Management Finance Review Chapters 5-8 PDF

Management Finance Review Chapters 5-8 Chapter 5 Time value of money with multiple cash flows Annuities o Solve for 1. PV 2. FV 3. PMT 4. Discount rate 5. Number of periods Ordinary Annuity and Ann...

Management Finance Review Chapters 5-8 Chapter 5 Time value of money with multiple cash flows Annuities o Solve for 1. PV 2. FV 3. PMT 4. Discount rate 5. Number of periods Ordinary Annuity and Annuity Due Perpetuity APR, EAR Types of loans – interest only, discount, amortization 1. Suppose you invest $1,000 per year for 10 years and earn 10%. What is the value of your investment at the end of 10 years? What if you made the investment at the beginning of the year? 2. Suppose you want to buy a car that costs $20,000. If the interest rate is 5% on a loan, what is your monthly payment? 3. Suppose your goal is to save $10,000 and you plan to start a plan where you save $1,000 each year. If you can earn 10% on your investments, how many years will it take to reach your goal? 4. Suppose your bank offers a new investment that promises to pay you $200 each year forever. If the interest rate is 5%, what is the value of this investment? 5. A bank advertises a savings account that pays 5% annual percentage rate, but it is compounded daily. What is the effective annual interest rate on this savings account? 6. Suppose that you borrow $100,000 to finance a house. Suppose that the interest rate on the loan is 6% and the mortgage is for 30 years. What is your monthly payment? How much of the first monthly payment is applied to interest? Principal? What about the second monthly payment?  Chapter 6 Bond basics Value of bond or price of bond o Relationship between interest rates & price of bond o Interest rate risk YTM, current yield Bond contracts 1. Draw the timeline of a 3 year semi-annual bond that has a 6.2% coupon. What is the price of this bond? 2. True or False. If interest rates increase, bond price go down. 3. True or False. The price of a 10 year bond with a 5% coupon will change more than a 10 year bond with a 3% coupon if interest rates increase in the economy. 4. What is the price of a 10 year bond with a 4% coupon, if interest rates in the economy are 5%? How would you describe this type of bond? If you purchased this bond, what is the current yield? 5. Suppose you are considering two bonds as a possible investment. One bond is a municipal bond that a yield of 5% and a taxable bond that has a yield of 6%. If you are in the 22% tax bracket, which is the better investment?  6. Suppose you look up a bond quote that says the bond asked price is 104.6719 and the bond’s bid price is 104.6563, how much would you pay for this bond? Chapter 7 Valuing a stock Three cases of dividend growth o Constant dividend o Constant dividend growth o Nonconstant growth Feature of common stock & preferred stock Valuation by multiples Stock exchanges 1. Suppose a preferred stock pays a dividend of $2 per share and the interest rate is 8%. What should the price be of this stock? 2. Suppose that Microsoft just paid a $2.00 dividend and that dividends are expected to grow by 4% per year. If the required rate of return is 7%, what is the price of one share of Microsoft? 3. Suppose that XYZ just paid a dividend of $1 per share. Suppose that dividends are expected to grow by 10% for 3 years and after that dividends are expected to grow by 5% per year forever. What is the price of this stock? 4. Suppose that the current EPS for company XYZ is $2.45. Suppose that the average PE ratio of XYZ’s competitors is 15. If EPS is expected to grow by 5%, what is the price of the stock 1 year from now? 5. Suppose that price of XYZ is $50 and the firm pays a $1 dividend next year. If the firm is expected to grow by 5%, what is the required rate of return implied by this data? Chapter 8 Capital budgeting 1. Net present value 2. Payback period 3. Average Accounting Return 4. Internal Rate of Return 5. Modified Internal Rate of Return 6. Profitability index