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FIN 340 Final Project Scenarios and Tables You will u.docxcharlottej5
FIN 340 Final Project Scenarios and Tables
You will use these scenarios and tables to complete the final project.
Client 1:
Ezra, age 26, is single. However, he is dating and preparing to get engaged. He will need roughly $5,000 for an engagement ring almost immediately, and expects
he will need $10,000–$15,000 for the wedding in the next 12–24 months. He is currently employed and earns about $70,000 a year in salary. This salary is
enough to cover all his taxes and normal living expenses of approximately $4,800. This leaves him with about $1,000 in savings each month ($350 to 401K, $650
to savings). He has been able to save roughly $15,000 to date in a 401K plan from work and about $20,000 in cash savings. His 401K plan has been invested 100%
in the stock market, including some sector-specific funds. His other savings have been in interest-bearing savings and cash substitutes such as money market
funds. He recently received a windfall of $60,000, and this prompted him to come to you for some advice. The following are few of Ezra’s comments to help
guide your thoughts:
1. “I understand I am young, so I need to take on as much risk as I can.”
2. “I am willing to lose 30–40% on my invested capital if the return is commensurate.”
3. “I do like to have a decent sized cushion in the bank in case something happens at my job.”
4. “I don’t foresee my risk tolerance changing after I get married.”
5. “Do you have any good stock tips?”
Client 2:
Jacob and Rachel, 53 and 52 respectively, are married with four children. Two of the children are currently in college, and two are in high school. They expect the
other two children to attend college. The couple has done relatively well for themselves and earn roughly $275,000 before tax between the two of them, which
equates to $190,000 after taxes. They live well below their means, and this should allow them to cover all of their children’s college expenses out of pocket, but
it will not leave much for them to save over the next six to eight years. Through savings and portfolio growth, they have managed to accumulate $900,000. To
this point, they have been moderately aggressive (70–75% equities) with their portfolio, but they feel that they need to begin preparing the portfolio for partial
retirement in eight years, and full retirement in 13 years.
1. “I know we still need to be somewhat aggressive—we could live until we’re 90—so we need to plan for some growth even in retirement.”
2. “We definitely can’t afford to take a big hit in our portfolio. We don’t have enough time to recover.”
3. “Our jobs allow us to work part-time in retirement, and we will probably do so as long as we are able.”
4. “What do bond yields look like today?”
5. “I think we’ll need to draw on 3–5% of our portfolio in retirement. We’d like to earn enough income from the portfolio to cover that.”
CAPM Inputs:
Market Return 9%
Risk-free Rate 0.75%
Stock Analysis Table:
.
1. Susmel Inc. is considering a project that has the following cas.docxjackiewalcutt
1. Susmel Inc. is considering a project that has the following cash flow data. What is the project's payback?
Year
0
1
2
3
Cash Flows
-$500
$150
$200
$300
a.
2.03 years
b.
2.25 years
c.
2.50 years
d.
2.75 years
e.
3.03 years
2. As assistant to the CFO of Boulder Inc., you must estimate the Year 1 cash flow for a project with the following data. What is the Year 1 cash flow?
Sales Revenues
$13,000
Depreciation
$4,000
Other operating costs
$6,000
Tax rate
35.0%
a.
$5,950
b.
$6,099
c.
$6,251
d.
$6,407
e.
$6,568
3. Francis Inc.'s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?
a.
$2.20
b.
$2.44
c.
$2.69
d.
$2.96
e.
$3.25
4. If a typical company correctly estimates its WACC at a given point in time and then uses that same cost of capital to evaluate all projects for the next 10 years, then the firm will most likely
a.
become riskier over time, but its intrinsic value will be maximized
b.
become less risky over time, and this will maximize its intrinsic value
c.
accept too many low-risk projects and too few high-risk projects
d.
become more risky and also have an increasing WACC. Its intrinsic value will not be maximized
e.
continue as before, because there is no reason to expect its risk position or value to change over time as a result of its use of a single cost of capital
5. Qualcomm Inc.'s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?
a.
$40.17
b.
$41.20
c.
$42.26
d.
$43.34
e.
$44.46
6. Schnusenberg Corporation just paid a dividend of D0 = $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. The company's beta is 1.25, the required return on the market is 10.50%, and the risk-free rate is 4.50%. What is the company's current stock price?
a.
$14.52
b.
$14.89
c.
$15.26
d.
$15.64
e.
$16.03
7. Masulis Inc. is considering a project that has the following cash flow and WACC data. What is the project's discounted payback?
WACC: 10.00%
Year
0
1
2
3
4
Cash Flows
-$950
$525
$485
$445
$405
a.
1.61 years
b.
1.79 years
c.
1.99 years
d.
2.22 years
e.
