Step 1: ________ (A) the current interest rate under your Mortgage
Step 2: ________ (B) current interest rate that we now charge for a mortgage with the term closest to your remaining term. T
Step 3: ________ (C) A - B = C, which is the difference between your current interest rate and the interest rate in B above
Step 4: ________ (D) amount you want to prepay
Step 5: ________ (E) number of months for the remaining term of your Mortgage
Step 6: ________ (F) (C x D x E) ÷ 12 = F, F is your estimated Interest Rate Differential Amount
The banks' gain is your pain. Globe & Mail

yment features. TD
mber 29, 2020
charge. The compensation charge is equal to the greater of Three Months' Interest Cost, or an Interest Rate Differential Amount.
o your remaining term. This will be our posted interest rate for the term minus the most recent discount you received
erest rate in B above
Differential Amount.
Perpetuities and Growing Perpetuities: chart examples
Imagine a scholarship where the donor would like to support a $6,000 payout every year. The interest rate is 5%.
PVP $ 120,000
Rate 5.0%
Time Account value Scholarship paid

0 120,000
1 126,000 (6,000) Account value
1 120,000 128,000
2 126,000 (6,000) 126,000
2 120,000 124,000
3 126,000 (6,000) 122,000
3 120,000 120,000
4 126,000 (6,000) 118,000
4 120,000 116,000
0 1 2 3 4 5
5 126,000 (6,000)
5 120,000
6 126,000 (6,000)
6 120,000
7 126,000 (6,000)
Now, imagine a scholarship where the donor would like to support a first-year payout of $6,000 and an annual scholarship gro
PVPG $ 300,000
Rate 5.0%
Growth rate 3.0%
Time Account value Scholarship paid

0 300,000 Account value
1 315,000 (6,000)
1 309,000
2 324,450 (6,180) 400,000
2 318,270
3 334,184 (6,365)
3 327,818 380,000
4 344,209 (6,556)
4 337,653
5 354,535 (6,753) 360,000
5 347,782
6 365,171 (6,956)
6 358,216
340,000
7 376,126 (7,164)
7 368,962
320,000
340,000
8 387,410 (7,379)
320,000
8 380,031
9 399,033 (7,601)
9 391,432
300,000
10 411,004 (7,829) 0 2 4 6
10 403,175
he interest rate is 5%.
Account value
2 3 4 5 6 7 8
,000 and an annual scholarship growth rate of 3%.
Account value
2 4 6 8 10 12
Finding PVA and FVA for growing annuity by formula PV of an arithmetic gradient
25
Example: PVAG and FVAG Calculator. Enter values in green cells 12%
50,000 C - C 12
0.080 r (per period) - r (per period) $648.81
0.050 g 0.000 g
40 t (period) 0 t (in periods)
1,126,571 = PVAG = (C/(r-g)) * (1-((1+g)/(1+r))^t) - = PVAG = (C/(r-g)) * (1-((1+g)/(1+r))^t)

24,474,221 = FVAGROWTH = P * (((1+r)^n - (1+g)^n) / (r-g)) - = FVAGROWTH = P * (((1+r)^n - (1+g)^n) / (r-g))
Example: On December 31st, Julio makes a New
Account, beginning next year. His first deposit w
than the previous. Calculate the present value of
Finding PVA for growing annuity using the Net Growth Rate approach
2.857143% Net growth rate = (1 + i)/(1 + g) -1 PV of 12 $100 deposits:
1,126,571 *Note: payment must be divided by (1+g) PV of arithmetic gradient:
24,474,221 Future value Total present value:
1,259,168 Check total present value, longhand 59,057,021 Check FV, longhand
Cash flow Period
$ 50,000.00 1 $2,171,370.95
$ 52,500.00 2 $2,111,055.09
$ 55,125.00 3 $2,052,414.67 References:
$ 57,881.25 4 $1,995,403.15 Financeformulas.net, FV of Growing annuity
$ 60,775.31 5 $1,939,975.29 Financeformulas.net, Growing Annuity
$ 63,814.08 6 $1,886,087.08 TVMCalcs.com
$ 67,004.78 7 $1,833,695.78
$ 70,355.02 8 $1,782,759.78
$ 73,872.77 9 $1,733,238.68
$ 77,566.41 10 $1,685,093.16
$ 81,444.73 11 $1,638,285.02
$ 85,516.97 12 $1,592,777.10
$ 89,792.82 13 $1,548,533.29
$ 94,282.46 14 $1,505,518.48
$ 98,996.58 15 $1,463,698.52
$ 103,946.41 16 $1,423,040.23
$ 109,143.73 17 $1,383,511.33
$ 114,600.92 18 $1,345,080.46
$ 120,330.96 19 $1,307,717.12
$ 126,347.51 20 $1,271,391.64
$ 132,664.89 21 $1,236,075.21
$ 139,298.13 22 $1,201,739.78
$ 146,263.04 23 $1,168,358.12
$ 153,576.19 24 $1,135,903.73
$ 161,255.00 25 $1,104,350.85
$ 169,317.75 26 $1,073,674.44
$ 177,783.63 27 $1,043,850.15
$ 186,672.82 28 $1,014,854.31
$ 196,006.46 29 $986,663.91
$ 205,806.78 30 $959,256.58
$ 216,097.12 31 $932,610.56
$ 226,901.97 32 $906,704.72
$ 238,247.07 33 $881,518.47
$ 250,159.43 34 $857,031.85
$ 262,667.40 35 $833,225.41
$ 275,800.77 36 $810,080.26
$ 289,590.81 37 $787,578.03
$ 304,070.35 38 $765,700.86
$ 319,273.86 39 $744,431.39
$ 335,237.56 40 $723,752.74
$ 351,999.44 41 $703,648.50
$ 369,599.41 42 $684,102.71
$ 388,079.38 43 $665,099.86
$ 407,483.35 44 $646,624.86
$ 427,857.51 45 $628,663.06
$ 449,250.39 46 $611,200.20
$ 471,712.91 47 $594,222.41
$ 495,298.55 48 $577,716.23
$ 520,063.48 49 $561,668.56
$ 546,066.66 50 $546,066.66
n arithmetic gradient
G (the dollar increase each period)
I (the rate per period)
n
PV gradient
Texas A&M, Lee Lowery

*Thanks to Troy Shapley for finding this useful resource.
e: On December 31st, Julio makes a New Years resolution to begin making deposits into his Tax-Free Savings
t, beginning next year. His first deposit will be $100, and he will make each subsequent deposit exactly $25 larger
e previous. Calculate the present value of his deposits for the first year.
2 $100 deposits: $619.44 25 G (the dollar increase each period)

rithmetic gradient: $648.81 12% I (the rate per period)
$1,268.24 12 n
$648.81 PV gradient
*Check, longhand 12%

1 100 $89.29 $1,268.24
2 125 $99.65
3 150 $106.77
4 175 $111.22
5 200 $113.49
6 225 $113.99
7 250 $113.09
8 275 $111.07
9 300 $108.18
10 325 $104.64
11 350 $100.62
12 375 $96.25
Carpenter Inc. has 8 percent coupon bonds on the market that have 10 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 9 percent, what is the current bo
price?
80 Coupon, once per year
10 years remaining
9.0% YTM - this is our discount rate, stated as an APR
$935.82 Current price
0 1 2 3 4 5 6 7 8 9
80 80 80 80 80 80 80 80 80
$ (73.39) $ (67.33) $ (61.77) $ (56.67) $ (51.99) $ (47.70) $ (43.76) $ (40.15) $ (36.83)
$ 935.82
$935.82
Bond Yields: Linebacker Co. has 7 percent coupon bonds on the market with nine years left to maturity. The bonds make annual payments. If the bond currently sells for $1,080, what is its YTM
0 1 2 3 4 5 6 7 8 9
70 70 70 70 70 70 70 70 70
Coupon Rate Face Value Coupon Payment Periods YTM (Discount Rate) Price
7.0% $ 1,000 $ 70 9 5.8324% $ (1,080.00)
By approximation: 5.8761%
Coupon rates: Hawk Enterprises has bonds on the market making annual payments, with 16 years to maturity, and selling for $870. The bonds have a YTM of 7.5%. What must the coupon rate
the bonds?
6.08% 1000 $60.78 16 7.5% $ (870.00)
Bond Prices: Cutler Co. issued 11-year bonds a year ago at a coupon rate of 7.8%. The bonds make semi-annual payments. If the YTM on these bonds is 8.6%, what is the current bond price?
$ 39.00 Coupon, every 6 months
20 periods remaining
4.30% YTM, per period
$ 1,000.00 Face value
$947.05 Current price
Bond X is a premium bond making annual payments 9% annual coupon, YTM 7%, 13 years to maturity If interest rates don't change, find the price at the following times:
9.0% $ 1,000 $ 90 13 7.0% $1,167
9.0% $ 1,000 $ 90 12 7.0% $1,159
9.0% $ 1,000 $ 90 11 7.0% $1,150
9.0% $ 1,000 $ 90 10 7.0% $1,140
9.0% $ 1,000 $ 90 9 7.0% $1,130
9.0% $ 1,000 $ 90 8 7.0% $1,119
9.0% $ 1,000 $ 90 7 7.0% $1,108
9.0% $ 1,000 $ 90 6 7.0% $1,095
9.0% $ 1,000 $ 90 5 7.0% $1,082
9.0% $ 1,000 $ 90 4 7.0% $1,068
9.0% $ 1,000 $ 90 3 7.0% $1,052
9.0% $ 1,000 $ 90 2 7.0% $1,036
9.0% $ 1,000 $ 90 1 7.0% $1,019
9.0% $ 1,000 $ 90 0 7.0% $1,000
BOND Y
7.0% $ 1,000 $ 70 13 9.0% $850
7.0% $ 1,000 $ 70 12 9.0% $857
7.0% $ 1,000 $ 70 11 9.0% $864
7.0% $ 1,000 $ 70 10 9.0% $872
7.0% $ 1,000 $ 70 9 9.0% $880
7.0% $ 1,000 $ 70 8 9.0% $889
7.0% $ 1,000 $ 70 7 9.0% $899
7.0% $ 1,000 $ 70 6 9.0% $910
7.0% $ 1,000 $ 70 5 9.0% $922
7.0% $ 1,000 $ 70 4 9.0% $935
7.0% $ 1,000 $ 70 3 9.0% $949
7.0% $ 1,000 $ 70 2 9.0% $965
7.0% $ 1,000 $ 70 1 9.0% $982
7.0% $ 1,000 $ 70 0 9.0% $1,000
s is 9 percent, what is the current bond
10
80
1000
$ (33.79)
$ (422.41)
rently sells for $1,080, what is its YTM?
of 7.5%. What must the coupon rate be on
e current bond price?
ollowing times:
Bond pricing example (convergence to par value)
30 year $1,000 bond, 8% coupon, semi-annual payments
YTM 0.060 0.100

