YSGOL BUSNES BANGOR

BANGOR BUSINESS SCHOOL

Arholiadau Diwedd Semester 2 2019/20

End of Semester 2 Examinations 2019/20

ASB-3210 ADVANCED CORPORATE FINANCE

Amser a ganiateir: 2.5 AWR

Time allowed: 2.5 HOURS

Cyfarwyddiadau / Instructions:
Answer
ALL questions in Section A,
Both questions from Section B and
ONE question from Section C.

Each question in Section A is worth 1 mark (30% in total).

All questions in section B and section C carry equal marks (35% each).
Please put your answers for Section A answers in your answer booklet, do not use an MCQ
response form.

Trowch y dudalen drosodd pan ddywedir wrthych / Please turn over when instructed.
Section A – Answer all questions in this section. For each question in Section A, there is only
ONE correct answer. Marks will not be deducted for incorrect answers.

Question 1

Consider a graph with standard deviation on the horizontal axis and expected return on the
vertical axis. What is the name of the line that connects the risk-free rate and the tangency
portfolio?
A. The security market line
B. The indifference curve
C. The capital market line
D. The characteristic line

Question 2

The risk-free rate for the next year is 3%, and the market risk premium is expected to be 10%.
The beta of Red’s stock is 1.5. If you believe that the actual return on Red’s stock will be
18.5% over the next year, what should you do according to the CAPM?
A. Buy the stock because it is under priced
B. Sell the stock because it is overpriced
C. Be indifferent between buying and selling the stock
D. Sell the stock because it is under priced
Question 3
The beta of stock H is 1 and it has a very high non-systematic risk. What is the expected
return on stock H according to the CAPM if the expected return on the market is 20%?
A. the answer cannot be found without knowing the risk-free rate of interest.
B. the answer cannot be found without knowing Stock A’s correlation or covariance with
the market.
C. more than 20% because of Stock A’s very high unique risk.
D. exactly 20%.
Question 4
Which of the following statements applies to the Arbitrage Pricing Model (APT) but not to
the CAPM?
A. APT specifies the number and identities of specific factors that determine expected
returns.
B. APT requires normally distributed security returns.
C. APT uses risk premiums based on micro variables.
D. APT has fewer restrictive assumptions.

Question 5

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Consider the multifactor APT with two factors. Stock A has an expected return of 20%, a
beta of 1.2 on factor 1 and a beta of 0.60 on factor 2. The risk premium on the factor 1
portfolio is 6%. The risk-free rate of return is 5%. What is the risk-premium on factor 2 if no
arbitrage opportunities exist?
A. 12%
B. 13%
C. 14%
D. 15%

20=5+1.2*6+0.6*X
0.6X=20-5-1.2*6
0.6X=7.8
X=13

Question 6

Which of the following statements about the Market Model is true?

A. The Market Model is a three factor model.

B. The common factor in the Market Model is the excess market return.
C. The Market Model can be used to estimate expected returns.
D. The Market Model regression equation does not include an intercept.

Question 7
Suppose you sell a call and buy one share of stock. What is your cash payoff when the option
expires? (Ignore the costs of the call and the share of stock).

A. Receive St if St ≤ X and receive X if St > X.

B. Receive (St – X) if St ≤ X and receive X if St > X.
C. Receive X if St ≤ X and receive St if St > X.
D. Receive St if St ≤ X and receive –(St –X) if St > X.

If St<=X, option payoff 0, stock payoff St

If St>=X, option payoff X-St, stock payoff St

Question 8
The seller of an option has the
A. Right to buy or sell the underlying asset
B. Ability to make risky investments without facing the downside risk
C. The obligation to buy or sell the underlying asset
D. Right to exchange one payment stream for another

Question 9

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Consider a European-style call option on a stock that is currently trading at £100. The strike
price of the call is £90. Assume that, in the next 12 months, the stock price can either go up to
£120 or go down to £80. Using risk-neutral valuation, calculate the current value of the
option if the risk-free rate is 5 percent per annum. Use discrete compounding. Which of the
following is correct?