2.44 years
8. Bilulu Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher MIRR rather than the one with the higher NPV, how much value will be forgone Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost.
WACC: 8.75%
Year
0
1
2
3
4
CFS
-$1,100
$375
$375
$375
$375
CFL
-$2,200
$725
$725
$725
$725
a.
$32.12
b.
$35.33
c.
$38.87
d.
$40.15
e.
$42.16
9. Assume that Ki ...
MECH 3330 Project 2 Due 12116 Design a tube bank that .docxARIV4
MECH 3330 Project 2 Due: 12/1/16
Design a tube bank that will increase the temperature of a 1200 CFM flow of air from 35⁰F to
100⁰F. Assume a constant pressure of 1atm. Each tube will have a diameter of 0.5in and a
length of 24in. The tube configuration must fit in an area of 18in by 18in. Assume reasonable
uniform surface temperature for the outside of the tubes.
Finding will be presented in a report with a memo cover sheet. A narrative including an
Introduction, Analysis Methods, Results, and Conclusions needs to be provided.
Introduction: Describe the problem
Analysis Methods: Describe the methods used to analyze the problem. Include equations used
and any other tools used.
Results: Provide a dimensioned drawing of the design along with any results obtained from
calculations or other analysis methods. The drawing should include the tube configuration,
number of tubes, and tub spacing.
Conclusions: Provide a summary of the problem, analysis, and results. Also discuss what
measurements and controls should be added to insure 100⁰F air at the exit.
Notes:
The report must be created in a word processing program.
All drawings must be created with a computer aided drafting program.
Internally Reference all research sources and also include a reference page
FINAL EXAM MGT 5002
MULTIPLE CHOICE CHAPTER 9
(9-5) Required return
1). If in the opinion of a given investor a stock’s expected return exceeds its required return, this suggests that the investor thinks
a. the stock is experiencing supernormal growth.
b. the stock should be sold.
c. the stock is a good buy.
d. management is probably not trying to maximize the price per share.
e. dividends are not likely to be declared.
(9-1) Preemptive right
2). The preemptive right is important to shareholders because it
a. allows managers to buy additional shares below the current market price.
b. will result in higher dividends per share.
c. is included in every corporate charter.
d. protects the current shareholders against a dilution of their ownership interests.
e. protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate.
(9-2) Classified stock
3). Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?
a. All common stocks fall into one of three classes: A, B, and C.
b. All common stocks, regardless of class, must have the same voting rights.
c. All firms have several classes of common stock.
d. All common stock, regardless of class, must pay the same dividend.
e. Some class or classes of common stock are entitled to more votes per share than other classes.
(9-5) Constant growth model
4). If a stock’s dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.
a. The expected return on the stock is 5% a year.
b. The stock’s ...
FORMULAS
𝑃𝑉 = 𝐶/(1 + 𝑟)+
𝑃𝑉 = 𝐶 ,-
.
− -
.(-0.)1
2
𝑃𝑉 =
𝐶
𝑟 − 𝑔
51 − 6
1 + 𝑔
1 + 𝑟
7
+
8
𝑃𝑉 = 𝐶/𝑟 𝑃𝑉 = 𝐶/(𝑟 − 𝑔)
𝐸𝐴𝑅 = 61 +
𝐴𝑃𝑅
𝑚
7
=
− 1
𝑃𝑉 = 𝐶 𝑒?.+, 𝑒 = 2.718
1 + 𝑅𝑒𝑎𝑙 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 =
1 + 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒
1 + 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒
𝑃 = 𝑃𝑉(𝐶𝑜𝑢𝑝𝑜𝑛 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠) + 𝑃𝑉(𝐹𝑎𝑐𝑒 𝑉𝑎𝑙𝑢𝑒)
𝑃T = U
𝐷𝑖𝑣+
(1 + 𝑟)+
𝑃T =
𝐷𝑖𝑣-
(𝑟 − 𝑔)
𝑔 = 𝑅𝑂𝐸 × 𝑃𝑙𝑜𝑤𝑏𝑎𝑐𝑘 𝑅𝑎𝑡𝑖𝑜
𝜎^ = _𝑤`
a𝜎`
a + 𝑤b
a𝜎b
a + 2𝑤`𝑤b𝜌`b𝜎`𝜎b
𝛽e =
𝜌e,=𝜎e
𝜎=
=
𝑐𝑜𝑣(𝑟e,𝑟=)
𝜎=a
𝑟 = 𝑟f + 𝛽(𝑟= − 𝑟f)
𝑊𝐴𝐶𝐶 =
𝐷
𝑉
(1 − 𝑇i)𝑟j +
𝑃
𝑉
𝑟 +
𝐸
𝑉
𝑟k
𝐷𝑂𝐿 =
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑜𝑓𝑖𝑡𝑠
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑠𝑎𝑙𝑒𝑠
= 1 + (𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠)/(𝑝𝑟𝑜𝑓𝑖𝑡𝑠)
𝑉q = 𝑉r + 𝑃𝑉 𝑡𝑎𝑥 𝑠ℎ𝑖𝑒𝑙𝑑𝑠 − 𝑃𝑉 𝑐𝑜𝑠𝑡𝑠 𝑜𝑓 𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑑𝑖𝑠𝑡𝑟𝑒𝑠𝑠
𝑉q = 𝑉s + 𝑇i𝐷
𝑟k = 𝑟t +
j
k
(1 − 𝑇i)(𝑟t − 𝑟j)
University of Guelph
Gordon S. Lang School of Business and Economics
Department of Economics and Finance
ECON*2560DE: Theory of Finance Summer Semester 2019
Key Concepts for Theory of Finance
The following is a list of some of the major concepts that have been covered during the course that you
should make sure you understand in your preparation for the final exam.