$1,400
Periods Remaining Price, YTM = 0.06 Price, YTM = 0.1
60 $1,277 $811
$1,200
59 $1,275 $811
58 $1,273 $812
57 $1,272 $812 $1,000
56 $1,270 $813
55 $1,268 $814 $800
54 $1,266 $814
Column B
53 $1,264 $815 $600 Column C
52 $1,262 $816
51 $1,260 $817 $400
50 $1,257 $817
49 $1,255 $818
$200
48 $1,253 $819
47 $1,250 $820
46 $1,248 $821 $0
45 $1,245 $822 1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61
44 $1,243 $823
43 $1,240 $825
42 $1,237 $826
41 $1,234 $827
40 $1,231 $828
39 $1,228 $830
38 $1,225 $831
37 $1,222 $833
36 $1,218 $835
35 $1,215 $836
34 $1,211 $838
33 $1,208 $840
32 $1,204 $842
31 $1,200 $844
30 $1,196 $846
29 $1,192 $849
28 $1,188 $851
27 $1,183 $854
26 $1,179 $856
25 $1,174 $859
24 $1,169 $862
23 $1,164 $865
22 $1,159 $868
21 $1,154 $872
20 $1,149 $875
19 $1,143 $879
18 $1,138 $883
17 $1,132 $887
16 $1,126 $892
15 $1,119 $896
14 $1,113 $901
13 $1,106 $906
12 $1,100 $911
11 $1,093 $917
10 $1,085 $923
9 $1,078 $929
8 $1,070 $935
7 $1,062 $942
6 $1,054 $949
5 $1,046 $957
4 $1,037 $965
3 $1,028 $973
2 $1,019 $981
1 $1,010 $990
0 $1,000 $1,000
TB Ch8 Q8: Big Pond Inc has an issue of preferred stock outstanding that pays a $5.50 dividend every year, in perpetuity. If this is
$108 per share, what is the required return?
PVP (or price) = D / r r= 5.09%
*We will work through the rest of these on Wednesday, as in the answers that have not yet been filled in*
TB Ch8 Q10: Foxtrap Bearings is a young start-up company. No dividends will be paid on the stock over the next nine years becau
plow back its earnings to fuel growth. The company will pay a $10 per share dividend in 10 years and will increase the dividend b
thereafter. If the required return on this stock is 14 percent, what is the current share price?
Discussion: Here the stock pays no dividend for 10 years. Once the stock begins paying dividends, it will have a constant growth r
can use the constant growth model at that point. It is important to use the constant growth formula.
Price, at time nine 111.11
Price, time zero $ 34.17
Stock Values: The JT Clothing Company just paid a dividend of $1.60 per share on its stock. The dividends are expected to grow a
percent per year, indefinitely. If investors require a 12 percent return on the stock, what is the current price? What will the price
fifteen years?
The constant dividend growth model is:
Pt = Dt x (1 + g) / (R - g)
So the price of the stock today is:

P0 = D0 x (1 + g) / (R - g)
=1.60*(1.06)/(.12-.06) $ 28.27
Next, the price at year 3. We'll need the dividend at year __four_______ for this:
P3 = D3 x (1 + g) / (R - g)
=1.60*(1.06)^4/(.12-.06) $ 33.67
Next, the price at year 15. We'll need the dividend at year __sixteen_______ for this:
P15 = D15 x (1 + g) / (R - g)
=1.60*(1.06)^16/(.12-.06) $ 67.74
Stock Values: The next dividend payment by Top Knot Inc. will be $2.50 per share. The dividends are anticipated to maintain a 5
forever. If the stock currently sells for $48.00 per share, what is the required return?
Using the constant growth model, we can solve the equation for R.
R = (D1/P0) + g = 2.5/48 + .05 10.21%
Stock Values: For the company in the previous problem, what is the dividend yield? What is the expected capital gains yield?
Dividend yield = next year's dividend/current price
= D1/P0 5.21%
Capital gains yield - same idea as the dividend growth rate
5.00%
Stock Values: Stairway Corporation will pay a $3.60 per share dividend next year. The company pledges to increase its dividend b
indefinitely. If you require an 11 percent return on your investment, how much will you pay for the company's stock today?
Using the constant growth model, we find the price of the stock today is:
P0 = D1/(r-g) = $3.60/(.11-.045)
Stock Valuation: Listen Close Company is expected to maintain a constant 6.5 percent growth rate in its dividends indefinitely.
If the company has a dividend yield of 3.6%, what is the required return on the company's stock?
The required return of a stock is made up of two parts: The dividend yield and the capital gains yield. So, the required return of
this stock is:
R = Dividend yield + Capital gains yield 10.10%
Stock Valuation: Suppose you know that a company's stock currently sells for $60 per share and the required return on the stock
know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it's the company's p
maintain a constant growth rate in its dividends, what is the current dividend per share?
Dividend yield = .5 * .12 = .06 = Capital Gains yield
D1= $ 3.60 Dividend yield = D1/P0
This is the dividend next year. The question asks for the dividend this year.
D1 = D0 (1 + .06) D0 = 3.60 / 1.06 $ 3.40
Stock Valuation: No More Corporation pays a constant $11 dividend on its stock. The company will maintain this dividend for the
will then cease paying dividends forever. If the required return on this stock is 10 percent, what is the current share price?
What kind of cash flow stream is this? It is a regular annuity.
11 PMT
10% RATE
8 NPER
$58.68 Value (PV)
Valuing Preferred Stock: Ayden Inc. has an issue of preferred stock outstanding that pays a $6.50 dividend every year in perpetu
currently sells for $113 per share, what is the required return?
P0 = D/R, or R = D/P0
R= $6.50/$113 5.75%
Ch8, Q&P #1
Current price (Pzero) =D1/(r-g) =(1.45*1.06)/(.11-.06)
Price at t=3 =D4/(r-g) =(1.45*1.06^4)/(.11-.06)
Price at t=15 =D16/(r-g) =(1.45*1.06^16)/(.11-.06)
Ch8, Q&P #2 r = Dt+1 / Price + g =1.89/38 + .05

Ch8, Q&P #7 Price = PVA =PV(0.1,11,-9.75,0)
CR#5
The common stock probably has a higher price because the dividend can grow, whereas it is fixed on the preferred. The
preferred is less risky because of the dividend and liquidation preference, so it is possible the preferred could be worth more,
depending on the circumstances.
CR #10
Investors buy such stock because they want it, recognizing that the shares have no voting power. Presumably, investors pay a
little less for such shares than they would otherwise.
nd every year, in perpetuity. If this issue currently sells for
et been filled in*

stock over the next nine years because the firm needs to
ears and will increase the dividend by 5 percent per year
?
ends, it will have a constant growth rate of dividends. We

formula.
The dividends are expected to grow at a constant rate of 6

he current price? What will the price be in three years? in
Q1/8/7
D4 = 2.019963136
ends are anticipated to maintain a 5 percent growth rate

Q2/8/7
the expected capital gains yield? Q3/8/7

any pledges to increase its dividend by 4.5% per year
for the company's stock today? Q4/8/7
th rate in its dividends indefinitely.

tock? Q5/8/7
ins yield. So, the required return of
and the required return on the stock is 12 percent. You also

dividend yield. If it's the company's policy to always
Q6/8/7
ny will maintain this dividend for the next eight years and
hat is the current share price? Q7/8/7
$6.50 dividend every year in perpetuity. If this issue

Q8/8/7
$ 30.74
$ 36.61
$ 73.67
9.97%
$ 63.33
fixed on the preferred. The
e preferred could be worth more,
ower. Presumably, investors pay a

P/E Ratio - Potential problem
An analyst is reviewing financial information for the Cornerstone

Corporation and the ACME Corporation. The information they have
collected, and their income forecasts, are shown below:
Cornerstone ACME
Price per share $ 50.00 $ 50.00
Shares outstanding 750,000 750,000
Forecasted Net Income $ 1,500,000 $ 500,000
Earnings per share $ 2.00 $ 0.67
P/E Ratio = PPS/EPS 25 75
*Warning about the dangers of trading on P/E ratios
ACME Anvil Company

Jack, RBC analyst Jane, BMO analyst
Price/share $ 50 $ 50
Shares outstanding 100,000 100,000
Forecast earnings $ 175,000 $ 75,000
Earnings per share $1.75 $0.75
Price/Earnings or P/E 29 67
Jane know that Jack does not? If an investor filtered stocks based solely on P/E ratios, it might lead to a
poor stock choice.
Pricing a gold mining company

