UNIVERSIDAD DEL PACÍFICO

Departamento Académico de Finanzas

1F0120 – FINANZAS CORPORATIVAS I
Prof. Julio Panduro
2023-I

JPs: Louis García, Carmilio Mendoza

PRÁCTICA DIRIGIDA #1
Exercises

1. A lender analyzes the following information, given a discount rate of 7%, calculate the Present
Value of a flow of $15,000 that will be received in 6 years.
2. A hospital in Lima is evaluating starting a COVID testing center. For this, it does not require an
additional investment since it would only assign a certain amount of personnel to this area.
However, it is considered that income equivalent to $100,000 will only be received after year 3.
Determine what additional value this area would generate for the company. Assume that the
discount rate is 10%.
3. Consider the cash flow (in thousands of dollars) from these two projects in Piura:
Y 0 1 2 3 4 5
PROJECT A -60 20 20 20 20 28
(Arándanos)
PROJECT B -72 45 22 13 13 13
(Limones)

a. What is the NPV of each project? Assume that the cost of capital is 11%.

b. Assuming the projects are independent, would you accept them if the cost of capital were
15%?

c. If the projects were mutually exclusive, which would you choose if the discount rate is 15%?

4. The project to buy printers for each building of the Maria Vergara house requires an investment
of US$100,000, so that the first year generates a cash flow of US$50,000. It is estimated that
during the next 4 years, the cash flow of year 1 will grow at an annual rate of 7%. The
opportunity cost of this project is 9%. Calculate the NPV of the project.

Annuity

5. A mother buys insurance to pay for her children's future college and makes a $250 tax payment
every year for the next 15 years. Calculate the future value, assuming that the investment expects
a return of 2%.

Perpetuity

6. Calculate the value of the ALICORC stock that pays a dividend of $2.5 per year, if this dividend
is expected to grow at a rate of 2% per year forever. Assume that the discount rate is 9%.

Arbitration

7. Define the term arbitrage for finance. How can it be used?

8. Find the value of a stock that pays a dividend of $10 per year if this dividend is expected to grow
at a rate of 5% per year forever. Assume that the discount rate is 13%. If the current price of the
share is 150, would you buy it and why?
9. Assume the stock price is $130. Does your answer change? Is the arbitration fulfilled?
Extra exercises
1) Which of the following statements is INCORRECT?
a) In general, money today is worth more than money in one year.
b) We define the risk-free interest rate, rf for a given period as the interest rate
at which money can be borrowed or lent without risk over that period.
c) We refer to (1-rf) as the interest rate factor for risk-free cash flows.
d) For most financial decisions, costs and benefits occur at different points in time.

2) Which of the following statements is FALSE?

a) The NPV represents the value of the project in terms of cash today.
b) Good projects will have a positive NPV.
c) The NPV of a project is the difference between the present value of its benefits and
the present value of its costs.
d) When faced with a set of alternatives, choose the one with the lowest NPV in order
to minimize the preset value of costs.

3) Which of the following statements is FALSE?

a) We refer to a series of cash flows lasting several periods as a stream of cash flows.
b) We can represent a stream of cash flows on a timeline.
c) A timeline is a non-linear representation of the timing of the (expected) cash flows.
d) Timeline is an important tool for solving financial problems.

4) Which of the following statements is FALSE?

a) The process of moving a value or cash flow forward in time is known as
compounding.
b) The process of moving a value or cash flow backward in time is known as
discounting.
c) The value of a cash flow that is moved backward in time is known as its future
value.
d) Finding the future value and compounding are the same.

5) Which of the following statements is FALSE?

PV
a) FV = n
(1+r )

b) PV =

c) FV = Cn × (1 +

r)n d)

6) If we use future value rather than present value to decide whether to make an
investment, which of the following statement is CORRECT?
a) We will make a bad decision, since the future value will always be higher if the discount
rate is positive.
b) We will make a bad decision, since the future value will always be lower if the discount
rate is positive.
 c) We will make the same decision using either future value or present value.
d) None of the above is correct.

7) Which of the following statements regarding perpetuities is FALSE?

a) A perpetuity is a stream of equal cash flows that occur at regular time intervals and lasts
forever.
b) PV of a perpetuity = r/C
c) A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a
constant rate forever.
d) PV of a growing perpetuity =𝐶⁄𝑟 − 𝑔
e) We assume that g < r for a growing perpetuity.

8) Which of the following statements regarding arbitrage is the most correct?

a) The practice of buying and selling equivalent goods in different markets to take advantage
of a price difference is known as arbitrage.
b) We call the price of a security in a normal market the no-arbitrage price for the security.
c) The general formula for the no-arbitrage price of a security is Price(security) = PV(All
cash flows paid by the security).
d) The NPV of trading a security in a normal market is positive.

9) If the risk-free rate of interest (rf) is 3.5%, then you should be indifferent between
receiving $1000 in one-year and receiving how much today?

10) Suppose you have $1,000 today and the risk-free rate of interest (rf) is 3.5%. What is
the equivalent value in one year?

11) A project that you are considering today is expected to provide benefits worth
$168,000 in one year. If the risk-free rate of interest (rf) is 4.5%, then what is the value
today of the benefits of this project?