Ch. 1 – Goals and Governance of the Firm
The goal of managers is to maximize firm value
Advantages and disadvantages of a corporation
The difference between real and financial assets
Ch. 2 – Financial Markets and Institutions
Functions of financial markets and institutions
Ch. 3 – Accounting and Finance
Balance sheet, Income statement, statement of Cash flows
Market value vs. book value
Ch. 5 - Time Value of money
Single cash flow: future value, present value, how to find discount rate
Annuity: present value, how to find cash flow, annuity due, growing annuity, multiple payments
per year, amortization
Perpetuity: present value, how to find cash flow, how to find discount rate, growing perpetuity
Relationship between discount rate and PV
Inflation – real vs. nominal interest rates
Compounding (EAR)
Ch. 6 – Valuing Bonds
Calculate PV with annual or semi-annual coupons
How bond prices vary with interest rates
Relationships between - coupon rate, YTM, current yield, rates of return, and prices
Relationships between risk and maturity, risk and coupon rate
Yield curve
Bond ratings and default premium
You will not be asked to calculate Yield to Maturity
Ch. 7 – Valuing Stocks
Dividend discount model: no growth, constant growth, non-constant growth, sustainable growth
rate
Relationship between price and growth rate, ROE, plowback ratio, discount rate
Market efficiency
Ch. 11 – Introduction to Risk and Return and the Opportunity Cost of Capital
Relationship between risk and return
Unique vs market risk
Benefits of diversificati
FIN 340 Final Project Scenarios and Tables You will u.docxcharlottej5
FIN 340 Final Project Scenarios and Tables
You will use these scenarios and tables to complete the final project.
Client 1:
Ezra, age 26, is single. However, he is dating and preparing to get engaged. He will need roughly $5,000 for an engagement ring almost immediately, and expects
he will need $10,000–$15,000 for the wedding in the next 12–24 months. He is currently employed and earns about $70,000 a year in salary. This salary is
enough to cover all his taxes and normal living expenses of approximately $4,800. This leaves him with about $1,000 in savings each month ($350 to 401K, $650
to savings). He has been able to save roughly $15,000 to date in a 401K plan from work and about $20,000 in cash savings. His 401K plan has been invested 100%
in the stock market, including some sector-specific funds. His other savings have been in interest-bearing savings and cash substitutes such as money market
funds. He recently received a windfall of $60,000, and this prompted him to come to you for some advice. The following are few of Ezra’s comments to help
guide your thoughts:
1. “I understand I am young, so I need to take on as much risk as I can.”
2. “I am willing to lose 30–40% on my invested capital if the return is commensurate.”
3. “I do like to have a decent sized cushion in the bank in case something happens at my job.”
4. “I don’t foresee my risk tolerance changing after I get married.”
5. “Do you have any good stock tips?”
Client 2:
Jacob and Rachel, 53 and 52 respectively, are married with four children. Two of the children are currently in college, and two are in high school. They expect the
other two children to attend college. The couple has done relatively well for themselves and earn roughly $275,000 before tax between the two of them, which
equates to $190,000 after taxes. They live well below their means, and this should allow them to cover all of their children’s college expenses out of pocket, but
it will not leave much for them to save over the next six to eight years. Through savings and portfolio growth, they have managed to accumulate $900,000. To
this point, they have been moderately aggressive (70–75% equities) with their portfolio, but they feel that they need to begin preparing the portfolio for partial
retirement in eight years, and full retirement in 13 years.
1. “I know we still need to be somewhat aggressive—we could live until we’re 90—so we need to plan for some growth even in retirement.”
2. “We definitely can’t afford to take a big hit in our portfolio. We don’t have enough time to recover.”