A. £17.86
B. £18.5
C. £18.75
D. £19

100*(1.05)=120p+80(1-p)
105=120p+80-80p
25=40p
p=25/40=0.625
30*0.625/1.05+0*0.375/1.05=17.86
Question 10
Which one of the following statements is correct?
A. A project which has positive NPV using traditional Discounted Cash Flow analysis
will always continue to have positive NPV once the presence of real options is taken
into account
B. A project which has negative NPV using traditional Discounted Cash Flow analysis
will always continue to have negative NPV once the presence of real options is taken
into account
C. Taking real options into account may increase or decrease the net present value of an
investment project
D. A project which has positive NPV using traditional Discounted Cash Flow analysis
may have negative NPV once the presence of real options is taken into account

Question 11
Which of the following suggestions is attributable to the “bird in the hand” hypothesis of
dividends?
A. Dividends are irrelevant
B. Firms should pay out all their earnings as dividends
C. Shareholders are risk averse and consider current dividends less risky
D. The market value of the firm is unaffected by dividend policy

Question 12
Dean plc have paid a dividend of £3 per share last year. The company's target payout ratio is

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40%. Using the Lintner (1956) model of dividend policy with an adjustment rate of 50%,
what dividend will Dean plc pay this year if earnings per share are £14.00?

A. £1.50
B. £2.30
C. £3.00
D. £4.30

Div(t)=Div(t-1)+s*(T*EPS(t)-Div(t-1))
Div(t)=3+0.5*(0.4*14-3)=4.3
Question 13
Assume that you have identified two companies that are virtually identical in all aspects
except for their capital structure, and their market values are different. What should happen to
these companies according to the Modigliani and Miller (no tax) theorem?
A. One will be at greater risk of default
B. The more leveraged firm will be more valuable
C. The less leveraged firm will be more valuable
D. This situation will not persist for long because arbitrage will eventually cause the
firms to sell at the same value
Question 14
Two firms, U and L, are identical in every respect except for their capital structures. Company
U is all-equity financed, whereas L is partly funded by debt. The market value of U’s equity is
£10 million and the total market value of L’s is £12 million. The corporate tax rate is 25%. If
all the assumptions of ‘Modigliani and Miller Theorem with Taxes (1961)’ apply, which of the
following is the market value of L’s equity?

A. £3 million
B. £4 million
C. £5 million
D. £6 million
V(L)=V(U)+T*D
12=10+0.25*D
0.25*D=2
D=8
12=E(L)+8
E(L)=4
Question 15
Which of the following statements is correct?

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 A. High leverage decreases the volatility of the net income available to investors
B. High leverage increases the volatility of the net income available to investors
C. In the absence of taxes, companies with lower leverage are more valuable than
companies with higher leverage
D. In the absence of taxes, companies with higher leverage are more valuable than
companies with lower leverage

Question 16
Suppose that weather predictions made by the BBC News could be used to make abnormal
returns in the market. Which of the following forms of market efficiency is violated?
A. Weak-form efficiency
B. Semi-strong form efficiency
C. Both weak and semi-strong form efficiency
D. None of the forms are violated, markets are efficient

Question 17
The use of ‘inside information’ to earn profits is illegal in many countries. What is the
underlying assumption made by the regulators prohibiting insider trading?
A. The market is semi-strong form efficient, but not strong form efficient
B. The market is semi-strong form efficient, but not weak form efficient
C. The market is strong form efficient
D. The market is strong form efficient, but not semi-strong form efficient
Question 18
Which one of the following statements is correct?
A. The existence of the January effect is consistent with the weak form efficiency
B. Event studies are used to test the strong-form efficiency
C. In the strong form efficient markets CEOs cannot earn abnormal profits by trading
shares in their own company
D. In the semi-strong efficient markets investors can make abnormal profits by trading
on the most recent news
Question 19
In which of the following situations will firms’ managers have an incentive to manipulate the
firm’s earnings upwards (i.e. make the firm look more profitable)?
A. During negotiations with trade unions
B. To sell their holdings at the firm before retiring next year
C. Before asking for emergency loans from the government
D. All of the above

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Question 20

Which of the following actions by a firm’s managers is usually perceived as a good signal by
the markets?

A. Equity issue
B. Decrease in leverage
C. Decrease in dividends
D. Increase in leverage

Question 21
Which one of the following does NOT provide an incentive for managers to try to increase
the current price of their shares?
A. Pressure from short-term shareholders
B. A competitor is threatening a hostile takeover of their company
C. Bonuses paid to managers on the basis of the increase in the company’s share price
over the year
D. Pressure from long-term shareholders.