12) Alekipa Steel (AS) Inc. needs to order a new blast furnace that will be delivered in one
year. The $1,000,000 price for the blast furnace is due in one year when the new
furnace is installed. The blast furnace manufacturer offers AS a discount of $50,000 if
they pay for the furnace now. If the interest rate is 7%, should AS choose to pay now to
take advantage of the discount?

13) Use the table for the question(s) below.

Cash flow Cash flow in

Project
today one year
"alpha" -18 23
"beta" 15 -12
"gamma" 15 -20
"delta" -16 21

Assume that the risk-free interest rate is 10%. Calculate the NPV for each of the four
projects. Rank the four projects from the most desirable one to the least desirable one
based upon NPV. Which project would you invest in first? Are there any projects that
you wouldn't invest in and why?

14) Use the information below to answer the following question(s):

The owner of La PAVITA is considering selling his sandwich store and retiring. An
investment fund has offered to buy the LA PAVITA for $350,000 at any time no more
than one year from now on. The owner is considering the following three alternatives:

1. Sell the restaurant now and retire.

2. Hire someone to manage the restaurant for one more year and retire. This will require the
owner to spend $50,000 now, but will generate $100,000 in profit at the end of the year. In
 one year the owner will sell the restaurant for $350,000.
3. Scale back the restaurant's hours and ease into retirement over the year. This will require
the owner to spend $40,000 now on expenses, but will generate $75,000 in profit at the end
of the year. In one year the owner will sell the restaurant for $350,000.

14.1) If the interest rate is 7%, what is the NPV of alternative #1?

14.2) If the interest rate is 7%, what is the NPV of alternative #2?

14.3) If the interest rate is 7%, what is the NPV of alternative #3?

14.4) Which alternative has the highest NPV? Which alternative has the lowest NPV?
Which alternative should the owner choose?

15) Suppose a security has a risk-free cash flow of $1000 in one year. If there are no
arbitrage opportunities and the current risk-free interest rate is 10%, how much should
the security trades at today?

16) Use the table for the question(s) below.

Cash flow Cash flow

Security
today in one year
A 0 100
B 100 0

16.1) If the risk-free rate of interest is 7.5%, what is the value of security "A"?

16.2) If the risk-free rate of interest is 7.5%, what is the value of security "B" ?

17) You have been offered the following investment opportunity, if you pay $2500 today,
you will receive $1000 at the end of each of the next three years. Draw a timeline
detailing this investment opportunity. Caculate the NPV of this investment opportunity
if the discount rate will keep constant at 10%. Is it a good investment opportunity?

18) At an annual interest rate of 7%, the future value of $5,000 in five years is:

19) At an annual interest rate of 7%, the present value of $5,000 received in five years is:

20)Consider the following timeline:

If the current market rate of interest is 9%, what is the present value of this timeline as
of year 0?

21) Consider the following timeline:

If the current market rate of interest is 7%, then the future value of this timeline as of
year 3 is:
22) Use the following information to answer the question(s) below.

Your great aunt Matilda put some money in an account for you on the day you were
born. This account pays 8% interest per year. On your 21st birthday the account balance
was $5,033.83.

22.1) The amount of money that your great aunt Matilda originally put in the account
is:

22.2) The amount of money that would be in the account if you left the money there
until your 65th birthday is:

23) Use the following information to answer the question(s) below.

You are considering an investment opportunity that requires an investment of

$1,000,000 today and will provide $250,000 one year from now, $450,000 two years
from now, and $650,000 three years from now.

23.1) If the appropriate interest rate is 10%, what is the NPV of this opportunity?
Should you invest in it and why?

23.2) If the appropriate interest rate is 15%, what is the NPV of this opportunity?
Should you invest in it and why?

24)Francisco d'Anconia is considering an investment opportunity that costs $10,000

today and will pay $11,500 in two years. The IRR of this opportunity is:

25) The British government has a consol bond outstanding that pays ₤100 in interest each
year. Assuming that the current interest rate in Great Britain is 5% and that you will
receive your first interest payment one year from now, then the value of the consol
bond is:

26)The British government has a consol bond outstanding that pays ₤100 in interest each
year. Assuming that the current interest rate in Great Britain is 5% and that you will
receive your first interest payment immediately upon purchasing the consol bond, then
the value of the consol bond is:

27) Consider a growing perpetuity that will pay $100 in one year. Each year after that, you
will receive a payment on the anniversary of the last payment that is 6% larger than the
last payment. This pattern of payments will continue forever. If the interest rate is 11%,
then the value of this perpetuity is:

28)If the current rate of interest is 8%, then the present value of an investment that pays
$1000 per year from one year onwards and lasts 20 years is:

29)Use the information for the question(s) below.

Assume that you are 30 years old today, and that you are planning on retirement at age
65. Your current salary is $45,000 and you expect your salary to increase at a rate of 5%
per year as long as you work. To save for your retirement, you plan on making annual
contributions to a retirement account. Your first contribution will be made on your 31st
birthday and will be 8% of this year's salary. Likewise, you expect to deposit 8% of your
salary each year until you reach age 65. Assume that the rate of interest is 7%.

29.1) The present value (at age 30) of your retirement savings is: