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FINA 307

Survey of Finance

Summer 2017

Prepexam

Hint for Conceptual questions:

1. Time Line: What are you calculating if you move a cash flow from left to right on the timeline? (P.V. or F.V.?) What do you use in your calculation? (Compounding interest?

Single interest? Yield to Maturity? Or others?)

2. How is annuity defined? What are the signatures that an annuity should have?

3. What is annuity due? How to calculate present value and future value of an annuity due if we know the value of the ordinary annuity?

4. What is perpetuity? What is the signature of perpetuity?

5. Bond’s Characteristics: (Drawing a timeline for a bond will help you on all following questions)

a. What is face value of a bond? What are the other names of face value? b. What is coupon payment? How to calculate coupon payment? c. What is time to maturity? How to calculate time to maturity? d. How does a typical cash flow for a bond look like? (Single C.F.? Annuity? Or both?)

6. What is the primary market and secondary? What is traded at primary market? What are the three main stock secondary market in the U.S.?

7. What is the relation between interest rates and bonds’ value (price)? If interest rates increase, what’s the impact on bond’s value? How about interest rate falls?

8. What do the profitability ratios/asset management ratios (working capital analysis)/ liquidity ratios measure? What are they?

9. What does the bid/ask price mean to investors/dealers?

Practice for Calculation questions: (Choice in bold is the correct answer)

10. A bond issued by a corporation on December 1, 1983 is scheduled to mature on December 1, 2006. If today is December 1, 1994, what is this bond's time to maturity?

A. 12 years

B. 45 years

C. 23 years

D. 19 years

11. A 16-year annuity due pays $800 per year and interest rates are 12%, what's the present value of the annuity due?

A. $12,800.00

B. $6,497.62

C. $6,248.69

D. $6,672.90

12. What is the future value of a $600 annuity payment over 8 years if the interest rates are 7.5%? Payments are made at the end of the periods.

A. $4,800.00

B. $5,450.57

C. $4,875.19

D. $6,267.82

13. What's the current yield of an 6% coupon corporate bond quoted at a price of 112.3? A. 4.66%

B. 5.34%

C. 10.20%

D. 8.13%

14. A 9 percent coupon bond with 13 years left to maturity is offered for sale at $1,350. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually.)

A. 5.25%

B. 4.37%

C. 5.09%

D. 2.62%

15. A 6 percent coupon bond with 12 years left to maturity is priced to offer a 6.5 percent yield to maturity. If the yield to maturity falls to 6.25 percent. What is the change in price the bond

will experience in dollars?

A. Decrease $19.67

B. Increase $20.33

C. Coupon payment decreases $25.00

D. Coupon payment increases $41.22

16. What's the present value, when interest rates are 15% percent, of a $165 payment made every year forever?

A. $1750.00

B. $1,100.00

C. $1,250.00

D. $1,675.00

17. What is the present value of a $1,300 deposit in year 1 and another $3,500 deposit at the end of year 5 if interest rates are 6 percent?

A. $3,662.66

B. $3,150.00

C. $3,841.82

D. $3,940.98

18. You are thinking of investing in NFL, Inc. You have only the following information on the firm at year-end 2008: net income = $18.5 million, total debt = $18 million, total debt ratio =

35%. What is NFL's ROE for 2008?

A. 28.97%

B. 31.73%

C. 55.34%

D. 15.00%

19. Annual dividends grew from $0.30 in 2010 to $0.99 in 2016. What was the annual growth rate?

A. 47.93%

B. 22.02%

C. 18.24%

D. 35.56%

Long Questions:

Requirements for long questions:

a. Draw the time line of the question. Put down all T.V.M factors: Size of cash flows, time, and interest rate.

b. Show the formula you should use to solve the problems, and the corresponding numbers in the formula.

c. Show all the financial calculators inputs and outputs.

1. Paper Homework #1

Question #5 and #6.

2. A 8.75 percent coupon bond with 30 years left to maturity is priced to offer a 5 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.35 percent.

If this occurs, what would be the total rate of return for holding this bond for only one

year? The payments are made semi-annually.

3. Walmart’s earnings are $9.42 per share. The firm’s ROE is 13.32% and its plowback ratio is 23%. Required rate of return is 10%

a. What is Walmart’s dividend for the next year? b. What is the stock price?