Question 22
Which one of the following statements agrees with the agency theory?
A. Information asymmetry does not exist
B. Individuals do not take actions that promote their own interests
C. The management board is the agent
D. The management board is the principal
Question 23
Know plc would like to borrow £10 million for one year. There is a 20 percent chance that the
firm will be bankrupt at the end of the year. In the event that the firm is bankrupt, its assets can
be sold for £3 million. However, the legal costs of seizing Know’s assets will cost the bank
£800,000. How much will a bank charge for the loan if it prices loans to companies like Don
to earn, on average, 9 percent?
A. 22.5%
B. 28.3%
C. 30.8%
D. 34.1%

0.8*X+0.2*2.2=10.9
0.8*X=10.9-2.2*0.2=10.46
X=13.075
Question 24

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Assume the cash flows arising from Project A are the only potential source of cash flow for a
company and that the company owes £2.5 million debt. Project A, in one year's time, will
have either a cash inflow of £1 million with a probability of 45% or a cash inflow of £3
million with a probability of 55%. What is the expected cash inflow for shareholders in one
year's time?
A. Minus £0.4 million
B. 0
C. £0.4 million
D. £2.1 million

(1*0.45+3*0.55)-2.5= -0.4
Limited liability, so 0

Question 25

For which type firms is the financial distress especially costly?

A. Firms whose product quality is not an important factor.

B. Firms whose products do not require follow-up service.
C. Firms with extremely low leverage.
D. Firms whose employees and suppliers require specialised capital or training.

Question 26

Which one of the following is an example of potential conflict (agency problem) between
managers and shareholders?
A. Managers exercising due diligence in evaluating projects
B. Managers engaging in mergers in order to generate operational synergies
C. Spending on corporate perquisites (i.e. purchase of a new corporate jet).
D. All of the above could give rise to agency problems

Question 27

One year interest rates are 7% in the UK and 9% in Australia. The spot USD/AUD rate is
$1.50. What is the one year forward price?

A. 1.4725
B. 1.5055
C. 1.5280
D. 1.5305

F0=S0*(1+ip)/(1+ib)=1.50*1.07/1.09=1.4725

Question 28

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What is the purpose of hedging?

A. To reduce or eliminate exposure to risk

B. To protect the arbitrage profit
C. To guarantee a certain level of return
D. To increase leverage in order to increase expected returns

Question 29

‘I am worried that our revenue of our foreign currency-denominated assets will be lower
when we prepare our accounts.’

What type of risk is the above statement associated with?

A. Translation risk
B. Economic risk
C. Transaction risk
D. Interest rate risk

Question 30

Which one of the following is the advantage of forward contracts compared to future
contracts?

A. Transaction costs for forwards are usually lower than for futures
B. Forwards can usually be tailored to user’s exact requirements
C. Forwards can be used to trade any currency pairs
D. None of the above

Section B – Answer both questions in this section.

Question 31 – Answer all parts

Aspen Marvin Plc, a UK-based car manufacturer, is considering adding a new model of high-
performance petrol cars to its current production line. The success of the new car line
depends on the government legislation to ban all petrol and diesel cars in the UK by 2025.
The legislation will be considered in the parliament a year from now, and the analysts
estimate that the probability of the ban becoming a law next year is 100% if the Green Party
wins the General Election which is scheduled for the next month, and 40% if any other party
wins the election. The probability of Green Party winning the election is 30%.
If the ban is not imposed, the revenues from the project are estimated to be £10 million a year
for each of 15 years, starting a year from now. On the other hand, if the ban is imposed, the
revenues are expected to be £1 million a year for 15 years starting a year from now. The risk-
free rate is 3 percent per annum and the initial cost of the project is £50 million.
Required
a) Calculate the Net Present Value (NPV) of the project
(10 marks)

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Probability of the ban – 1*0.3+0.4*0.7=0.58
NPV= -50+0.42*10*AF(15 years, 3%) + 0.58*1*AF(15 years, 3%)= -
50+0.42*10*11.938+0.58*11.938=£7.064 mil
b) Aspen Marvin’s CEO thinks that the project is too risky and wants to wait for a year
and only invest in the project if the legislation is not passed. Assume that, if the
decision is delayed, the project’s cash flows and its time duration will not change but
the positive cash flows will start in 2 years’ time. Also, assume that Aspen Marven’s
competitors are not ready to produce high performance petrol cars within the next 12
months.