3. “Our jobs allow us to work part-time in retirement, and we will probably do so as long as we are able.”
4. “What do bond yields look like today?”
5. “I think we’ll need to draw on 3–5% of our portfolio in retirement. We’d like to earn enough income from the portfolio to cover that.”
CAPM Inputs:
Market Return 9%
Risk-free Rate 0.75%
Stock Analysis Table:
.
1. Susmel Inc. is considering a project that has the following cas.docxjackiewalcutt
1. Susmel Inc. is considering a project that has the following cash flow data. What is the project's payback?
Year
0
1
2
3
Cash Flows
-$500
$150
$200
$300
a.
2.03 years
b.
2.25 years
c.
2.50 years
d.
2.75 years
e.
3.03 years
2. As assistant to the CFO of Boulder Inc., you must estimate the Year 1 cash flow for a project with the following data. What is the Year 1 cash flow?
Sales Revenues
$13,000
Depreciation
$4,000
Other operating costs
$6,000
Tax rate
35.0%
a.
$5,950
b.
$6,099
c.
$6,251
d.
$6,407
e.
$6,568
3. Francis Inc.'s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?
a.
$2.20
b.
$2.44
c.
$2.69
d.
$2.96
e.
$3.25
4. If a typical company correctly estimates its WACC at a given point in time and then uses that same cost of capital to evaluate all projects for the next 10 years, then the firm will most likely
a.
become riskier over time, but its intrinsic value will be maximized
b.
become less risky over time, and this will maximize its intrinsic value
c.
accept too many low-risk projects and too few high-risk projects
d.
become more risky and also have an increasing WACC. Its intrinsic value will not be maximized
e.
continue as before, because there is no reason to expect its risk position or value to change over time as a result of its use of a single cost of capital
5. Qualcomm Inc.'s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?
a.
$40.17
b.
$41.20
c.
$42.26
d.
$43.34
e.
$44.46
6. Schnusenberg Corporation just paid a dividend of D0 = $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. The company's beta is 1.25, the required return on the market is 10.50%, and the risk-free rate is 4.50%. What is the company's current stock price?
a.
$14.52
b.
$14.89
c.
$15.26
d.
$15.64
e.
$16.03
7. Masulis Inc. is considering a project that has the following cash flow and WACC data. What is the project's discounted payback?
WACC: 10.00%
Year
0
1
2
3
4
Cash Flows
-$950
$525
$485
$445
$405
a.
1.61 years
b.
1.79 years
c.
1.99 years
d.
2.22 years
e.
2.44 years
8. Bilulu Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher MIRR rather than the one with the higher NPV, how much value will be forgone Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost.
WACC: 8.75%
Year
0
1
2
3
4
CFS
-$1,100
$375
$375
$375
$375
CFL
-$2,200
$725
$725
$725
$725
a.
$32.12
b.
$35.33
c.
$38.87
d.
$40.15
e.
$42.16
9. Assume that Ki ...
MECH 3330 Project 2 Due 12116 Design a tube bank that .docxARIV4
MECH 3330 Project 2 Due: 12/1/16
Design a tube bank that will increase the temperature of a 1200 CFM flow of air from 35⁰F to
100⁰F. Assume a constant pressure of 1atm. Each tube will have a diameter of 0.5in and a
length of 24in. The tube configuration must fit in an area of 18in by 18in. Assume reasonable
uniform surface temperature for the outside of the tubes.
Finding will be presented in a report with a memo cover sheet. A narrative including an
Introduction, Analysis Methods, Results, and Conclusions needs to be provided.
Introduction: Describe the problem
Analysis Methods: Describe the methods used to analyze the problem. Include equations used
and any other tools used.
Results: Provide a dimensioned drawing of the design along with any results obtained from
calculations or other analysis methods. The drawing should include the tube configuration,
number of tubes, and tub spacing.
Conclusions: Provide a summary of the problem, analysis, and results. Also discuss what
measurements and controls should be added to insure 100⁰F air at the exit.
Notes:
The report must be created in a word processing program.
All drawings must be created with a computer aided drafting program.
Internally Reference all research sources and also include a reference page
FINAL EXAM MGT 5002
MULTIPLE CHOICE CHAPTER 9
(9-5) Required return
1). If in the opinion of a given investor a stock’s expected return exceeds its required return, this suggests that the investor thinks
a. the stock is experiencing supernormal growth.
b. the stock should be sold.
c. the stock is a good buy.
d. management is probably not trying to maximize the price per share.
e. dividends are not likely to be declared.
(9-1) Preemptive right
2). The preemptive right is important to shareholders because it
a. allows managers to buy additional shares below the current market price.
b. will result in higher dividends per share.
c. is included in every corporate charter.
d. protects the current shareholders against a dilution of their ownership interests.
e. protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate.