Ounces in reserve 2,000,000
Price per ounce $ 1,200
Total value $ 2,400,000,000
Total shares 15,000,000
Price per share $ 160.00 *Note: this might be ridiculous
What about time value? What about uncertainty? To price the gold mining company this way we
would be ignoring that it could take years to mine the gold and that our assessment of the total gold in
ounces could be wrong.
Present value of a football player's future earnings
Discount rate: PV of investor's 20% share Cost: Result for investor
0% $ 13,908,429 $ 10,000,000 $ 3,908,429
5% $ 9,962,929 $ 10,000,000 $ (37,071)
15% $ 6,015,402 $ 10,000,000 $ (3,984,598)
*Note: the discount rate we use should reflect the risk of future cash flows to the investor.
Discount Rate 5%
My forecast for Arian
Period Foster's earnings Present values Total present value Investor's Share at 20%
1 $ 5,255,000 $ 5,004,762 $ 49,814,647 $ 9,962,929.34
2 $ 5,412,650 $ 4,909,433
3 $ 5,575,030 $ 4,815,920
4 $ 5,742,280 $ 4,724,188
5 $ 5,914,549 $ 4,634,204
6 $ 6,091,985 $ 4,545,933
7 $ 6,274,745 $ 4,459,344
8 $ 6,462,987 $ 4,374,404
9 $ 6,656,877 $ 4,291,082
10 $ 6,856,583 $ 4,209,347
11 $ 500,000 $ 292,340 Transition to broadcasting
12 $ 515,000 $ 286,771
13 $ 530,450 $ 281,309
14 $ 546,364 $ 275,951
15 $ 562,754 $ 270,694
16 $ 579,637 $ 265,538
17 $ 597,026 $ 260,481
18 $ 614,937 $ 255,519
19 $ 633,385 $ 250,652
20 $ 652,387 $ 245,878
21 $ 671,958 $ 241,194
22 $ 692,117 $ 236,600
23 $ 712,880 $ 232,093
24 $ 734,267 $ 227,673
25 $ 756,295 $ 223,336
Viewed Dec. 23, 2013 http://profootballtalk.nbcsports.com/2013/10/17/company-plans-to-sell-stock-in-players-starting-with-arian-foster/

Calculating returns: Suppose a stock had an initial price of $84 per share, paid a dividend of
$2.05 per share during the year, and had an ending share price of $97. Compute the
percentage total return. 7/Q1
R= 17.92% *with dividend
15.48% *without the dividend
Calculating Yields: In the previous problem, what was the dividend yield? The capital gains
yield? 7/Q2
Dividend yield 2.44%
Capital gain yield 15.48%
17.92%
Return Calculations: Rework Problems 1 and 2 assuming the ending share price is $79. 7/Q3
R= -3.51%
Dividend yield 2.44%
Capital gain yield -5.95%
Calculating returns and variability: Using the following returns, calculate the arithmetic
average returns, the variances, and the standard deviations for X and Y. 7/Q7
Year X Y
1 6% 18%
2 24% 39%
3 13% -6%
4 -14% -20%
5 15% 47%
Average 8.8% 15.6%
STDEV.S 14.27% 28.61% *Standard deviation Excel function, for a sample.
Nominal versus Real Returns - What was the average annual return on Canadian stock from
1957 through 2014? The nominal return is the stated return, which is 10.15% from Table 12.4. 10CE/Q5/Ch12
b. Using the Fisher equation, the real return was:
(1 + R) = (1 + r)(1 + h)
r = (1.1015)/(1.0370) – 6.22%
R ~ r + h; r ~ R - h 6.45%
Chapter 9: Net Present Value and Other Investment Criteria
Capital Budgeting Decision Criteria
Discount rate 10.000%
Time 0 1 2 3
Cash flows -50,000 10,000 10,000 15,000
Running tally for payback -50,000 -40,000 -30,000 -15,000
Discounted cash flows -50,000 9,091 8,264 11,270

Running tally for discounted payback -50,000 -40,909 -32,645 -21,375
NPV $1,289
IRR 10.889% *Be sure to solve this manually, using trial & error.
PI 1.0258
4 5
15,000 20,000
0 20,000 4.0 Years, for full year payback
4.0 Years, for part year payback
10,245 12,418 5.0 Years, for discounted payback using full years
-11,130 1,289 4.9 Years, for discounted payback using partial years
ng trial & error.

Payback, from the slides: ABC company
Time 0 1 2 3 4
Cash Flow -100 20 40 50 100
Running Tally -100 -80 -40 10
Full year payback 3
Part year payback 2.8
Discounted payback, from the slides: ABC Company

Time - 1 2 3 4
Projected cash flow -100 20 40 50 100
Discounted cash flows ($100.00) $16.67 $27.78 $28.94 $48.23
Running Tally ($100.00) ($83.33) ($55.56) ($26.62) $21.60
Now…after discounting, we do our running tally on the Discounted Cash Flows, not the original.
Discount rate 20% Full year discounted payback: 4

Part year discounted payback: 3.55
Calculating payback: Old Country Inc. imposes a payback cutoff of three years for its international investment projects. If the company has the
following two projects available, should it accept either project?
Year 0 1 2 3 4
Cash flow A (50,000) 35,000 21,000 10,000 5,000
Running tally, A (50,000) (15,000) 6,000
2
1.71
Cash flow B (70,000) 15,000 22,000 31,000 240,000

Running tally, B (70,000) (55,000) (33,000) (2,000) 238,000
4
3.01
Discounted Payback
Year 0 1 2 3 4
Cash Flow (8,000) 6,500 7,000 7,500 8,000
PV at 14% (8,000) 5,702 5,386 5,062 4,737
Running tally, on DCFs (8,000) (2,298) 3,088
*Sign switched to positive somewhere in year 2*
Calculate:
Full year discounted payback 2.00
Partial year discounted payback 1.43
Calculating NPV at various discount rates

0 1 2 3 NPV (add across)
(30,000) 13,000 19,000 12,000 14,000
(30,000) 12,381 17,234 10,366 9,981
(30,000) 11,818 15,702 9,016 6,536
(30,000) 11,304 14,367 7,890 3,561
(30,000) 10,650 12,752 6,598 0
$ 500,000,000
Calculating NPV and IRR
Year Cash flow, project A Cash flow, project B
10.0000% 10.00%
0 (37,000) ($37,000) (37,000) ($37,000)
1 19,000 $17,273 6,000 $5,455
2 14,500 $11,983 12,500 $10,331
3 12,000 $9,016 19,000 $14,275
4 9,000 $6,147 23,000 $15,709 Profitability Index (PI)
NPV 7,419 8,769 1.237
IRR 20.3047% 18.5540%
*Accept A based on IRR, but the decision is meaningless as we are comparing mutually exclusive projects.
Profitability Index Example, with Capital Rationing: Your company has $50 million to spend on capital projects in the coming year, using the PI criteria which
projects will you select?
Project Investment Discounted Cash Flows PI NPV
A $ (10) $ 12 1.21 $ 2.10
B $ (25) $ 30 1.19 $ 4.75
C $ (20) $ 24 1.20 $ 4.00
D $ (15) $ 15 1.01 $ 0.15
Total NPV, using Profitability Index to decide: $ 7.00 *Do A, C, want B but can't, so pick D
Choose only projects B & C: $ 8.75 *Spend $45M, left with $5 M unspent
Discussion:
In order from highest PI to lowest PI, until your $50 million is used up, you would select:
Project A leaving $40 m.
Project C leaving $20 m.
Project D (since you do not have enough for project B) leaving $5m.
The total NPV of your choices would be $6.25 million. Is this the best mix using NPV criteria?
No – If you were to select projects B and C, you would obtain NPV of $8.75 million.
Problems with IRR: The CFO of Sweet Petroleum Inc. is trying to evaluate a generation project with the following cash flows:
Year 0 1 2
Cash Flow (27,000,000) 46,000,000 (6,000,000)
DCFs at 10% (27,000,000) 41,818,182 (4,958,678) NPV
Based on the NPV approach, this project is acceptable because, at a discount rate of 10%, it has a positive NPV.
b. Compute the IRR for this project. How many IRRs are there? Using the IRR decision rule, should the company accept the project? What's happening here?
The equation for the IRR of the project is:
0 = -$27,000,000 + $46,000,000/(1 + IRR) - $6,000,000/(1 + IRR)^2
From Descartes' rule of signs, we know that there could be as many as two positive IRRs.
Year 0 1 2 NPV
Cash Flow (27,000,000) 46,000,000 (6,000,000) -
0.00
*Note: Goal Seek provides only 1 solution. IRR does the same thing.
Chapter 9, Question 18 - from the 8th edition of the book.
Rate NPV 0 1 2 3
1000% ($658,132) $ (684,680) $ 263,279 $ 294,060 $ 227,604
100% ($440,178)
75% ($377,157) IRR 16.23%
50% ($276,588)
25% ($97,909)
0% $274,619 NPV
$400,000
$200,000
$0
0% 200% 400% 600% 800% 1000% 1200%
($200,000)
($400,000)
($600,000)
($800,000)
Year Cash Flow PVs at 15% PVs at 22%

0 $ (14,000) $ (14,000) $ (14,000)
1 $ 7,300 $ 6,348 $ 5,984
2 $ 6,900 $ 5,217 $ 4,636
3 $ 5,700 $ 3,748 $ 3,139
Profitability Index 1.09 0.98

years
years
years
years
Q3 7CE/Ch9
years
part years
years
part years
Q4
years
years
Q7, Q8
Discount Rate
0.00%
5.00%
10.00%
15.00%
22.0645%
Q12
ability Index (PI)
using the PI criteria which

A, C, want B but can't, so pick D
nd $45M, left with $5 M unspent
Q14
9,859,504
What's happening here?
Discount Rate
56.14%
-85.77%
*By trial & error
4
$ 174,356
1000% 1200%
10CE/Ch9/QP15
Year 0 1 2 3 4
Cashflow (252) 1,431 (3,035) 2,850 (1,000)
IRR Guess 1% Calculate NPV

