ASSIGNMENT COVER SHEET

STUDENT DETAILS

Student name: Hồ Đắc Minh Quốc Student ID number: 22002863

UNIT AND TUTORIAL DETAILS

Unit name: Corporate Financial Management Unit number: CFM-T22324PWB-1

Tutorial/Lecture: Lecture Class day and time: Monday, 12:00 – 15:15
Lecturer or Tutor name: Dr. Vũ Việt Quảng

ASSIGNMENT DETAILS

Title: 48-Hour Take-home Exercises Session 2

Length: 1726 words Due date: 15/01/2024 Date submitted: 12/01/2024

DECLARATION

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assignment.
I hereby certify that no part of this assignment or product has been submitted by me in
another (previous or current) assessment, except where appropriately referenced, and with
prior permission from the Lecturer / Tutor / Unit Coordinator for this unit.
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 ANSWER SHEET

Name: Hồ Đắc Minh Quốc

Student’s ID: 22002863

5.9 5.18
a) $530 a) $1,251.25; $1,300.32
c) $471.70 b) $1,600; $1,600
5.10 5.19
b) $1552.92 a) $423,504.48
c) $279.20 b) $681,537.69
5.11 c) $46,393.42; $84,550.80
a) 14.87% 5.21
5.12 a) Receive 30 end-of-year payments of $5.5M
a) 7% c) Receive $61M now
b) 7% 5.23
5.13 a) $881.17
a) 10.24 years b) $895.42
b) 7.27 years c) $903.06
5.14 d) $908.35
a) $6,374.97 6.2 2.25%
c) $2,000 6.3 6%; 6.33%
5.16 $1,428.57; $714.29 6.4 1.5%
5.17 9% 6.5 0.2%
 CALCULATIONS SHEET
5.9
a)
An initial $500  PV = 500
Compounded for 1 year  t = 1
Interest rate 6%  r = 6%
Compounding annually
t 1
FV =PV ×(1+ r) =500 ×(1+ 6 %) =$ 530
Conclusion: The future value of an initial $500 compounded for 1 year at 6% (compounding occurs
annually) will be $530.
c)
The present value of $500  FV = 500
Due in 1 year  t = 1
Discount rate 6%  r = 6%
Compounding annually
−t −1
PV =FV ×(1+ r) =500 ×(1+6 %) ≈ $ 471.70
Conclusion: The present value of $500 due in 1 year at a discount rate of 6% (compounding occurs
annually) will be approximately $471.70.
5.10
b)
An initial $500  PV = 500
Compounded for 10 years  t = 10
Interest rate 12%  r = 12%
Compounding annually
t 10
FV =PV × ( 1+r ) =500 ×(1+ 12% ) ≈ 1552.92
Conclusion: The future value of an initial $500 compounded for 10 year at 12% (compounding
occurs annually) will be approximately $1552.92.
c)
The present value of $500  FV = 500
Due in 10 years  t = 10
Discount rate 6%  r = 6%
Compounding annually
−t −10
PV =FV ×(1+ r) =500 ×(1+6 %) ≈ $ 279.20
Conclusion: The present value of $500 due in 10 year at a discount rate of 6% (compounding occurs
annually) will be approximately $279.20.
5.11
a)
2009 sales of 6 million  PV = 6
2014 sales of 12 million  FV = 12
2009 to 2014  t = 5
Compounding annually
t 5
FV =PV ×(1+ r) ↔ 12=6 ×(1+r ) → r ≈ 14.87 %
Conclusion: The sales have been growing at a compounded rate of 14.87% annually from 2009 to
2014.
5.12
a)
Borrow $700  PV = 700
Promise to pay back $749  FV = 749
At the end of 1 year  t = 1
Compounding annually
t 1
FV =PV ×(1+ r) ↔ 749=700 ×(1+r ) → r=7 %
Conclusion: The interest rate earned for this occasion is 7%.
b)
Lend $700  PV = 700
Promise to pay back $749  FV = 749
At the end of 1 year  t = 1
Compounding annually
t 1
FV =PV ×(1+ r) ↔ 749=700 ×(1+r ) → r=7 %
