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Issue Sets 15 401 '08

 Problem Sets 15 401 08 Article

UBER Sloan Financing Problems

and Solutions Collection

Finance Theory I

Portion 1

Andrew W. Lo and Jiang Wang

The fall of 2008

(For Course Use Only. Every Rights Set aside. )

Acknowledgements

The problems in this collection will be drawn from problem sets and exams utilized in Finance Theory I in Sloan over time. They are produced by many instructors of the course, including (but not limited to) Utpal Bhattacharya, Leonid Kogan, Gustavo Manso, Stew Myers, Ould - Pavlova, Dimitri Vayanos and Jiang Wang.

Contents

1 Present Value

1

two Fixed Income Securities

on the lookout for

3 Prevalent Stock

twenty-eight

1 Present Value Alternatives

36

2 Fixed Profits Securities Alternatives

43

3 Common Stock Solutions

49

1

Present Value

1 . You can commit $10, 000 in a certificate of pay in (CD) provided by your traditional bank. The CD is for a few years as well as the bank estimates you an interest rate of four. 5%. How much will you possess in 5 years in case the 4. five per cent is

(a) an HEARING?

(b) a quarterly APR?

(c) monthly APR?

installment payments on your (W) e-Money rates. An online company, e-Money, is offering a money market bank account with top marks. P. R. of 4. 75%. Precisely what is the successful annual interest charge offered by e-Money if the compounding interval is

(a) annual

(b) month to month

(c) each week

(d) consistently?

3. You are able to invest $50, 000 within a certificate of deposit (CD) offered by the bank. The CD is good for 2 years as well as the bank rates you an interest rate of 4%. How much will you have in 2 years if the 4% is definitely

(a) an EAR?

(b) a quarterly APR?

(c) a monthly APRIL?

4. You can invest $10, 000 within a certificate of deposit (CD) offered by the bank. The CD is made for 5 years and the bank quotes you a rate of 4. five per cent. How much will you have in 5 years if the 4. 5% is

(a) an EAR?

(b) a quarterly APR?

(c) a monthly APRIL?

5. e-Money rates. An online company, e-Money, is offering a money market bank account with an A. P. R. of five. 25%. What is the powerful annual interest rate offered by e-Money if the compounding interval is

(a) annual

(b) month to month

(c) daily

Fall 2008

Webpage 1 of 66

(d) continuously?

six. True, false or " it depends” (give a brief explanation): PHOTOVOLTAIC is sometimes calculated by discounting free earnings for several years, claim from season 1 to T, and then discounting a forecasted terminal value for horizon time T. Picking out the distance date can hae an important effect on PHOTO VOLTAIC, particularly for growing firms. 7. Suppose you invest $10, 000 each year for 10 years at an typical return of 5. 5%. The average future inflation price is 2% per year.

(a) The initially investment is manufactured immediately. What is their ending investment balance? (b) What is its purchasing power in present day dollars?

8. Overhaul of a production range generates the following incremental money inflows over the line's 5-year remaining lifestyle.

Cash influx ($ million)

C1

C2

C3

C4

C5

plus one. 5 plus one. 3 plus1. 05 +0. 9 +0. 75

(a) What is the PV of the inflows? The price of capital is 12%. (b) Part (a) used a nominal price cut rate and the cash inflows incorporated inflation. Redo Part (a) with real cash runs and a genuine discount price. The expected inflation level is 3% per year.

on the lookout for. You have just inherited the workplace building. You expect the annual rental cash flow (net of maintenance and other cost) to get the building to be $100, 500 for the next 12 months and to boost at five per cent per year consistently. A broadening internet business offers to rent home at a set annual hire for 5 years. After year 5, you could re-negotiate or lease the building to a different tenant. What is the bare minimum acceptable set rental obligations for this five-year agreement? Use a discount charge of 12%. 10. Two dealers remain competitive to sell you a new Hummer with a list price of $45, 000. Dealer C offers to offer it to get $40, 000 cash. Dealer F presents " 0-percent financing: ” 48 monthly payments of $937. 50. (48x937. 50=45, 000)

(a) You can finance obtain by withdrawals from a money market fund yielding 2% per year. Which deal is more preferable?

(b) Actually carry past due credit card balances charging interest at 15% per year....

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