Excel Calcs 25% NPV = $ 0.00
IRR Guess 35%

Excel Calcs 33% NPV = $ -
IRR Guess 45%

Excel Calcs 43% NPV = $ 0.00
IRR Guess 70%

Excel Calcs 67% NPV = $ -
Ferdinand Gold Mining 12%
Year Cash Flow Payback, running tally Discounted CFs, @ 12%
0 (450,000,000) (450,000,000) (450,000,000)
1 63,000,000 (387,000,000) 56,250,000
2 85,000,000 (302,000,000) 67,761,480
3 120,000,000 (182,000,000) 85,413,630
4 145,000,000 (37,000,000) 92,150,121
5 175,000,000 138,000,000 99,299,700
6 120,000,000 60,795,735
7 95,000,000 42,973,175
8 75,000,000 30,291,242
9 (70,000,000) (25,242,702)
IRR Partial P/B, in years NPV
15.7% 4.21 $ 59,692,381
What's the problem here? Full P/B, in years NPV, by Excel
There is potential for 5.00 $ 53,296,769
two correct solutions. $ 59,692,381
Profitability Index
1.133
NPVs at many different rates
Disc. P/B, running tally NPV Rate 0 1
(450,000,000) (364,945,313) 100% (450,000,000) 63,000,000
(393,750,000) (353,769,027) 90%
(325,988,520) (339,707,682) 80% These are 3 rates that satisfy the
(240,574,891) (321,646,792) 70% -182.5%
(148,424,769) (297,891,276) 60% -56.5%
(49,125,070) (265,778,794) 50% 15.7%
11,670,665 (220,974,285) 40% Compliments of wolframalpha.co
(156,127,365) 30%
(58,195,857) 20% *There's an IRR somewhere between 10% and 20
97,164,733 10%
Partial P/B, in years 358,000,000 0%
5.81 824,883,892 -10%
Full P/B, in years 1,720,252,190 -20%
6.00 3,548,340,722 -30%
7,300,931,769 -40%
12,096,000,000 -50% *There's an IRR somewhere between -50% and -6
(40,439,960,938) -60%
(1,719,189,372,555) -70%
(97,470,510,000,000) -80%
(61,410,921,320,000,100) -90%
#NUM! -100%
76,653,837,419,999,400 -110%
159,998,860,000,000 -120%
4,371,435,691,714 -130%
339,406,171,875 -140%
46,084,000,000 -150%
8,583,590,408 -160%
1,748,392,349 -170%
162,977,638 -180% *There's an IRR somewhere between -180% and -
(272,940,618) -190%
(408,000,000) -200%
2 3 4 5 6 7 8
85,000,000 120,000,000 145,000,000 175,000,000 120,000,000 95,000,000 75,000,000
hese are 3 rates that satisfy the equation for an NPV of zero.
ompliments of wolframalpha.com.
mewhere between 10% and 20%
mewhere between -50% and -60%
mewhere between -180% and -190%

9
(70,000,000)
AB Enterprises, from lecture slides
Projected (Pro Forma) Income Statements
Year 0 1 2 3
Sales $ 50,000 $ 50,000 $ 50,000
Variable Costs 30,000 30,000 30,000
Fixed Costs 5,000 5,000 5,000
Depreciation 7,000 7,000 7,000
EBIT 8,000 8,000 8,000
Taxes (34%) 2,720 2,720 2,720
Net income 5,280 5,280 5,280
Projected OCF 12,280 12,280 12,280

Change in NWC (10,000) 10,000
Capital Expenditures (21,000) -
Total (CFA) (31,000) 12,280 12,280 22,280
0 1 2 3
$ 655
Chapter 10: The Majestic Mulch and Compost Company
Proforma Income Statements
0 1 2 3 4
Unit Sales 3,000 5,000 6,000 6,500
Unit Price $ 120 $ 120 $ 120 $ 110
Revenues $ 360,000 $ 600,000 $ 720,000 $ 715,000

Variable Costs $ 60 180,000 300,000 360,000 390,000
Fixed Costs 25,000 25,000 25,000 25,000
CCA 80,000 144,000 115,200 92,160
Terminal Loss
EBIT $ 75,000 $ 131,000 $ 219,800 $ 207,840
Taxes 40% 30,000 52,400 87,920 83,136
Net Income $ 45,000 $ 78,600 $ 131,880 $ 124,704
Proforma Annual Cash Flows

EBIT $ 75,000 $ 131,000 $ 219,800 $ 207,840
plus: CCA 80,000 144,000 115,200 92,160
plus: Terminal Loss
less: Taxes 30,000 52,400 87,920 83,136
OCF $ 125,000 $ 222,600 $ 247,080 $ 216,864
NWC Investment (20,000) (34,000) (36,000) (18,000) 750
CapX and Salvage (800,000)
Total Cash Flows (820,000) 91,000 186,600 229,080 217,614
Payback (820,000) (729,000) (542,400) (313,320) (95,706)
15.0%
Discounted cash flows (820,000) 79,130 141,096 150,624 124,422
Discounted Payback (820,000) (740,870) (599,773) (449,149) (324,728)
NPV $ 4,734 4,117 $4,734

IRR 15.2%
PI 1.006
Payback 5.00 4.47
Disc. Payback 8.00 7.95
Majestic Mulch and Compost - Net Present Value Calculation and an explanation of a potential NPV error in Excel
0 1 2 3 4 5
$ (820,000) $ 91,000 $ 186,600 $ 229,080 $ 217,614 $ 202,741
15% Discount Rate (Required return on projects like this)

NPV as computed by Excel:
$4,003.40 is this correct? No!
=NPV(A6,A4:I4)
Discounted cash flows:

$ (820,000) $ 79,130 $ 141,096 $ 150,624 $ 124,422 $ 100,798
Sum of the discounted cash flows:

$ 4,603.91
Why was the Excel calculation wrong? Excel assumed that the -$820,000 initial expense occurred at the END of the first year!
Correction:
4,603.91
=NPV($A6,B4:I4)+A4
Compost Company
5 6 7 8 CCA Schedule
6,000 5,000 4,000 3,000 CCA Rate 20%
$ 110 $ 110 $ 110 $ 110 Year Beg UCC
1 $ -
$ 660,000 $ 550,000 $ 440,000 $ 330,000 2 720,000
360,000 300,000 240,000 180,000 3 576,000
25,000 25,000 25,000 25,000 4 460,800
73,728 58,982 47,186 37,749 5 368,640
995 6 294,912
$ 201,272 $ 166,018 $ 127,814 $ 86,256 7 235,930
80,509 66,407 51,126 34,503 8 188,744
$ 120,763 $ 99,611 $ 76,688 $ 51,754
$ 201,272 $ 166,018 $ 127,814 $ 86,256 Net Working Capital Schedule

73,728 58,982 47,186 37,749 15%
995 Year Revenues
80,509 66,407 51,126 34,503 0
$ 194,491 $ 158,593 $ 123,874 $ 90,497 1 $ 360,000
8,250 16,500 16,500 66,000 2 600,000
150,000 3 720,000
202,741 175,093 140,374 306,497 4 715,000
107,035 282,128 422,503 729,000 5 660,000
6 550,000
7 440,000
100,798 75,698 52,772 100,195 8 330,000
(223,930) (148,232) (95,460) 4,734
otential NPV error in Excel
6 7 8
$ 175,093 $ 140,374 $ 306,099
$ 75,698 $ 52,772 $ 100,064
occurred at the END of the first year!

Additions CCA End UCC
$ 800,000 $ 80,000 $ 720,000
- 144,000 576,000
- 115,200 460,800
- 92,160 368,640
- 73,728 294,912
- 58,982 235,930
- 47,186 188,744
- 37,749 150,995
Salvage Value 150,000
Terminal Loss $ 995
pital Schedule
NWC ∆ NWC
$ 20,000 $ 20,000
54,000 34,000
90,000 36,000
108,000 18,000
107,250 (750)
99,000 (8,250)
82,500 (16,500)
66,000 (16,500)
49,500 (16,500)
Various approaches to OCF
Basic: OCF = EBIT + Depreciation - Taxes
Bottom up: OCF = Net Income + Depreciation
Top - down: OCF = Sales - Costs - Taxes
Tax shield: OCF = (Sales - Costs)x(1-Tc) + Depreciation x Tc
OCF from several approaches: A proposed new project has projected sales of $96,000, costs of $49,000, and CCA of $4,500.
The tax rate is 35%. Calculate operating cash flow using the four different approaches described in the chapter and verify
that the answer is the same in each case.
Sales 96,000
Variable costs 49,000
Depreciation 4,500
EBIT 42,500
Interest - OCF Basic 32,125
EBT 42,500 OCF Top down 32,125
Taxes, at 35% 14,875 OCF Tax shield 32,125
Net Income 27,625 OCF Bottom up 32,125
Parker & Stone Inc. is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company
bought some land six years ago for $5 million in anticipation of using it as a warehouse and distribution site, but the
company has since decided to rent these facilities from a competitor instead. If the land were sold today, the company
would net $5.3 million. The company wants to build its new manufacturing plant on this land; the plant will cost $11.6
million to build, and the site requires $425,000 worth of preparation (grading) before it is suitable for construction. What is
the proper cash-flow amount to use as the initial investment in fixed assets when evaluating this project. Why?
Initial Cost: $ (17.325) million
Calculating Depreciation: A new electronic process monitor costs $925,000. This cost could be depreciated at 30 percent per
year (Class 10). The monitor would actually be worthless in five years. The new monitor would save $490,000 per year before
taxes and operating costs. If we require a 12 percent return, what is the NPV of the purchase? Assume a tax rate of 40
percent.
Cash flow, time zero (925,000)
Cash flow, years 1 - 5 294,000 0 1 2 3 4
PV of year 1 - 5 After tax CF $1,059,804 294,000 294,000 294,000 294,000
PV of CCATS 250,128
NPV 384,932
NPV and NWC Requirements: In the previous question, suppose the new monitor also requires us to increase net working
capital by $36,200 when we buy it. Further suppose that the monitor could actually be worth $100,000 in five years. What is
the new NPV?
Cash flow, time zero: (961,200)
Cash flow, years 1 - 5 294,000 0 1 2 3 4
PV of year 1 - 5 After tax CF $1,059,804 (961,200) 294,000 294,000 294,000 294,000
Ending cash flow 136,200
PV of ending cash flow $77,284
PV of CCATS 233,915
NPV 409,803
EAC: HaroldCo is a leading manufacturer of electronic brains for robots. The company is considering two alternative
production methods. The costs and lives associated with each are:
Year Method 1 Method 2
- -6600 -9100
1 -800 -520
2 -800 -520
3 -800 -520
4 -520
*Note: after our class discussion I changed the values for Method 1, to demonstrate how EAC can change our decision.
Assuming that the company will not replace the equipment when it wears out, which should it buy? If the company is going
to replace the equipment, which should it buy (r = 13%)? Ignore depreciation and taxes in answering.
Assuming Replacement:
Method 1, PV of costs at 13% ($8,488.92) *These are the "without replacement" numbers.
Method 2, PV of costs at 13% ($10,646.73)
Difference:
Method 1, EAC ($3,595.25) *Now we allow for the differing life spans.
Method 2, EAC ($3,579.37)
EAC = PV of Costs
[1 – 1/(1+r)n]/r
End of chapter (EOC), Question 7, Chapter 10