Conclusion: The interest rate earned for this occasion is 7%.
5.13
a)
Take $200 to double  PV = 200; FV = 400
Interest rate 7%  r = 7%
Compounding annually
t t
FV =PV ×(1+ r) ↔ 400=200 ×(1+ 7 %) → t ≈ 10.24 years
Conclusion: It will take around 10.24 years (approximately 11 years) to take $200 and double it with
the interest of 7% compounding annually.
b)
Take $200 to double  PV = 200; FV = 400
Interest rate 10%  r = 10%
Compounding annually
t t
FV =PV ×(1+ r) ↔ 400=200 ×(1+ 10 %) →t ≈ 7.27 years
Conclusion: It will take around 7.27 years (approximately 8 years) to take $200 and double it with
the interest of 10% compounding annually.
5.14
a)
$400 per year  C = 400
For 10 years  t = 10
Interest rate 10%  r = 10%
Ordinary annuity
t 10
[ ( 1+r ) −1] [ (1+10 % ) −1]
FV annuity=C × =400 × ≈ $ 6,374.97
r 10 %
Conclusion: The future value of a 10-year annuity with $400 per year and 10% interest rate will be
approximately $6,374.97.
c)
$400 per year  C = 400
For 5 years  t = 5
Interest rate 0%  r = 0%
Ordinary annuity
FV annuity=C ×t=400× 5=$ 2,000
Conclusion: The future value of a 5-year annuity with $400 per year and 0% interest rate will be
$2,000.
5.16
$100 perpetuity  C = 100
Interest rate 7%  r = 7%
C 100
PV = = ≈ $ 1,428.57
r 7%
$100 perpetuity  C = 100
Interest rate 14%  r = 14%
 C 100
PV = = ≈ $ 714.29
r 14 %
Conclusion: The present value of a perpetuity with 7% interest rate is approximately $1,428.57 and
with 14% interest rate is approximately $714.29.
5.17
Borrow $85,000  PV = 85,000
Annual loan payment $8,273.59  C = 8,273.59
For 30 years  t = 30
−t −30
[1−( 1+r ) ] [1−( 1+r ) ]
PV =C × ↔ 85,000=8,273.59× →r ≈9%
r r
Conclusion: The interest being charged for this loan is 9% per annum.
5.18
a)
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Stream A $0 $100 $400 $400 $400 $300
Stream B $0 $300 $400 $400 $400 $100
Discount rate 8%  r = 8%
CF 0 CF 1 CF 2 CF 3 CF 4 CF 5
PV of Stream A= 0
+ 1
+ 2
+ 3
+ 4
+ 5
(1+r ) (1+r ) (1+r ) (1+ r) (1+r ) (1+ r )
0 100 400 400 400 300
¿ 0
+ 1
+ 2
+ 3
+ 4
+ 5
(1+8 % ) (1+8 % ) (1+8 % ) (1+8 %) (1+8 %) (1+ 8 %)
≈ $ 1,251.25
CF 0 CF 1 CF 2 CF 3 CF 4 CF 5
PV of Stream B= 0
+ 1
+ 2
+ 3
+ 4
+ 5
(1+r ) (1+ r) (1+ r ) (1+r ) (1+r ) (1+r )
0 300 400 400 400 100
¿ 0
+ 1
+ 2
+ 3
+ 4
+ 5
(1+8 % ) (1+8 % ) (1+8 % ) (1+8 %) (1+8 %) (1+ 8 %)
≈ $ 1,300.32
Conclusion: The present value of stream A is approximately $1,251.25 and stream B is
approximately $1,300.32 if the discount rate is 8%.
b)
Discount rate 0%  r = 0%
CF 0 CF 1 CF 2 CF 3 CF 4 CF 5
PV of Stream A= 0
+ 1
+ 2
+ 3
+ 4
+ 5
(1+r ) (1+r ) (1+r ) (1+ r) (1+r ) (1+ r )
0 100 400 400 400 300
¿ 0
+ 1
+ 2
+ 3
+ 4
+ 5
(1+0 % ) (1+0 % ) (1+0 % ) (1+0 %) (1+0 %) (1+ 0 %)
≈ $ 1,600
CF 0 CF 1 CF 2 CF 3 CF 4 CF 5
PV of Stream B= 0
+ 1
+ 2
+ 3
+ 4
+ 5
(1+r ) (1+ r) (1+ r ) (1+r ) (1+r ) (1+r )
0 300 400 400 400 100
¿ 0
+ 1
+ 2
+ 3
+ 4
+ 5
(1+0 % ) (1+0 % ) (1+0 % ) (1+0 %) (1+0 %) (1+ 0 %)
¿ $ 1,600
Conclusion: The present value of stream A and B are approximately $1,600 if the discount rate is
0%.
5.19
a)
Save $5,000 per year  C = 5000
Average return 9%  r = 9%
40 years old to 65 years old, first payment to come 1 year from now  t = (65 – 40 + 1) – 1 = 25