(9-2) Classified stock
3). Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?
a. All common stocks fall into one of three classes: A, B, and C.
b. All common stocks, regardless of class, must have the same voting rights.
c. All firms have several classes of common stock.
d. All common stock, regardless of class, must pay the same dividend.
e. Some class or classes of common stock are entitled to more votes per share than other classes.
(9-5) Constant growth model
4). If a stock’s dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.
a. The expected return on the stock is 5% a year.
b. The stock’s ...
FORMULAS
𝑃𝑉 = 𝐶/(1 + 𝑟)+
𝑃𝑉 = 𝐶 ,-
.
− -
.(-0.)1
2
𝑃𝑉 =
𝐶
𝑟 − 𝑔
51 − 6
1 + 𝑔
1 + 𝑟
7
+
8
𝑃𝑉 = 𝐶/𝑟 𝑃𝑉 = 𝐶/(𝑟 − 𝑔)
𝐸𝐴𝑅 = 61 +
𝐴𝑃𝑅
𝑚
7
=
− 1
𝑃𝑉 = 𝐶 𝑒?.+, 𝑒 = 2.718
1 + 𝑅𝑒𝑎𝑙 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 =
1 + 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒
1 + 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒
𝑃 = 𝑃𝑉(𝐶𝑜𝑢𝑝𝑜𝑛 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠) + 𝑃𝑉(𝐹𝑎𝑐𝑒 𝑉𝑎𝑙𝑢𝑒)
𝑃T = U
𝐷𝑖𝑣+
(1 + 𝑟)+
𝑃T =
𝐷𝑖𝑣-
(𝑟 − 𝑔)
𝑔 = 𝑅𝑂𝐸 × 𝑃𝑙𝑜𝑤𝑏𝑎𝑐𝑘 𝑅𝑎𝑡𝑖𝑜
𝜎^ = _𝑤`
a𝜎`
a + 𝑤b
a𝜎b
a + 2𝑤`𝑤b𝜌`b𝜎`𝜎b
𝛽e =
𝜌e,=𝜎e
𝜎=
=
𝑐𝑜𝑣(𝑟e,𝑟=)
𝜎=a
𝑟 = 𝑟f + 𝛽(𝑟= − 𝑟f)
𝑊𝐴𝐶𝐶 =
𝐷
𝑉
(1 − 𝑇i)𝑟j +
𝑃
𝑉
𝑟 +
𝐸
𝑉
𝑟k
𝐷𝑂𝐿 =
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑜𝑓𝑖𝑡𝑠
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑠𝑎𝑙𝑒𝑠
= 1 + (𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠)/(𝑝𝑟𝑜𝑓𝑖𝑡𝑠)
𝑉q = 𝑉r + 𝑃𝑉 𝑡𝑎𝑥 𝑠ℎ𝑖𝑒𝑙𝑑𝑠 − 𝑃𝑉 𝑐𝑜𝑠𝑡𝑠 𝑜𝑓 𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑑𝑖𝑠𝑡𝑟𝑒𝑠𝑠
𝑉q = 𝑉s + 𝑇i𝐷
𝑟k = 𝑟t +
j
k
(1 − 𝑇i)(𝑟t − 𝑟j)
University of Guelph
Gordon S. Lang School of Business and Economics
Department of Economics and Finance
ECON*2560DE: Theory of Finance Summer Semester 2019
Key Concepts for Theory of Finance
The following is a list of some of the major concepts that have been covered during the course that you
should make sure you understand in your preparation for the final exam.
Ch. 1 – Goals and Governance of the Firm
The goal of managers is to maximize firm value
Advantages and disadvantages of a corporation
The difference between real and financial assets
Ch. 2 – Financial Markets and Institutions
Functions of financial markets and institutions
Ch. 3 – Accounting and Finance
Balance sheet, Income statement, statement of Cash flows
Market value vs. book value
Ch. 5 - Time Value of money
Single cash flow: future value, present value, how to find discount rate
Annuity: present value, how to find cash flow, annuity due, growing annuity, multiple payments
per year, amortization
Perpetuity: present value, how to find cash flow, how to find discount rate, growing perpetuity
Relationship between discount rate and PV
Inflation – real vs. nominal interest rates
Compounding (EAR)
Ch. 6 – Valuing Bonds
Calculate PV with annual or semi-annual coupons
How bond prices vary with interest rates
Relationships between - coupon rate, YTM, current yield, rates of return, and prices
Relationships between risk and maturity, risk and coupon rate
Yield curve
Bond ratings and default premium
You will not be asked to calculate Yield to Maturity
Ch. 7 – Valuing Stocks
Dividend discount model: no growth, constant growth, non-constant growth, sustainable growth
rate
Relationship between price and growth rate, ROE, plowback ratio, discount rate
Market efficiency
Ch. 11 – Introduction to Risk and Return and the Opportunity Cost of Capital
Relationship between risk and return
Unique vs market risk
Benefits of diversificati
Strayer leg 565 week 4 assignment 2 the downfall of enron v newvindaniel182
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Ethnobotany and Ethnopharmacology:
Ethnobotany in herbal drug evaluation,
Impact of Ethnobotany in traditional medicine,
New development in herbals,
Bio-prospecting tools for drug discovery,
Role of Ethnopharmacology in drug evaluation,
Reverse Pharmacology.