0 1 2 3 4 5
Investment (990,000)
NWC Additions -
Operating savings, after tax 276,000 276,000 276,000 276,000 276,000
NPV
PV of after tax savings 925,195
PVCCATS 246,783
NPV $ 181,977
End of chapter, Question 8, Chapter 10

0 1 2 3 4 5
NWC Additions (47,200)
Time zero outflow: (1,037,200)
Operating savings, after tax 276,000 276,000 276,000 276,000 276,000
Salvage value, year 5 100,000
NWC recovery, in year 5 47,200
Time five, total of NWC and salvage 147,200
*Items to be discounted shown in green 990,000 C

NPV 30% d
Time zero outflow: (1,037,200) 15% r
PV of after tax savings 925,195 40% TC
PV of time 5 cash flows 73,184 100,000 S
PVCCATS 233,525 5 n
NPV 194,704 233,525 PVCCATS
PVCCATS - What does this value include?

1. All tax shields coming from CCA
2. The present values of all tax shields.
3. Any tax consequences of salvage
4. The present values of any tax consequences of salvage.
When should I/can I use the PVCCATS approach?

1. When the asset pool remains open.
2. When assets remain in the pool.
Pizza Oven, from Ch10 slides

Year Oven #1 Oven #2
0 $ (35,000) $ (42,000)
1 $ (4,000) $ (2,000)
2 $ (4,000) $ (2,000)
3 $ (4,000) $ (2,000)
4 $ (2,000)
PV of costs, for each option $ (44,133) $ (47,710)

EAC, for each option $ (19,329) $ (16,711)
Q5
7CE/Ch10
Q1
Q7
925,000 C
5 30% d
294,000 12% r
40% TC
- S
5 n
250,128 PVCCATS
Q8
925,000 C
5 30% d
294,000 12% r
136,200 40% TC
100,000 S
5 n
233,915 PVCCATS
nge our decision.

PVCCATS Calculator
990,000 C
30% d
15% r
40% TC
- S
5 n
246,783 PVCCATS
TB Example Replacing an asset with a new asset to enhance productivity.
Old equipment, in isolation
New equipment cost: 200,000
Remaining life, new equipment 6 years
Salvage, new equipment 30,000
Old equipment purchase (4 years ago) 150,000 Old equipment purchase ( 150,000
Remaining life, old equipment 6 years Remaining life, old equip 6 years
Current salvage, old equipment 50,000 Current salvage, old equ 50,000
Salvage after 6 more years, old equipment 10,000 Salvage after 6 more year 10,000
Savings, from new equipment 75,000 *New equip. saves $75K/year
NWC: No change NWC: No change
Class 8 assets (old & new), CCA rate of 20%, required return = 15%, tax rate = 44% Class 8 assets (old & new), CCA rate of 20%, required return =
Year Year
0 1 2 3 4 5 6 0 1
Investment -200 Investment
Salvage on old 50 Salvage on old -50
NWC additions 0 NWC additions 0
Subtotal -150 Subtotal -50
Op. savings 75 75 75 75 75 75 Op. savings
Taxes 33 33 33 33 33 33 Taxes
Subtotal 42 42 42 42 42 42 Subtotal 0
Salvage forgone -10 Salvage forgone
Salvage 30 Salvage
NPV
Salvage recovered now 50,000
Operating cash flows 158,948 *Financial calculator, or PVA
PV of salvage forgone (4,323)
PV of salvage recovered 12,970
PVCCATS 33,081
NPV $ 50,675
New equipment, in isolation (this is a repeat of the first scenario, not a continuation)
New equipment cost: 200,000
Remaining life, new equipment 6 years
Salvage, new equipment 30,000
Savings, from new equipment 75,000 *New equip. saves $75K/year

NWC: No change
ate of 20%, required return = 15%, tax rate = 44 Class 8 assets (old & new), CCA rate of 20%, required return = 15%, tax rate = 44%
Year Year
2 3 4 5 6 0 1 2 3 4 5 6
Investment -200
Salvage on old
NWC additions 0
Subtotal -200
Op. savings 75 75 75 75 75 75
Taxes 33 33 33 33 33 33
0 0 0 0 0 Subtotal 42 42 42 42 42 42
10 Salvage forgone
Salvage 30
Chapter 10 Minicase
a. The software consultant is a sunk cost. The consultant is being hired to assist with the decision as to whether to invest in
either project or not. This cost will be incurred before the decision for either project is made and is not incremental to
either project. Consequently, it is considered a sunk cost.
In addition, the inter-company charge for the computer time is not an incremental cash flow to the firm. Consequently, it is
really an internal allocation and should not be considered in the valuation of either project.
Year 0 1 2 3 4
Alternative A $ 86,000 $ 86,000 $ 67,000 $ 56,000
Alternative A, after tax $ (194,000) $ 55,900 $ 55,900 $ 43,550 $ 36,400
NPV A
Upfront cost $ (194,000) 194,000 C
PV of future CFs 152,927 30% d
PV of CCATS 42,314 15% r
NPV $ 1,242 35% TC
- S
5 n
42,314 PVCCATS
Year 0 1 2 3 4
Alternative B $ 118,000 $ 130,000 $ 106,000 $ 98,000
Alternative B, after tax $ (336,000) $ 76,700 $ 84,500 $ 68,900 $ 63,700
NPV B
Upfront cost $ (336,000) 336,000 C
PV of CCATS 73,287 15% r
NPV $ (31,333) 35% TC
- S
5 n
73,287 PVCCATS
Part B, eliminating cost savings for years 4 and 5 (simply delete those savings from the calculations above).
NPV A $ (32,174)
NPV B $ (86,820)
Part C:
Year 0 1 2 3
Alternative A $ 86,000 $ 86,000 $ 67,000
Alternative A, after tax $ (194,000) $ 55,900 $ 55,900 $ 43,550
NPV A
Upfront cost $ (194,000) 194,000 C
PV of salvage $34,191 15% k
PV of CCATS 34,337 35% TC
NPV $ (5,961) 52,000 S
3 n
34,337 PVCCATS
*I have reviewed the text book solution for part C and have concluded that it is incorrect. My solution for
the 3-year salvage is above, and the 4 & 5 year salvage can be completed in a similar manner.
on as to whether to invest in
nd is not incremental to
the firm. Consequently, it is
5
$ 39,000
$ 25,350
5
$ 59,000
$ 38,350
ons above).
Chapter 11 Minicase
Part A
Year 0 1 2 3
Alternative A $ 86,000 $ 86,000 $ 67,000
NPV A
Upfront cost $ (194,000)
PV of future CFs 152,927
PV of CCATS 42,314
NPV $ 1,242
c. Sensitivity and scenario analyses allow managers to determine what the NPV will be given changes in their initial underlying
assumptions. In the alternatives examined above, we found that the NPV for Alternative B was only positive in a relatively
extreme best case scenario and therefore, from a strict financial standpoint, this project should not be undertaken. For the
Alternative A analysis, we found that the NPV is most sensitive to changes in cost savings but that in the worst case scenario
changes in the initial investment and changes in cost savings resulted in a negative NPV. As a result, the company will have to
be very diligent in ensuring that these cost savings are actually realized.
Year 0 1 2 3
Alternative B $ 118,000 $ 130,000 $ 106,000
Alternative B, after tax $ (336,000) $ 76,700 $ 84,500 $ 68,900
NPV B
PV of CCATS 73,287
NPV $ (31,333)
Round 2, incorporating a data table (Data, What If analysis, Data Table) - FOR INFORMATION ONLY
*In 825 you are not responsible for the creation of a data table in Excel.
Part A
Year 0 1 2 3
Alternative A $ 86,000 $ 86,000 $ 67,000
NPV A
PV of CCATS 42,314
NPV $ 1,242 60% 100% 140%
115% (82,682) (21,511) 39,660
100% (59,929) 1,242 62,413
85% (37,176) 23,995 85,165
Part A: Sensitivity Analysis
Trial Results NPV
4 5 Software +15% $ (21,511)
$ 56,000 $ 39,000 Software Base $ 1,242
$ 36,400 $ 25,350 Software - 15% $ 23,995
Savings +40% $ 62,413
Savings Base $ 1,242
194,000 C Savings -40% $ (59,929)
30% d
Change %s 15% k
Savings 100% 35% TC Part B: Scenario Analysis
Software 100% - S Trial Results NPV
5 n Worst: cost up and savings down $ (82,682)
42,314 PVCCATS Base: base $ 1,242
Best: cost down and savings up $ 85,165
ven changes in their initial underlying