Calculate

i. the NPV of the project if the CEO’s proposal is accepted

(8 marks)

and

ii. the value of the option to delay the project.

(2 marks)

New NPV = p*(-50/1.03 +10*AF(15 years, 3%)*DF(1 year, 3 percent)=0.42*(-

50/1.03+10*11.938*0.971)=£28.30 mil

Option to delay = £28.30mln – £7.064mln=£21.24mln

c) Now assume that other car manufacturers can enter the market within the next 12
months and, if they do, the estimated revenues from the project will no longer be
correct. However, Aspen Marven can obtain a patent for its new car model, which
would mean that no other car manufacturer will be able to produce this or similar
models within the next 12 months. The cost of this patent is £20 million. Explain
whether or not the company should buy the patent and why.
(5 marks)

The company should buy the patent since its value is lower than the value of the option, i.e
company would create value for its shareholders compared with no-option case.

Question 32 – Answer all parts

DDV plc is a UK-based pharmaceutical company with a current share price of £30 and has 1
million shares in issue.

The company’s research and development center has discovered a new drug which is
expected to be a success and the company will be able to market the drug in two months’
time. This information is currently not available to investors and DDV plc is reluctant to
make an announcement before marketing the drug as their competitors may benefit from an
early announcement. The share price is expected to increase to £50 when the news is
released.

In addition, DDV plc wishes to invest in a new machine, which will cost £6 million and has
an expected net present value of £2 million. This net present value is already reflected in the

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£30 share price, of which £28 reflects current business and £2 reflects the net present value of
the machine project. The company is unable to raise debt to finance the machine project;
hence if the company wishes to proceed they will need to issue equity.

a) How many shares will the company need to issue to raise £6 million?
(2 marks)

5,000,000/30=200,000

b) If the equity issue is made and the new machine is purchased, what will the new share
price be after the drug announcement is made?
(9 marks)

Existing no of shares = 1,000,000

Value of the company after hearing about the new drug = £50,000,000
No of shares after the equity issue = 1,200,000
New value = £50,000,000+£6,000,000(equity issue)=£56,000,000
New share price = £56,000,000/1,200,000=£46.67

c) If the company decides to forego the machine project, what will the share price be
after the drug announcement is made?
(5 marks)

The share price will be £50 less the £2 from the machine project, hence £48

d) Assuming the only consideration is the share price, should the company proceed with
the machine project? Briefly explain, why this result has occurred.
(5 marks)

No, the share price will be higher if the positive npv project is foregone – the
new shareholders will benefit at the cost of the existing shareholders as the
company would be issuing shares at below their ‘imminent’ revised market
value – half marks if just state whether to accept or not without elaborating

e) In addition, DDV have purchased some chemicals used to manufacture drugs from the
US which cost $300,000. DDV them resells these chemicals in the UK for £280,000.
The spot USD/GBP rate at the time of the import purchase is $1.24-$1.25 per £1.

Calculate the expected profit on the resale.

(4 marks)

DDV must buy USD to pay the supplier, and so the bank is selling USD. The
expected profit is as follows:

£ Revenue from resale of goods £280,000

Less cost of $300,000 in pounds (div by 1.24) £241,935
Expected profit £38,065

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Section C - You must choose only one question from this section.

Question 33

Explain the underlying reasoning for the following proposition in the context of company
dividend policy: “Dividend policy if strongly affected by tax rates on income and capital
gains”

(20 marks)

The lecture topics placed emphasis on the impact of taxes on dividend policy, hence
this aspect is given a greater weighting in this question. The lectures also covered two
types of empirical testing that are commonly mentioned in the literature, and students
would be expected to discuss some of those aspects here.

Under the principles of Modigliani-Miller’s theorem with taxes: in any tax system
where dividends are taxed more heavily than capital gains, firms should pay the
lowest cash dividend they can get away with.

