Mid-semester Exam Revision 2

Introduction to Finance
 CAPM
• Assume a risk free rate of 7% and a market return of
15%. Calculate the expected return on each stock
and compare this to CAPM’s required return to
determine whether or not the stock is under, over, or
fairly valued. Then, develop your trading strategy
based on your findings.
Stock Price today Estimated Estimated Beta
price next dividend in 1
year year
Disney 12.5 13.5 0.5 1
Intel 20 22.5 1 0.8
Nike 7.5 8.5 0.25 1.2
 CAPM Answers
• Disney ER = 12% vs CAPM 15%
• Intel: ER = 17.5% vs CAPM 13.4%
• Nike: ER = 16.7% vs CAPM = 16.7%
 Time Value of Money
• If a man put 950BD in his baby’s bank account
(which compounded quarterly) and left it
there how much would the be in the account
when the child reached 18 years of age if the
interest rate was 9%?

• 4,715BD
 Annuity
• You need to pay your rent at the beginning of
each year. Your parents said they’ll pay you
enough money for each of the 4 years of your
university in one lump sum before you start
university.
• If your annual rent is 3,600BD, how much
money should your parents give you now to
cover you for all 4 years?
• R = 6%
 Annuity
• Imagine the landlord in the above question
would accept the payment at the end of the
year instead. How much would you need
now?
 Current & Quick ratio
For example, consider a firm with the following
current assets on its balance sheet: Cash $5
million, marketable securities $10 million,
accounts receivable $15 million, inventories $20
million. This is offset by current liabilities of $20
million.
 Current & Quick ratio
The quick ratio in this case is 1.5

and the current ratio is 2.5.

Market to Book
Market to Book Value
Market to Book
 PV or FV?
Your rich uncle has offered you the following
choices:
• 120,000BD now
• 1,500,000 in 20 year’s time

Assume you have a business that can generate

returns of 12% p.a. Which payment offers you
the most value?