We all have good and bad thoughts from time to time and situation to situation. We are bombarded daily with spiraling thoughts(both negative and positive) creating all-consuming feel , making us difficult to manage with associated suffering. Good thoughts are like our Mob Signal (Positive thought) amidst noise(negative thought) in the atmosphere. Negative thoughts like noise outweigh positive thoughts. These thoughts often create unwanted confusion, trouble, stress and frustration in our mind as well as chaos in our physical world. Negative thoughts are also known as “distorted thinking”.
Synthetic Fiber Construction in lab .pptxPavel ( NSTU)
Synthetic fiber production is a fascinating and complex field that blends chemistry, engineering, and environmental science. By understanding these aspects, students can gain a comprehensive view of synthetic fiber production, its impact on society and the environment, and the potential for future innovations. Synthetic fibers play a crucial role in modern society, impacting various aspects of daily life, industry, and the environment. ynthetic fibers are integral to modern life, offering a range of benefits from cost-effectiveness and versatility to innovative applications and performance characteristics. While they pose environmental challenges, ongoing research and development aim to create more sustainable and eco-friendly alternatives. Understanding the importance of synthetic fibers helps in appreciating their role in the economy, industry, and daily life, while also emphasizing the need for sustainable practices and innovation.
Model Attribute Check Company Auto PropertyCeline George
In Odoo, the multi-company feature allows you to manage multiple companies within a single Odoo database instance. Each company can have its own configurations while still sharing common resources such as products, customers, and suppliers.
The Art Pastor's Guide to Sabbath | Steve ThomasonSteve Thomason
What is the purpose of the Sabbath Law in the Torah. It is interesting to compare how the context of the law shifts from Exodus to Deuteronomy. Who gets to rest, and why?
2024.06.01 Introducing a competency framework for languag learning materials ...Sandy Millin
http://sandymillin.wordpress.com/iateflwebinar2024
Published classroom materials form the basis of syllabuses, drive teacher professional development, and have a potentially huge influence on learners, teachers and education systems. All teachers also create their own materials, whether a few sentences on a blackboard, a highly-structured fully-realised online course, or anything in between. Despite this, the knowledge and skills needed to create effective language learning materials are rarely part of teacher training, and are mostly learnt by trial and error.
Knowledge and skills frameworks, generally called competency frameworks, for ELT teachers, trainers and managers have existed for a few years now. However, until I created one for my MA dissertation, there wasn’t one drawing together what we need to know and do to be able to effectively produce language learning materials.
This webinar will introduce you to my framework, highlighting the key competencies I identified from my research. It will also show how anybody involved in language teaching (any language, not just English!), teacher training, managing schools or developing language learning materials can benefit from using the framework.
Welcome to TechSoup New Member Orientation and Q&A (May 2024).pdfTechSoup
In this webinar you will learn how your organization can access TechSoup's wide variety of product discount and donation programs. From hardware to software, we'll give you a tour of the tools available to help your nonprofit with productivity, collaboration, financial management, donor tracking, security, and more.
The Indian economy is classified into different sectors to simplify the analysis and understanding of economic activities. For Class 10, it's essential to grasp the sectors of the Indian economy, understand their characteristics, and recognize their importance. This guide will provide detailed notes on the Sectors of the Indian Economy Class 10, using specific long-tail keywords to enhance comprehension.
For more information, visit-www.vavaclasses.com
Unit 8 - Information and Communication Technology (Paper I).pdfThiyagu K
This slides describes the basic concepts of ICT, basics of Email, Emerging Technology and Digital Initiatives in Education. This presentations aligns with the UGC Paper I syllabus.
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Uop fin 486 week 2 individual assignment new
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FIN 486 Week 2 Individual Assignment (5-1,5-4,5-5,5-8,5-10,5-
17,5-21,P8-3,P8-4,P8-9,P8-10,P8-13,P8-24,P8-25,P8-26)
P8–3 Risk preferences Sharon Smith, the financial manager for
Barnett Corporation, wishes to evaluate three prospective
investments: X, Y, and Z. Sharon will evaluate each of these
investments to decide whether they are superior to
investments that her company already has in place, which have
an expected return of 12% and a standard deviation of 6%. The
expected returns and standard deviations of the investments
are as follows:
a. If Sharon were risk neutral, which investments would she
select? Explain why.
b. If she were risk averse, which investments would she select?