For long-question #2 and #3, you can find the solution from the lecture notes. They are

exactly the same practice/example problems that we went through in class.

Formula Sheet

Future Value of Ordinary Annuity:

F.V.An = 𝐶× (1+𝑟)𝑡−1

𝑟

Present Value of Ordinary Annuity:

P.V.An = 𝐶×[ 1

𝑟 −

1

𝑟(1+𝑟)𝑡 ]

Present Value of Perpetuity:

P.V.P. = 𝐶

𝑟

Future Value of Annuity Due:

F.V.An (DUE) = F.V.An × (1+ r)

Present Value of Annuity Due:

P.V.An (DUE) = P.V.An × (1+ r)

EAR and APR:

EAR = (1 + 𝐴𝑃𝑅

𝑚 )m – 1

Current Yield:

Current Yield = 𝐴𝑛𝑛𝑢𝑎𝑙 𝐶𝑜𝑢𝑝𝑜𝑛

𝐵𝑜𝑛𝑑 𝑃𝑟𝑖𝑐𝑒

Total Rate of Return

Total Rate of Return = 𝐶𝑜𝑢𝑝𝑜𝑛 𝐼𝑛𝑐𝑜𝑚𝑒+(𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 −𝐵𝑢𝑦𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒)

𝐵𝑢𝑦𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒

Constant Growth Model:

𝑃0 = 𝐷0(1+𝑔)

𝑟−𝑔 =

𝐷1

𝑟−𝑔

Required rate of return from CGM:

𝑟 = 𝐷1 𝑃0

+ 𝑔

Sustainable growth rate:

Sustainable growth rate (g) = return on equity × plowback ratio

Market-to-book ratio:

Market-to-book = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦

𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦

Return on Asset (ROA):

ROA = 𝐴𝑓𝑡𝑒𝑟𝑡𝑎𝑥 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛 𝐼𝑛𝑐𝑜𝑚𝑒

𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑎𝑡 𝑠𝑡𝑎𝑟𝑡 𝑜𝑓 𝑦𝑒𝑎𝑟

Return on Equity (ROE):

ROE= 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒

𝐸𝑞𝑢𝑖𝑡𝑦 𝑎𝑡 𝑠𝑡𝑎𝑟𝑡 𝑜𝑓 𝑦𝑒𝑎𝑟

Total Debt Ratio:

𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡 𝑅𝑎𝑡𝑖𝑜 = 𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡

𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

Market Capitalization and Market Value Added:

Market capitalization = share price × number of shares

Market Value Added = Market Capitalization – Shareholders’ equity

Assets Turnover:

Assets Turnover = 𝑆𝑎𝑙𝑒𝑠

𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑎𝑡 𝑠𝑡𝑎𝑟𝑡 𝑜𝑓 𝑦𝑒𝑎𝑟

Long-term Debt-Equity Ratio:

Long-term Debt to Equity Ratio = 𝐿𝑜𝑛𝑔−𝑡𝑒𝑟𝑚 𝐷𝑒𝑏𝑡

𝐸𝑞𝑢𝑖𝑡𝑦

Net (Profit) Margin:

Net margin = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒

𝑆𝑎𝑙𝑒𝑠

Operating Margin:

Operating Margin = 𝐴𝑓𝑡𝑒𝑟𝑡𝑎𝑥 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒

𝑆𝑎𝑙𝑒𝑠

DuPont Analysis:

ROA = 𝑆𝑎𝑙𝑒𝑠

𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑎𝑡 𝑠𝑡𝑎𝑟𝑡 𝑜𝑓 𝑦𝑒𝑎𝑟 ×

𝐴𝑓𝑡𝑒𝑟𝑡𝑎𝑥 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛 𝐼𝑛𝑐𝑜𝑚𝑒

𝑆𝑎𝑙𝑒𝑠

ROE = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑎𝑡 𝑠𝑡𝑎𝑟𝑡 𝑜𝑓 𝑦𝑒𝑎𝑟

𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠′ 𝐸𝑞𝑢𝑖𝑡𝑦 ×

𝑆𝑎𝑙𝑒𝑠

𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑎𝑡 𝑠𝑡𝑎𝑟𝑡 𝑜𝑓 𝑦𝑒𝑎𝑟 ×

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒

𝑆𝑎𝑙𝑒𝑠