FV =C ×
[ (1+ r )t−1 ]
=5,000 ×
25
[ (1+ 9 % ) −1]
≈ $ 423,504.48
r 9%
Conclusion: If she follows the advice, she will have approximately $423,504.48 at the age of 65.
b)
40 years old to 70 years old, first payment to come 1 year from now  t = (70 – 40 + 1) – 1 = 30

FV =C ×
[ (1+ r )t−1 ] =5,000 × [ ( 1+ 9 % )30−1 ] ≈ $ 681,537.69
r 9%
Conclusion: If she follows the advice, she will have approximately $681,537.69 at the age of 70.
c)
65 years old retired, live for 20 years  t = 20
−t
[1−( 1+r ) ]
PV =C ×
r
−20
[1−( 1+9 % ) ]
423,504.4811=C × → C=$ 46,393.42
9%
70 years olf retired, live for 10 years  t = 15
−t
[1−( 1+r ) ]
PV =C ×
r
−15
[1− ( 1+ 9 % ) ]
681,537.6927=C × →C=$ 84,550.80
9%
Conclusion: If she continues to earn the same rate, she will be able to withdraw approximately
$46,393.42 at the end of each year after retirement at the retirement age of 65 and approximately
$84,550.80 at the age of 70.
5.21
a)
Option 1: $61M now  PV = 61M
Option 2: $9.5M in 10 end-of-year payments, can earn 7% annually  C = 9.5M; t = 10; r = 7%
−t −10
[1−( 1+r ) ] [1− (1+7 % ) ]
PV =C × =9.5 × ≈ $ 66.72 M
r 7%
Option 3: $5.5M in 30 end-of-year payments, can earn 7% annually  C = 5.5M; t = 30; r = 7%
−t −30
[1−( 1+r ) ] [1−( 1+7 % ) ]
PV =C × =5 .5× ≈ $ 6 8.25 M
r 7%
Conclusion: She should consider option 3 to receive 30 end-of-year payments in $5.5M as it has the
highest present value out of 3 options (68.25 > 66.72 > 61).
c)
Option 1: $61M now  PV = 61M
Option 2: $9.5M in 10 end-of-year payments, can earn 9% annually  C = 9.5M; t = 10; r = 9%
−t −10
[1−( 1+r ) ] [1− (1+ 9 % ) ]
PV =C × =9.5 × ≈ $ 60.97 M
r 9%
Option 3: $5.5M in 30 end-of-year payments, can earn 9% annually  C = 5.5M; t = 30; r = 9%
−t −30
[1−( 1+r ) ] [1−( 1+9 % ) ]
PV =C × =5.5 × ≈ $ 56.51 M
r 9%
Conclusion: She should consider option 1 to receive $61M now as it has the highest present value
out of 3 options (61 > 60.97 > 56.51).
5.23
a)
$500 will grow  PV = 500
12% compounded annually  r = 12%; n = 1
For 5 years  t = 5