B was only positive in a relatively
should not be undertaken. For the
but that in the worst case scenario
As a result, the company will have to
4 5
$ 98,000 $ 59,000
$ 63,700 $ 38,350
336,000 C
30% d
15% k
Savings 100% 35% TC
Software 100% - S
5 n
73,287 PVCCATS
ATION ONLY
4 5
$ 56,000 $ 39,000
$ 36,400 $ 25,350
194,000 C
30% d
Change %s 15% k
Savings 100% 35% TC
Software 100% - S
5 n
42,314 PVCCATS
Calculating costs and Break-Even: Night Shades Inc. (NSI) manufactures sunglasses. The variable materials cost is $5.43 per un
variable labour cost is $3.13 per unit. Suppose the company incurs fixed costs of $720,000 during a year in which total producti
280,000 units. Depreciation is $220,000 per year. Price is $19.99. Calculate the total variable cost per unit, total cost, and the 3
quantities.
a. Total variable cost per unit: = $ 8.56

b. Total cost = Variable costs + fixed costs
Total costs = $ 3,116,800
c. Qc = (FC + 0) / (P - v) 62,992 units. This is the cash break-even quantity.
Qa = (FC + Depreciation)/(P - v) 82,240 units. This is the accounting break-even quan
d. Financial break even, assume a discount rate of 15% Assume 5 year life
$ 1,100,000 Assumed initial investment
OCF $328,147
QF = (FC + OCF)/(P - v) 91,701 units. This is the financial break-even quantity
Whitewater Transmissions Inc. has the following estimates for its new gear assembly project: price = $1,700 per unit; variable
per unit; fixed costs = $4.1 million; quantity = 95,000 units. Suppose the company believes all of its estimates are accurate onl
15 percent. What values should the company use for the four variables given here when it performs its best-case scenario ana
about the worst-case scenario?
Scenario Unit Sales Unit Price
Base 95,000 $ 1,700
Best 109,250 1,955
Worst 80,750 1,445
Calculating Break-Even: A project has the following estimated data: price = $57 per unit; variable costs = $32 per unit; fixed co
required return = 12%; initial investment = $18,000; life = four years. Ignoring the effect of taxes, what is the accounting break
quantity? The cash break-even quantity? The financial break-even quantity? What is the degree of operating leverage at the fi
break-even level of output?
Qc = (FC+0)/ (P - v) = Cash Break-even quantity 360 units
Qa = (FC + Depreciation) / (P - v) 540 units
At the financial break-even point, the project will have a zero NPV. Since this is true, the initial cost of the project must be equ
of the cash flows of the project. Using this relationship, we can find the OCF of the project as follows:
OCF = Investment / ((1-(1+r)^-t)/r) $5,926
Qf = (FC+OCF)/ (P - v) = Financial Break-even quantity 597 units

DOL = FC/OCF +1 2.5
variable materials cost is $5.43 per unit, and the
00 during a year in which total production is
iable cost per unit, total cost, and the 3 break-even
7CE/Ch11
Q1
his is the cash break-even quantity.
his is the accounting break-even quantity
ed initial investment
his is the financial break-even quantity.
oject: price = $1,700 per unit; variable costs = $480

es all of its estimates are accurate only to within +/-
n it performs its best-case scenario analysis? What
Unit variable cost Fixed cost Q3 - from 9th edition of TB

$ 480 $ 4,100,000
408 3,485,000
$ 552 $ 4,715,000
variable costs = $32 per unit; fixed costs = $9,000;

of taxes, what is the accounting break-even
e degree of operating leverage at the financial
Q9
initial cost of the project must be equal to the PV

ect as follows:
Chapter 11 - Scenario and Sensitivity Analysis
Scenario Analysis Sensitivity Analys
Base Case Lower Bound Upper Bound
Unit Sales 6,000 5,500 6,500 Unit Sales
Price per unit 80 75 85 Price per unit
Variable costs per unit 60 58 62 Variable costs per unit
Fixed costs per year 50,000 45,000 55,000 Fixed costs per year
*Income statement will remain the same over 5 years. *Income statement will remain the same ove
Base Case Best Case Worst Case

Sales 480,000 552,500 412,500 Sales
Variable costs 360,000 377,000 341,000 Variable costs
Fixed costs 50,000 45,000 55,000 Fixed costs
Depreciation (Given) 40,000 40,000 40,000 Depreciation (Given)
EBIT 30,000 90,500 (23,500) EBIT
Taxes (34%) 10,200 30,770 - Taxes (34%)
Net income 19,800 59,730 (23,500) Net income
OCF, each year 59,800 99,730 16,500 OCF, each year

PVA of OCFs 215,566 359,504 59,479 PVA of OCFs
CapX (200,000) (200,000) (200,000) CapX
PVCCATS 45,969 45,969 45,969 PVCCATS
NPV 61,535 205,474 (94,552) NPV
Discount rate 12%

CCA rate 30%
Tax rate 34%
Sensitivity Analysis Sensitivity Analysis 2
Base Case Lower Bound Upper Bound Base Case Lower Bound
6,000 5,500 6,500 Unit Sales 6,000 6,000
80 80 80 Price per unit 80 75
60 60 60 Variable costs per unit 60 60
50,000 50,000 50,000 Fixed costs per year 50,000 50,000
ment will remain the same over 5 years. *Income statement will remain the same over 5 years.
Base Case Best Case Worst Case Base Case Best Case
480,000 520,000 440,000 Sales 480,000 510,000
360,000 390,000 330,000 Variable costs 360,000 360,000
50,000 50,000 50,000 Fixed costs 50,000 50,000
40,000 40,000 40,000 Depreciation (Given) 40,000 40,000
30,000 40,000 20,000 EBIT 30,000 60,000
10,200 13,600 6,800 Taxes (34%) 10,200 20,400
19,800 26,400 13,200 Net income 19,800 39,600
59,800 66,400 53,200 OCF, each year 59,800 79,600

215,566 239,357 191,774 PVA of OCFs 215,566 286,940
(200,000) (200,000) (200,000) CapX (200,000) (200,000)
45,969 45,969 45,969 PVCCATS 45,969 45,969
61,535 85,327 37,743 NPV 61,535 132,910
2
Upper Bound
6,000
85
60
50,000
Worst Case
450,000
360,000
50,000
40,000
-
-
-
40,000
144,191
(200,000)
45,969
(9,840)
Hot Dog Stand - Break Even Examples
Cash flow BE: Q = (10,000+0)/(2.50 – 0.50) = 5,000 hot dogs
Accounting BE: Q = (10,000 + 1,000)/(2.50 – 0.50) = 5,500 hot dogs
Financial BE: OCF = 5,000/2.991 = $1,671.90
Q = (10,000 + 1,671.90)/(2.50 – 0.50) = 5,836 hot dogs
SP $ 2.50
VC $ 0.50
Cash Flow Accounting Financial

Sales $ 12,500 13,750 14,590
VC $ 2,500 2,750 2,918
FC $ 10,000 10,000 10,000
Dep'n $ 1,000 1,000 1,000
EBIT $ (1,000.00) $ - $ 672.00
OCF $ - $ 1,000.00 $ 1,672.00
Discount Rate 20%

Cash B/E
Cash Flows:
0 1 2 3 4 5
(5,000.00) - - - - -
(5,000.00) - - - - -
NPV = (5,000)
Accounting B/E
Cash Flows:
0 1 2 3 4 5
(5,000.00) 1,000 1,000 1,000 1,000 1,000
(5,000.00) 833 694 579 482 402
NPV = (2,009)
IRR = 0.00%
Financial B/E
Cash Flows:
0 1 2 3 4 5
(5,000.00) 1,672 1,672 1,672 1,672 1,672
(5,000.00) 1,393 1,161 968 806 672
NPV = 0
IRR = 20%
Calculating cash collections: The Morning Jolt Coffee Company has projected the following quarterly
sales amounts for the coming year:
a. Q1 Q2 Q3 Q4
Sales 790 740 870 950
a. Accounts receivable at the beginning of the year are $360. Morning Jolt has a 45-day collection
period. Calculate cash collections in each of the four quarters by completing the following:
A 45 day collection period implies that ALL receivables outstanding from previous quarter will be
collected in this quarter
(90-45)/90 = 1/2 of current sales are collected.
a. Q1 Q2 Q3 Q4
Beginning receivables 360
Sales 790 740 870 950
Cash collections
Ending receivables
b. Assume 60 days Q1 Q2 Q3 Q4
Beginning rec. 360
Sales 790 740 870 950
Cash collections
Ending receivables
c. Assume 30 days Q1 Q2 Q3 Q4
Beginning rec. 360
Sales 790 740 870 950
Cash collections
Ending receivables
Factoring Receivables: Your firm has an average collection period of 32 days. Current practice is to
factor all receivables immediately at a 1.5 percent discount. What is the effective interest rate in this
case? Assume that default is extremely unlikely.
If we factor immediately, we receive cash 32 days sooner.

Periods per year:
Quoted rate (APR), per year: *APR = rate per period x the number of periods
Effective rate, where n = 1 year (EAR)
f = (1 + APR/m)^(m/n) - 1
Calculating the Cash Budget for Nashville Nougats: Here are some important figures from the budget
of Nashville Nougats Inc. for the second quarter of 2009:
April May June

Credit sales 390,000 364,000 438,000
Credit purchases 147,800 176,300 208,500
Cash disbursements
Wages, taxes, and expenses 53,800 51,000 78,300
Interest 13,100 13,100 13,100
Equipment purchases 87,000 147,000 -
The company predicts that 5 percent of its credit sales will never be collected, 35 percent of its sales
will be collected in the month of the sale, and the remaining 60 percent will be collected in the
following month. Credit purchases will be paid in the month following the purchase.
In March 2009, credit sales were $245,000, and credit purchases were $168,000. Using this
information, complete the following cash budget:
The company predicts that 5 percent of its credit sales will never be collected, 35 percent of its sales
will be collected in the month of the sale, and the remaining 60 percent will be collected in the
following month. Credit purchases will be paid in the month following the purchase. In March 2009,
credit sales were $245,000, and credit purchases were $168,000. Using this information, complete the
following cash budget:
April May June
Beginning cash balance 140,000
Cash receipts
Cash collections, credit sales
Total cash available
Cash disbursements
Purchases
Interest 13,100 13,100 13,100
Total cash disbursements
Ending cash balance
Nashville Nougats, Complete Solution

April May June
Credit sales 390,000 364,000 438,000
Credit purchases 147,800 176,300 208,500
Cash disbursements
Interest 13,100 13,100 13,100
April May June
Beginning cash balance 140,000 101,600 104,100
Cash receipts
Cash collections, credit sales 283,500 361,400 371,700
Total cash available 423,500 463,000 475,800
Cash disbursements
Purchases 168,000 147,800 176,300
Interest 13,100 13,100 13,100
Total cash disbursements 321,900 358,900 267,700
Ending cash balance 101,600 104,100 208,100
7CE/Ch18
Q5
Q7
er period x the number of periods per year.