Why?
c. If she were risk seeking, which investments would she select?
Why?
d. Given the traditional risk preference behavior exhibited by
financial managers, which investment would be preferred?
Why?
2. Investment Expected return Standard deviation
X 14% 7%
Y 12 8
Z 10 9
P8–4 Risk analysis Solar Designs is considering an investment
in an expanded product line. Two possible types of expansion
are being considered. After investigating the possible
outcomes, the company made the estimates shown in the
following table.
Expansion A Expansion B
Initial investment $12,000 $12,000
Annual rate of return
Pessimistic 16% 10%
Most likely 20% 20%
Optimistic 24% 30%
a. Determine the range of the rates of return for each of the two
projects.
b. Which project is less risky? Why?
c. If you were making the investment decision, which one would
you choose? Why? What does this decision imply about your
feelings toward risk?
d. Assume that expansion B’s most likely outcome is 21% per
year and that all other facts remain the same. Does your answer
to part c now change? Why?
P8–9 Rate of return, standard deviation, and coefficient of
variation Mike is searching for a stock to include in his current
stock portfolio. He is interested in Hi-Tech, Inc.; he has been
impressed with the company’s computer products and believes
that Hi-Tech is an innovative market player. However, Mike
realizes that any time you consider a technology stock, risk is a
major concern. The rule he follows is to include only securities
with a coefficient of variation of returns below 0.90.
Mike has obtained the following price information for the
period 2012 through 2015. Hi-Tech stock, being growth-
3. oriented, did not pay any dividends during these 4 years.
Stock price
Year Beginning End
2012 $14.36 $21.55
2013 21.55 64.78
2014 64.78 72.38
2015 72.38 91.80
a. Calculate the rate of return for each year, 2012 through 2015,
for Hi-Tech stock.
b. Assume that each year’s return is equally probable, and
calculate the average return over this time period.
c. Calculate the standard deviation of returns over the past 4
years. (Hint: Treat these data as a sample.)
d. Based on b and c, determine the coefficient of variation of
returns for the security.
e. Given the calculation in d, what should be Mike’s decision
regarding the inclusion of Hi-Tech stock in his portfolio?
P8–10 Assessing return and risk Swift Manufacturing must
choose between two asset purchases. The annual rate of return
and the related probabilities given in the following table
summarize the firm’s analysis to this point.
Project 257 Project 432
Rate of return Probability Rate of return Probability
−10% 0.01 10% 0.05
10 0.04 15 0.10
20 0.05 20 0.10
30 0.10 25 0.15
40 0.15 30 0.20
45 0.30 35 0.15
50 0.15 40 0.10
60 0.10 45 0.10
70 0.05 50 0.05
80 0.04 100 0.01
a. For each project, compute: (1) The range of possible rates of
4. return. (2) The expected return. (3) The standard deviation of
the returns. (4) The coefficient of variation of the returns.
b. Construct a bar chart of each distribution of rates of return. c.
Which project would you consider less risky? Why?
P8–13 Portfolio return and standard deviation Jamie Wong is
considering building an investment portfolio containing two
stocks, L and M. Stock L will represent 40% of the dollar value
of the portfolio, and stock M will account for the other 60%.
The expected returns over the next 6 years, 2015–2020, for
each of these stocks are shown in the following table.
Expected return
Year Stock L Stock M
2015 14% 20%
2016 14 18
2017 16 16
2018 17 14
2019 17 12
2020 19 10
a. Calculate the expected portfolio return, rp, for each of the 6
years.
b. Calculate the expected value of portfolio returns, , over the 6-
year period.
c. Calculate the standard deviation of expected portfolio
returns, , over the 6-year period.
d. How would you characterize the correlation of returns of the
two stocks L and M?
e. Discuss any benefits of diversification achieved by Jamie
through creation of the portfolio.
P8–24 Capital asset pricing model (CAPM) For each of the cases
shown in the following table, use the capital asset pricing
model to find the required return.
Case Risk-free rate, RF Market return, rm Beta,β
A 5% 8% 1.30
B 8 13 0.90
5. C 9 12 −0.20
D 10 15 1.00
E 6 10 0.60
P8–25 Beta coefficients and the capital asset pricing model
Katherine Wilson is wondering how much risk she must
undertake to generate an acceptable return on her portfolio.