( ) ( )
n ×t 1 ×5
r 12 %
FV =PV × 1+ =500 × 1+ ≈ $ 881.17
n 1
Conclusion: $500 compounded for 12% annually for 5 years will become $881.17 in the future.
b)
$500 will grow  PV = 500
12% compounded semiannually  r = 12%; n = 2
For 5 years  t = 5
 ( ) ( )
n ×t 2 ×5
r 12 %
FV =PV × 1+ =500 × 1+ ≈ $ 8 95.42
n 2
Conclusion: $500 compounded for 12% semiannually for 5 years will become $895.42 in the future.
c)
$500 will grow  PV = 500
12% compounded quarterly  r = 12%; n = 4
For 5 years  t = 5

( ) ( )
n ×t 4× 5
r 12 %
FV =PV × 1+ =500 × 1+ ≈ $ 903.06
n 4
Conclusion: $500 compounded for 12% quarterly for 5 years will become $903.06 in the future.
d)
$500 will grow  PV = 500
12% compounded monthly  r = 12%; n = 12≈
For 5 years  t = 5

( ) ( )
n ×t 1 2× 5
r 12 %
FV =PV × 1+ =500 × 1+ ≈ $ 908.35
n 12
Conclusion: $500 compounded for 12% annually for 5 years will become $908.35 in the future.
6.2
30-day T-bills yielding 5.5%  Risk-free rate = 5.5%
Inflation premium = 3.25%
Real risk-free rate = Risk-free rate – Inflation premium = 5.5% – 3.25% = 2.25%
Conclusion: Based on the basis of these data, the real risk-free rate of return is 2.25%.
6.3
Real risk-free rate = 3%  R* = 3%
Inflation of 2% this year and 4% for the next 2 years  Inflation premium for the next 2 years = (2%
+ 4%) / 2 = 3%; Inflation premium for the next 3 years = (2% + 4% + 4%) / 3 ≈ 3.3333%  IP2 =
3%; IP3 = 3.3333%
Assumption that maturity risk premium = 0%  MRP = 0%
As this is a treasury security, liquidity premium = 0% and default risk premium = 0%  LP = DRP
= 0%
Yield rate on 2-year treasury security:
R = R* + IP2 + MRP + LP + DRP = 3% + 3% + 0% + 0% = 6%
Yield rate on 3-year treasury security:
R = R* + IP3 + MRP + LP + DRP = 3% + 3.3333% + 0% + 0% ≈ 6.33%
Conclusion: The yield rate for 2-year treasury securities are 6% and 3-year are approximately 6.33%.
6.4
R*: real risk-free rate
IP10 and MRP10: Inflation premium and maturity risk premium for 10-year period
LP: Liquidity premium
DRP: Default risk premium
Yield rate of 10-year treasury bond at 6%:
R* + IP10 + MRP10 + LP + DRP = 6% ↔ R* + IP10 + MRP10 = 6% (LP = DRP = 0 due to this
being a treasury bond)
Yield rate of 10-year corporate bond at 8%:
R* + IP10 + MRP10 + LP + DRP = 8% ↔ R* + IP10 + MRP10 + LP + DRP = 8%
As both bonds have similar period to maturity, it will have similar real risk-free rate, inflation
premium, and maturity risk premium.
Default risk premium for corporate bond:
DRP = 8% – (R* + IP10 + MRP10 + LP) = 8% – (6% + 0.5%) = 1.5%
Conclusion: The default risk premium of corporate bond is 1.5%.
6.5
Real risk-free rate = 3%  R* = 3%
Inflation of the next 2 years at 3%  IP2 = (3% + 3%) / 2 = 3%
Treasury bond  LP = DRP = 0%
Yield rate of 2-year treasury security:
R = R* + IP2 + MRP + LP + DRP ↔ 6.2% = 3% + 3% + MRP + 0% + 0% ↔ MRP = 0.2%
Conclusion: The maturity risk premium for 2-year treasury securities are 0.2%.