It has been common in past exam answers for students to confuse the impact of taxes
on dividend policy with the impact of taxes on capital structure. That is part of the
knowledge being tested here.

Question 34

Explain the reasons why corporate and personal taxes could affect firms’ capital structure
choices.

(20 marks)

These issues were covered in detail in Lecture 7 of Semester 1.

With corporate taxes but no personal taxes, the optimal capital structure includes
enough debt to fully offset the firm’s tax liabilities. But increasing leverage also
increases risk and one should consider the costs of financial distress. Hence, optimal
Capital Structure becomes a balancing act between the benefit of the tax shield and
the costs of financial distress.

With personal taxes, the value of the levered firm is that of the equivalent unlevered
firm plus the present value of the tax gain from debt

VL=VU+D×[1-(1-Tc)(1-TE) /(1-TD)] VL =VU onlywhen1-TD =(1-Tc)(1-TE)

Question 35

Carefully discuss how one can test whether the market is weak-form efficient, including in
your discussion empirical evidence from such tests.

(20 marks)

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Empirical tests of Weak-form efficiency include autocorrelation analysis, calendar
effects and technical trading rules. Each of these techniques attempts to use the patterns
in past price/return data to forecast the behaviour of future prices/returns.
Autocorrelation - A tool commonly used by statisticians and econometricians to
examine how a variable is related to its own past values is known as an autocorrelation
coefficient
𝐶𝑜𝑣(𝑟𝑡 , 𝑟𝑡−𝑘 )
𝜌𝑘 =
𝑉𝑎𝑟(𝑟𝑡 )
This coefficient tells us whether a systematic relationship exists between a variable and
its value k periods earlier. It is computed as follows;
If the kth autocorrelation is positive (negative) we have a situation where a positive
return today tends to forecast positive (negative) returns k periods ahead.
Various authors have constructed such statistics for various securities from a number
of countries.
• Fama (1965) found little evidence of autocorrelations that were reliably
different from zero for daily data on US stock returns.
• Campbell, Lo, and Mackinlay (1996) provide recent evidence in this area using
US data from the 1960s through to the 1990s. They find positive first-order
autocorrelations for daily, weekly and monthly returns.
• deBondt and Thaler (1985) demonstrate that if one measures returns over very
long periods, e.g. 5 years, then there is clear evidence of strong negative
autocorrelation.
Problem: most of these studies fail to risk-adjust returns. Thus perhaps we are not
finding evidence of true inefficiency (Best answers will mention this).
Calendar anomalies
Returns are predictability higher or lower than usual at certain times of the year, month
or week (or even day). The most famous of these effects is the January effect which
suggests that stock returns tend to be significantly higher in January than in other
months of the year. See Fama (1991) for results and further references on the January
effect in US, UK and other stock return data. Certain authors have also found evidence
of a Monday effect in US return data — returns on Monday are significantly lower than
on other days of the week. Puzzling as explanations based on inadequate risk-
adjustment requires us to tell stories regarding calendar effects in the risk factors that
affect stock returns. This is not easy to do. Other explanations focus on features of
market institutions or trading arrangements that cause certain parts of the week, month
or year to differ from others. Perhaps the most convincing explanation of the calendar
anomalies is that they arise by chance and it is the intensive analysis of the stock return
data that have uncovered them. If so, they do not really reflect inefficiency and will fail
to generate positive excess returns in future samples of data.
Technical trading rules

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 Widely used by FX and equities traders. TR attempt to relate patterns observed in
security prices to subsequent returns. Some of the rules are based on statistical
transformations of past prices and others are based on graphical representations. Some
examples:
1. Moving-average crossover rules
2. Support/resistance rules
3. Head and shoulder patterns
Sweeney (1988) and Levich and Thomas (1993) applied several common rules to daily
FX data, concluding that trading profits were available. Brock, Lakonishok, and
LeBaron (1992) applied moving average and support-resistance rules to daily stock
index data also concluding that they had the power to forecast returns. In all these cases,
the returns from the trading rules outperformed the simple strategy of just buying and
holding the asset in question. However, some caution must be required in interpreting
these results. All fall prey to the problem that they do not risk-adjust their trading rule
returns.