The risk-free return currently is 5%. The return on the overall
stock market is 16%. Use the CAPM to calculate how high the
beta coefficient of Katherine’s portfolio would have to be to
achieve each of the following expected portfolio returns.
a. 10%
b. 15%
c. 18%
d. 20%
e. Katherine is risk averse. What is the highest return she can
expect if she is unwilling to take more than an average risk?
P8–26 Manipulating CAPM Use the basic equation for the
capital asset pricing model (CAPM) to work each of the
following problems.
a. Find the required return for an asset with a beta of 0.90 when
the risk-free rate and market return are 8% and 12%,
respectively.
b. Find the risk-free rate for a firm with a required return of
15% and a beta of 1.25 when the market return is 14%.
c. Find the market return for an asset with a required return of
16% and a beta of 1.10 when the risk-free rate is 9%.
d. Find the beta for an asset with a required return of 15%
when the risk-free rate and market return are 10% and 12.5%,
respectively.
P5–1 Using a time line The financial manager at Starbuck
Industries is considering an investment that requires an initial
outlay of $25,000 and is expected to result in cash inflows of
$3,000 at the end of year 1, $6,000 at the end of years 2 and 3,
$10,000 at the end of year 4, $8,000 at the end of year 5, and
6. $7,000 at the end of year 6.
a. Draw and label a time line depicting the cash flows
associated with Starbuck Industries’ proposed investment.
b. Use arrows to demonstrate, on the time line in part a, how
compounding to find future value can be used to measure all
cash flows at the end of year 6.
c. Use arrows to demonstrate, on the time line in part b, how
discounting to find present value can be used to measure all
cash flows at time zero.
d. Which of the approaches—future value or present value—do
financial managers rely on most often for decision making?
Why?
P5–4 Future values For each of the cases shown in the following
table, calculate the future value of the single cash flow
deposited today at the end of the deposit period if the interest
is compounded annually at the rate specified.
Case Single cash flow Interest rate Deposit period (years)
A $ 200 5% 20
B 4,500 8 7
C 10,000 9 10
D 25,000 10 12
E 37,000 11 5
F 40,000 12 9
P5–5 Time value You have $1,500 to invest today at 7% interest
compounded annually.
a. Find how much you will have accumulated in the account at
the end of (1) 3 years, (2) 6 years, and (3) 9 years.
b. Use your findings in part a to calculate the amount of interest
earned in (1) the first 3 years (years 1 to 3), (2) the second 3
years (years 4 to 6), and (3) the third 3 years (years 7 to 9).
c. Compare and contrast your findings in part b. Explain why
the amount of interest earned increases in each succeeding 3-
year period.
P5–8 Time value Misty needs to have $15,000 at the end of 5
7. years to fulfill her goal of purchasing a small sailboat. She is
willing to invest a lump sum today and leave the money
untouched for 5 years until it grows to $15,000, but she
wonders what sort of investment return she will need to earn
to reach her goal. Use your calculator or spreadsheet to figure
out the approximate annually compounded rate of return
needed in each of these cases:
a. Misty can invest $10,200 today.
b. Misty can invest $8,150 today.
c. Misty can invest $7,150 today.
P5–10 Present value calculation Without referring to the
preprogrammed function on your financial calculator, use the
basic formula for present value, along with the given
opportunity cost, r, and the number of periods, n, to calculate
the present value of $1 in each of the cases shown in the
following table.
Case Opportunity cost, r Number of periods, n
A 2% 4
B 10 2
C 5 3
D 13 2
P5–17 Cash flow investment decision Tom Alexander has an
opportunity to purchase any of the investments shown in the
following table. The purchase price, the amount of the single
cash inflow, and its year of receipt are given for each
investment. Which purchase recommendations would you
make, assuming that Tom can earn 10% on his investments?
Investment Price Single cash inflow Year of receipt
A $18,000 $30,000 5
B 600 3,000 20
C 3,500 10,000 10
D 1,000 15,000 40
P5–21 Time value: Annuities Marian Kirk wishes to select the
better of two 10-year annuities, C and D. Annuity C is an
8. ordinary annuity of $2,500 per year for 10 years. Annuity D is
an annuity due of $2,200 per year for 10 years.
a. Find the future value of both annuities at the end of year 10
assuming that Marian can earn (1) 10% annual interest and (2)
20% annual interest.
b. Use your findings in part a to indicate which annuity has the
greater future value at the end of year 10 for both the (1) 10%
and (2) 20% interest rates.
c. Find the present value of both annuities, assuming that
Marian can earn (1) 10% annual interest and (2) 20% annual
interest.
d. Use your findings in part c to indicate which annuity has the
greater present value for both (1) 10% and (2) 20% interest
rates.
e. Briefly compare, contrast, and explain any differences
between your findings using the 10% and 20% interest rates in
parts b and d.