Q11
Calculating float: In a typical month, the JT Corporation receives 80 payments totalling $156,000. These are delayed four days
is the average daily float?
Total Float = Float per day x number of days
Average daily float = the average number of payments received per day x average number of days delay divided by the numbe
month
Typical month: 80 payments received, value of $156,000 with a 4 day average delay
Average daily float, as a weighted average: per day.
Costs of float: A company receives an average of $19,000 in payments per day. The delay in clearing is typically three days. Th
rate is .019 percent per day.
*daily rate, as a decimal
a. What is the company's float?
- The collection float is the average daily cheques received x the average number of days for the cheques to clear, so:
Collection float =
b. What is the most the company should be willing to pay today to eliminate its float entirely?
- The firm should not pay more than the total value of the collection float to eliminate the collection float.
c. What is the highest daily fee the company should be willing to pay to eliminate its float entirely?
- The maximum daily charge the firm should be willing to pay is the collection float x the daily interest rate:
Maximum daily charge =
Disbursement float
Collection float
ese are delayed four days on average. What
7CE/Ch19
Q1
lay divided by the number of days in one
is typically three days. The current interest

Q3
ques to clear, so:

c. Banker's acceptance - when a bank guarantees the future payment of a commercial draft
d. Promissory note - an IOU that the customer signs "I Owe You"
e. Trade acceptance - when the buyer accepts the commercial draft and promises to pay it in the future.
Most common form of trade credit: open account

Most common credit instrument: invoice
Character: willingness to pay debts

Capacity: is operating cash flow adequate to cover debts?
Capital: financial reserves, if operating cash flow is inadequate?
Collateral: assets that can be liquidated to pay off the loan in the event of default
Conditions: Customer's ability to weather an economic downturn, and whether such a downturn is likely.
1. Cash Discounts: You place an order for 400 units of inventory at a unit price of $125. The supplier offers terms of 1/10, net 3
a. How long do you have to pay before the account is overdue? If you take the full period, how much should you remit?
1.a. Days until the account is overdue: 30
If you take the full 30 day period, your remittance:
b. What is the discount being offered? How quickly must you pay to get the discount? If you do take the discount, how muc
should you remit?
1.b. Discount: 1.00%
Remittance =
c. If you don't take the discount, how much interest are you paying implicitly? How many days' credit are you receiving?
1.c. The implicit interest is the difference between the 2 remittance amounts:
Implicit interest
Days' credit Days
Terms of sale: A firm offers terms of 1/10, net 35. What effective annual interest rate does the firm earn when a customer doe
take the discount?
Interest rate 14.6
And the interest is for 35 - 10 = 25 days
f = (1 + Periodic Rate)^(m/n) - 1 *the effective rate, where n = 1
f = (1.01)^(365/25/1) - 1
Simplified example of an A/R aging schedule:

ACME Company, accounts receivable aging: *(ACME has a 30-day payment policy)
0-30 days 31-60 days 61-90 days 90-120 days
ACME's customers:
ABC Co. $500
BCD Co. $200
YXE Co. $300
XYZ Co. $200
7CE/Ch20
CR1
CR2
CR4
ely.
ffers terms of 1/10, net 30. Q&P1

ch should you remit?
e the discount, how much
dit are you receiving?
rn when a customer does not
120 + days
$100
Calculating WACC: Country Road has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35
Its cost of equity is 11.20% percent, the cost of preferred stock is 6.25 percent, and the cost of debt is 8 percent. The relevant
percent.
a. What is the company's WACC?
WACC = WDRD(1 - TC) + WPRP + WERE
WD = Percentage weight, debt
WP = Percentage weight, preferred shares
WE = Percentage weight, common shares (equity)
RD = Rate on debt (YTM)
RP = Rate on preferred shares
RE = Rate on common shares (from div. growth model or CAPM, either can be u
b. The company president has approached you about Country Road's capital structure. He wants to know why the company do
more preferred stock financing because it costs less than debt. What would you tell the president?
Interest is tax-deductible, dividends are not, hence, we must look at the cost of debt after tax:
After tax cost of debt
Flotation Examples:
Imagine you are raising money, with an an upfront Total Direct Cost (flotation cost) of 5%.
You raise, with your bank's help: $ 400,000
The bank charges (up front) 5%
You are left with:
A common mistake:
It's often tempting to multiply the target x F A $ 20,000 This is assumed to be the flotation cos
Total to raise
You are left with: Note that we end up short
This may not be enough. What if our business opportunity (or machine, land, etc) actually costs $400,000?
Take the initial cost and divide by (1 - F A) = Amount to be raised
You are left with:
This way, you are left with the proper target amount.
cent preferred stock, and 35 percent debt.
bt is 8 percent. The relevant tax rate is 35
del or CAPM, either can be used)
o know why the company doesn't use

?
cost of debt
umed to be the flotation cost
we end up short
t to be raised
Review questions all based on the 9th Canadian Edition of the Ross text.
Ch7, CR 2: All else the same, the government security will have lower coupons because of its lower default risk, so it will have
Ch7, CR 6: Bond issuers look at outstanding bonds of similar maturity and risk. The yields on such bonds are used to establish t
necessary for a particular issue to initially sell for par value. Bond issuers also simply ask potential purchasers what coupon rat
attract them. The coupon rate is fixed and simply determines what the bond’s coupon payments will be. The required return i
demand on the issue, and it will fluctuate through time. The coupon rate and required return are equal only if the bond sells fo
Q&P 17
PriceSAM 3.50% Price $1,000
PriceDAVE 3.50% Price $1,000
Rates up: % change

PriceSAM 4.50% Price $948 -5.2%
PriceDAVE 4.50% Price $816 -18.4%
Rates down:
PriceSAM 2.50% Price $1,055 5.5%
PriceDAVE 2.50% Price $1,251 25.1%
Ch8, Self-Test, page 284/285

*Solution in text.
Ch8, CR 5: The common stock probably has a higher price because the dividend can grow, whereas it is fixed on the preferred.
is less risky because of the dividend and liquidation preference, so it is possible the preferred could be worth more, depending
Ch8 Example, Supernormal Growth: The ACME company just paid a dividend of $.50 per share. Executives believe that the div
per year for the next 4 years, after which the dividend growth rate will slow to a perpetual 2.5%. The required return is 12%. C
price of the stock.
0 1 2 3 4
Dividend $ 0.50 $ 0.63 $ 0.78 $ 0.98 $ 1.22
P4 $ 13.17
Total CF $ 0.63 $ 0.78 $ 0.98 $ 14.39
Price $11.02
Ch9, CR 12: Yes, they are. Such entities generally need to allocate available capital efficiently, just as for-profits do. However, i
that the “revenues” from not-for-profit ventures are not tangible. For example, charitable giving has real opportunity costs, bu
generally hard to measure. To the extent that benefits are measurable, the question of an appropriate required return remain
commonly used in such cases. Finally, realistic cost/benefit analysis along the lines indicated should definitely be used by gove
long way toward balancing the budget!
Ch9 Minicase: See 9MC tab.
Review Ch10, MMCC Tax-shield approach

Review PVCCATS
Ch10 CR 3: The EAC approach is appropriate when comparing mutually exclusive projects with different lives that will be repla
This type of analysis is necessary so that the projects have a common life span over which they can be compared; in effect, ea
exist over an infinite horizon of N-year repeating projects. Assuming that this type of analysis is valid implies that the project c
same forever, thus ignoring the possible effects of, among other things: (1) inflation, (2) changing economic conditions, (3) the
of cash flow estimates that occur far into the future, and (4) the possible effects of future technology improvement that could
flows.
Ch10 CR 4: Depreciation is a non-cash expense, but it is tax-deductible on the income statement. Thus depreciation causes tax
outflow, to be reduced by an amount equal to the depreciation tax shield tcD. A reduction in taxes that would otherwise be pa
cash inflow, so the effects of the depreciation tax shield must be included to get the total incremental aftertax cash flows.
Ch10 Q&P 13, Calculating Project OCF: Hubrey Home Inc. is considering a new three-year expansion project that requires an i
investment of $3.9 million. The fixed asset falls into Class 10 for tax purposes, with a CCA rate of 30% per year, and at the end
be sold for a salvage value equal to its UCC. The project is estimated to generate $2,650,000 in annual sales, with costs of $840
35%, what is the OCF for each year of this project?
Sales $ 2,650,000 $ 2,650,000 $ 2,650,000

Costs $ 840,000 $ 840,000 $ 840,000 UCCBEG
Depreciation 585,000 994,500 696,150 CCA
EBIT/EBT $ 1,225,000 $ 815,500 $ 1,113,850 UCCEND
Tax $ 428,750 $ 285,425 $ 389,848
OCF 1,381,250 1,524,575 1,420,153
Ch10 Q&P 14
Salvage Value $ 1,624,350
PV of OCFs $ 3,459,477
PV Salvage $ 1,156,180
NPV $ 715,658
Ch11 CR 4
It is true that if average revenue is less than average cost, the firm is losing money. This much of the statement is therefore co
however, accepting a project with a marginal revenue in excess of its marginal cost clearly acts to increase operating cash flow
Ch11 Q&P #9
Cash B/E = (FC + 0) / (P - v) 1,072
Acctg B/E = (FC + Dep'n) / (P - v) 1,444
Fin'l B/E OCF that provides $0 NPV $8,823.48