Question 36

Explain, using numerical examples, how shareholders can expropriate wealth from
debt-holders.
(20 marks)

At times, managers may take actions which benefit one party (i.e., shareholders) at the
cost of the other (i.e., debtholders). Equity holders have limited liability for the debts
of the firm. In the event of bankruptcy, the losses of shareholders are limited to only
the capital that they already have in the firm. In the presence of debt, equity may be
like holding a ‘call option’ on the firm’s assets (limited downside, with unlimited
upside potential).
Shareholders have a residual claim to what is left after repaying debt. But
shareholders have a limited downside since they do not have to compensate
debtholders if firm value is lower than the level of debt outstanding.
When a company is vulnerable to bankruptcy, shareholders will prefer decisions that
make the firm more risky:
• More risk means greater upside potential
• Downside risks are limited
However, there will be greater potential losses for debtholders
Students should also discuss the following and provide some numerical examples that
illustrate these issues
1. Debt overhang problem
2. Asset substitution problem
3. Shortsighted investment problem

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4. Reluctance to liquidate

Debt overhang problem

Equity holders will choose to underinvest (pass up positive NPV projects) if existing
debtholders capture most of the benefits. This is also known as the underinvestment
problem
Example:
- Risk-free project will return 7% if exercised
- Current risk-free borrowing rate is 5%
- Current borrowing costs 8%
- Return on the project would be 7% - 5% = 2% (using appropriate discount rate)
- Return to shareholders would be 7% - 8% = -1%
- Therefore, while bondholders would be better off (project would reduce risk of the
firm) shareholders would pass on the investment.
Asset substitution problem
Equity holders prefer to take on overly risky projects, even if they have negative
NPV. Additional downside risks for debtholders, while equity holders may only have
additional upside potential (Equity may be similar to holding a call option).

Example:

Project Unfavourable Favourable E(v) Cost NPV

(prob = 50%) (prob = 50%)

A 50 100 75 70 5

B 25 115 70 70 0

If financed by 40 debt, payoffs to equity are as follows:

Value to
Project Unfavourable Favourable Shareholders

A 10 60 35

B 0 75 37.5

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Shortsighted investment problem
Equity holders of highly levered firms prefer to pass up profitable investments that
pay off over a long time horizon in favour of less profitable (lower NPV) projects that
pay off more quickly
High rates required for subordinate debt drives the need to generate cash quickly to
reduce the amount of high cost debt required
Reluctance to Liquidate
Equity holders may want to keep a firm operating when its liquidation value exceeds
its operating value

16
USEFUL FORMULAE

𝐶𝑜𝑣𝑖,𝑀
CAPM beta: 𝛽𝑖 = 2
𝜎𝑀

CAPM equation: 𝑟𝑖 = 𝑟𝑓 + 𝛽𝑖 (𝑟𝑀 − 𝑟𝑓 )

Dividend Discount Model: Price per share (P) = d1/(ke - g)

Binomial valuation (tracking portfolio) : λ = (Ku - Kd ) / (Su - Sd )
μ = e-r [ Ku - {Su x (Ku - Kd ) / (Su - Sd )}]
1−(1+𝑟)−𝑛
Annuity formula: PV = C *
𝑟
𝑃0 −𝑃1 1−𝑡
Dividend drop ratio: = 1−𝑡 𝑖
𝐷 𝑐𝑔

Lintner model (1956): Divt = Divt-1 + s *(T * EPSt - Divt-1)

Modigliani-Miller (1961): VL = VU + DTc
Miller (1997): VL = VU + D × [1 - (1 - Tc ) ( 1 - TE ) / ( 1 - TD ) ]
Interest rate parity: F0=S0*(1+ip)/(1+ib)
Purchasing power parity: S1 =S0*(1+hp)/(1+hb)
1+𝑖𝑎 1+ℎ
International Fisher Effect: = 1+ℎ𝑎
1+𝑖𝑏 𝑏

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 DISCOUNT FACTOR TABLES

Present value of £1 to be received n periods hence, discount rate r per period.

DF(n, r ) = (1 + r)-n

r
n 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386

r
n 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162

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Present value of an annuity of £1 for n periods, discount rate r per period.
1− (1+ r )− n
AF ( n,r ) =
r

r
n 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145

r
n 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192

END OF PAPER

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