Introduction To Corporate Finance

Introduction to Corporate Finance
Quiz – 1
Problem 1. Notation
Which of the following present value notations denotes the value as of period 4 of a
cash flow received in period 12?
Answer: d) PV4(CF12)
Problem 2. Notation
Which of the following present value notations denotes the value as of today of a cash flow received
in period 6?
Answer: a) PV0(CF6)
Problem 3. Inheritance
You will receive an inheritance of \$500,000$500,000 in 20 years on your 40th birthday. What is the
value of the inheritance today if the discount rate is 10\%10%?
74321.81
Problem 4. Inheritance
Your brother offers you \$150,000$150,000 today for a claim to your future inheritance of \
$500,000$500,000, twenty years from today.
If the discount rate is 10\%10%, should you accept his offer?
Yes
Problem 5. Bond Price
What is the present value (i.e., price) today of a bond that will pay its owner \
$1,000,000$1,000,000 five years from today if the discount rate is 4\%4% per annum? (This is
called a zero-coupon or pure discount bond)
821927.11
Quiz – 2
Problem 1. Notation
Which of the following future value notations denotes the value as of period six of a cash flow
received today?
Answer: b)FV6(CF0)
Problem 2. Notation
Which of the following future value notations denotes the value as of period 11 of a cash flow
received in period 2?
Answer: d) FV11(CF2)
Problem 3. House Value
What will the value of your house be in 10 years if the current value is \$500,000$500,000 and local
home prices are expected to appreciate by 5\%5% per year in the future?
814447.31
Problem 4. Savings
Imagine that you deposit \$6,000$6,000 a year, starting one year from today, for four years into a
savings account
paying 6\%6% per annum. (That is one deposit of \$6,000$6,000 per year.) How much money will
you have immediately after you make your fourth and final deposit?
27852.56
26,247.70
Problem 5. Savings
Imagine that your goal is to retire 34 years from today with \$1,000,000$1,000,000 in savings.
Assuming that you currently (i.e., today) have \$5,000$5,000 in savings, what rate of return must
you earn
on that savings to hit your goal? (Hint: Solve your future value formula for the discount rate, RR)
0.1686
Quiz – 3
Problem 1. Amortizing Bond

Assume that a bond makes 30 equal annual payments of \$1,000$1,000 starting one year from
today.
(This security is sometimes referred to as an amortizing bond.)
If the discount rate is 3.5\%3.5% per annum, what is the current price of the bond?
(Hint: Recognize that this cash flow stream is an annuity and that the price of an asset is the present
value of its future cash flows.)
Answer : 18392.04
Problem 2. Coupon Bond

Assume that a bond makes 10 equal annual payments of \$1,000$1,000 starting one year from
today.
The bond will make an additional payment of \$100,000$100,000 at the end of the last year, year
10.
(This security is sometimes referred to as a coupon bond.)
If the discount rate is 3.5\%3.5% per annum, what is the current price of the bond?
(Hint: Recognize that this bond can be viewed as two cash flow streams: (1) a 10-year annuity with
annual payments of \$1,000$1,000, and (2) a single cash flow of \$100,000$100,000 arriving 10
years from today. Apply the tools you've learned to value both cash flow streams separately and
then add.)
Answer: 79208.48
Problem 3. Paying for School
Your daughter will start college one year from today, at which time the first tuition payment of \
$58,000$58,000must be made. Assuming that tuition does not increase over time and that your
daughter remains in school for four years, how much money do you need today in your savings
account, earning 5\%5% per annum, in order to make the tuition payments over the next four
years ?
205665.13
Problem 4. Perpetuities
Imagine that the government decided to fund its current deficit of \$431$431 billion dollars by
issuing a perpetuity offering a 4\%4% annual return. How much would the government have to pay
bondholders each year in perpetuity? Express your answer in billions of dollars.
(Hint: The \$431$431 billion is just the present value of these cash flows at a discount rate
of 4\%4%.)
10775.00 17.24
Quiz – 4
Problem 1. After-tax Return
If you earn 10\%10% per year on your investments, but pay 35\%35% in taxes on all of your
investment returns, then what is your annual after-tax return?
0.0650
Problem 2. HELOC
A home equity line of credit (HELOC) is, loosely speaking, like a credit card for your home. You can
borrow money by drawing down on the line of credit. But, because the borrowed money is for the
purpose of your home, the interest is tax-deductible meaning that you can deduct the interest paid
on this money from your income to reduce your taxes. If the current annual interest rate on a HELOC
is 3.85\%3.85% and your tax rate is 32\%32%, what is the after-tax interest rate you will pay on
any borrowings under the HELOC?
0.0262
Problem 3. HELOC
You are preparing to buy a car that costs \$36,000$36,000.
You can pay for the car using an auto loan from the car manufacturer or using money from your
home equity line of credit (HELOC). The auto loan charges 2.75\%2.75% interest per annum. The
HELOC charges 3.85\%3.85%interest per annum but the interest is tax deductible. If your current
tax rate is 32\%32%, which source of funds should you use?
HELOC
Problem 4. Municipal Bonds 1

The interest on some municipal bonds is tax free, in contrast to the interest on corporate bonds. If
the current annual interest rates on otherwise similar(i.e., maturity, credit risk, liquidity) municipal and
corporate bonds are 1.48\%1.48% and 1.80\%1.80%, respectively, what is the implied tax rate?
0.1778
Problem 5. Paying for School with Taxes

Your daughter will start college one year from today, at which time the first tuition payment of \
$58,000$58,000must be made. Assume that tuition does not increase over time and that your
daughter remains in school for four years. How much money do you need today in your savings
account, earning 5\%5% per annum, in order to make the tuition payments over the next four years,
provided that you have to pay 35\%35% per annum in taxes on any earnings (e.g., interest on the
savings)?
214309.02

Introduction To Corporate Finance

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What are some examples of present value and future value notations?

How would saving and investing impact someone's future financial goals?

Introduction to Corporate Finance

If the discount rate is 10\%10%, should you accept his offer?

Problem 5. Bond Price

Problem 3. House Value

Problem 1. Amortizing Bond

Problem 2. Coupon Bond

Problem 3. Paying for School

Problem 4. Municipal Bonds 1

Problem 5. Paying for School with Taxes

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