= (FC + OCF) / (P - v) 1,562
Ch 18/19/20
Review tab 18, do the Nashville Nougats question. Solution on Tab 18
Ch20, CR 3 - 6
Ch20, CR 3: Credit costs: cost of debt, probability of default, costs of managing credit and credit collections and the cash disco
No-credit costs: lost sales
The sum of these are the carrying costs.
Ch20, CR 4:
1. Character: determines if a customer is willing to pay his or her debts.
2. Capacity: determines if a customer is able to pay debts out of operating cash flow.
3. Capital: determines the customer’s financial reserves in case problems occur with opera-ting cash flow.
4. Collateral: Pledged assets that can be liquidated to pay off the loan in case of default.
5. Conditions: customer’s ability to weather an economic downturn and whether such a down-turn is likely.
Ch20, CR 5:
1. Perishability and collateral value
2. Consumer demand
3. Cost, profitability, and standardization
4. Credit risk
5. The size of the account
6. Competition
7. Customer type
If the credit period exceeds a customer’s operating cycle, then the firm is financing the receivables and other aspects of the cu
go beyond the purchase of the selling firm’s merchandise.
Ch20, CR 6:
a. B: A is likely to sell for cash only, unless the product really works. If it does, then they might grant longer credit periods to en
b. A: Landlords have significantly greater collateral, and that collateral is not mobile.
c. A: Since A’s customers turn over inventory less frequently, they have a longer inventory period, and thus, will most likely ha
as well.
d. B: Since A’s merchandise is perishable and B’s is not, B will probably have a longer credit period.
e. A: Rugs are fairly standardized and they are transportable, while carpets are custom fit and are not particularly transportabl
Q&P 1&6
Ch20, Q&P 1
a. There are 30 days until account is overdue. Full period remittance: $ 49,000
b. For the first 10 days a 1% discount is allowed. Remittance: $ 48,510
c. Implicit interest. This is the difference between the 2 amounts: $ 490
Days' credit offered: 20
Ch20, Q&P 6
Receivables turnover = 365/Average collection period 12.59
Annual credit sales = Receivables turnover x Average daily receivables $ 552,534
Ch12, CR 6: Yes, historical information is also public information; weak form efficiency is a subset of semi-strong form efficienc
Ch12, CR 9: The EMH only says, within the bounds of increasingly strong assumptions about the information processing of inve
fairly priced. An implication of this is that, on average, the typical market participant cannot earn excessive profits from a parti
However, that does not mean that a few particular investors cannot outperform the market over a particular investment horiz
who do well for a period of time get a lot of attention from the financial press, but the scores of investors who do not do well
time generally get considerably less attention from the financial press.
Ch13, CR 1: Some of the risk in holding any asset is unique to the asset in question. By investing in a variety of assets, this uniq
risk can be eliminated at little cost. On the other hand, there are some risks that affect all investments. This portion of the tota
be costlessly eliminated. In other words, systematic risk can be controlled, but only by a costly reduction in expected returns.
Ch13, CR 3:
a. systematic
b. unsystematic
c. both; probably mostly systematic
d. unsystematic
e. unsystematic
f. systematic
Ch13, CR 4:
a. a change in systematic risk has occurred; market prices in general will most likely decline.
b. no change in unsystematic risk; company price will most likely stay constant.
c. no change in systematic risk; market prices in general will most likely stay constant.
d. a change in unsystematic risk has occurred; company price will most likely decline.
e. no change in systematic risk; market prices in general will most likely stay constant.
Ch14, CR 10: If the different operating divisions were in much different risk classes, then separate cost of capital figures should
different divisions; the use of a single, overall cost of capital would be inappropriate. If the single hurdle rate were used, riskie
receive more funds for investment projects, since their return would exceed the hurdle rate despite the fact that they may act
and, hence, be unprofitable projects on a risk-adjusted basis. The typical problem encountered in estimating the cost of capita
rarely has its own securities traded on the market, so it is difficult to observe the market’s valuation of the risk of the division.
this are to use a pure play proxy for the division, or to use subjective adjustments of the overall firm hurdle rate based on the
division.
Ch14 Q&P 10
D/E ratio = 0.35
0.35 parts Debt for every 1 part Equity; hence, firm value = 1.35
Wdebt 25.9% WACC 9.9000%
Wequity 74.1%
Rd 6%
Re 12%
Tax rate 35%
Ch14, Q&P 18:

a. He should look at the weighted average flotation cost, not just the debt cost.
b. The weighted average floatation cost is the weighted average of the floatation costs for debt and equity, so:
fT = 0.03(0.6/1.6) + 0.07(1/1.6) = 0.055 or 5.5%
c. The total cost of the equipment including floatation costs is:
Amount raised(1 – 0.055) = $24,000,000

Amount raised = $24,000,000/(1 – 0.055) = $25,396,825.40
Even if the specific funds are actually being raised completely from debt, the flotation costs, and hence true investment cost,
the firm’s target capital structure is used.
10CE, Chapter 10, Q&P 24

0 1 2 3
Revenue 9,226,634 9,226,634 9,226,634
Costs 8,544,000 8,544,000 8,544,000
EBIT 682,634 682,634 682,634
Tax 245,748 245,748 245,748
A/T operating income 436,886 436,886 436,886
CapX (1,300,000)
Salvage 376,157 650,000
WC investment (340,000)
WC recovery 196,759 340,000
PVCCATS 146,792 1,300,000
PV of A/T income 920,292 20%
NPV 0 20%
36%
650,000
3.00
146,792
er default risk, so it will have greater interest rate risk.
bonds are used to establish the coupon rate

purchasers what coupon rate would be necessary to
will be. The required return is what investors actually
equal only if the bond sells for exactly par.
as it is fixed on the preferred. However, the preferred

ld be worth more, depending on the circumstances.
xecutives believe that the dividend will grow at 25%

The required return is 12%. Calculate the current
5
$ 1.25
as for-profits do. However, it is frequently the case

has real opportunity costs, but the benefits are
priate required return remains. Payback rules are
uld definitely be used by governments and would go a
fferent lives that will be replaced when they wear out.
an be compared; in effect, each project is assumed to
alid implies that the project cash flows remain the
economic conditions, (3) the increasing unreliability
ogy improvement that could alter the project cash
Thus depreciation causes taxes paid, an actual cash

s that would otherwise be paid is the same thing as a
ental aftertax cash flows.
ion project that requires an initial fixed asset

30% per year, and at the end of the three years can
nnual sales, with costs of $840,000. If the tax rate is
CCA Table
3,900,000 3,315,000 2,320,500
585,000 994,500 696,150
3,315,000 2,320,500 1,624,350
he statement is therefore correct. At the margin,

increase operating cash flow.
ollections and the cash discount
ash flow.
rn is likely.
es and other aspects of the customer’s business that
nt longer credit periods to entice buyers.
d, and thus, will most likely have a longer credit period
d.
not particularly transportable.
times
of semi-strong form efficiency.
nformation processing of investors, that assets are

excessive profits from a particular trading strategy.
a particular investment horizon. Certain investors
nvestors who do not do well over the same period of
n a variety of assets, this unique portion of the total

ments. This portion of the total risk of an asset cannot
duction in expected returns.
cost of capital figures should be used for the

hurdle rate were used, riskier divisions would tend to
ite the fact that they may actually plot below the SML
estimating the cost of capital for a division is that it
on of the risk of the division. Two typical ways around
rm hurdle rate based on the perceived risk of the
nd equity, so:
hence true investment cost, should be valued as if
C
d
r
TC
S
n
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15 EPR1 0.050945336914063 23215.090354

39 EPR 0.0038 0.0038

967,485 = FVAGROWTH = P * (((1+r)^n - (1+g)^n) / (r-g))

Math % of total points

e midterm. Q36 and Q40 are

Monday, January 17, 2022

Saturday, January 15, 2022 *Tentative

12PM - 1PM Lunch break

1PM - 2:15PM Ch10 live discussion Zoom

Thursday, January 13, 2022

Sales Revenue $ 1,000,000

Abby's Retail Limited

Retained Earnings, January 1 $ 20,000

Total Assets $ 168,500 $ 152,000

Total Liabilities $ 148,000 $ 122,000

Total Liabilities and Shareholder's Equity $ 168,500 $ 152,000

Dividend declared & paid $ 86,000

Operating cash flow (OCF):

Net income = Dividends + Addition to Retained Earnings

OCF = $ 6,248 =EBIT + Depreciation - taxes

Verifying that the cash flow identity holds:

Given: Long term debt repaid = 6,400

Given: Net new equity = 7,350

Cash Flow from Assets (CFA).

New information: NFA increased by $12,000 during the year

Check: does it all work out? $ 24,950

From ch2 Table 2.5 page 38, progressive tax calculation

CCA table example

Cost of Capital Asset $ 1,000,000

Year Beginning UCC Additions CCA

ence between the selling price

8,954 Future value

PV, by formula PV, by Excel Years Interest Rate FV

PV Years Interest Rate Future Value 7/5/Q9

PV Years Interest Rate Future Value 7/5/Q17

Example, with multiple level cash flows

Using a 22% discount rate:

Calculating EAR: Find the EAR in each of the following cases:

eturn is 8 percent, what is the value of the

ure value of these cash flows?

percent, what is the value of the

ur, the number of quarters per year. So:

Principal $ 100,000 Total Paid

Cumulative Cumulative Mortgage

ayout penalty example

ree Months' Interest Costs:

Step 1: ________ (A) amount you want to prepay

terest Rate Differential Amount:

The banks' gain is your pain. Globe & Mail

Time Account value Scholarship paid

Time Account value Scholarship paid

,000 and an annual scholarship growth rate of 3%.

1,126,571 = PVAG = (C/(r-g)) * (1-((1+g)/(1+r))^t) - = PVAG = (C/(r-g)) * (1-((1+g)/(1+r))^t)

Texas A&M, Lee Lowery

2 $100 deposits: $619.44 25 G (the dollar increase each period)

*Check, longhand 12%

$ (73.39) $ (67.33) $ (61.77) $ (56.67) $ (51.99) $ (47.70) $ (43.76) $ (40.15) $ (36.83)

rently sells for $1,080, what is its YTM?

of 7.5%. What must the coupon rate be on

e current bond price?

YTM 0.060 0.100

So the price of the stock today is: