FINS1613
Find the share price at t=4, when dividend growth is expected to remain constant. 5.15(1.045)/.1=$53.85 Then, find the PV of this share price, plus the present value of the first four dividends. 1/1.145+4/1.145^2+8/1.145^3+5.15/1.145^4+53.85/1.145^4 Share price = $43.56
A company is expected to pay the following dividends over the next 4 years: $1, $4, $8, $5.15. After that, dividend growth is expected to remain constant at 4.5%. If the company's required return is 14.5%, what is the current share price? How do you solve for it?
The dividend yield and capital gains yield are both equal to .13/2=.065
A share has a required return of 13%. Total return on the share is evenly divided between the capital gains yield and the dividend yield. What is the dividend yield? What is the capital gains yield?
10/.115 = 86.9565 = Price in year 9 Divide price in year 9 by (1+r)^9 86.9565/1.115^9= $32.65
A share pays dividends of $10 a year, but dividend payments don't start until year 10. If you require a return of 11.5% on this share, how much will you pay today? How is this calculated?
P(8) = 3.5/.15-.045 = 33.3333 P(0) = 33.3333/1.15^8 P(0) = $10.897
A startup pays no dividends for 8 years, but in year 9 it starts paying dividends of $3.50. Required return=15%, growth =4.5%. What is the share price today?
A) Increase in interest rates would have a greater effect on a zero coupon bond with 10 years to maturity
An increase in interest rates will have a larger effect on: A) a zero coupon bond with 10 years to maturity B) a 9 year bond with a 10 percent annual coupon
Average net income/average book value Average investment will always be one half the initial investment as long as we depreciate straight-line with zero salvage value
How do you calculate AAR?
Coupon rate = annual coupon/face value of the bond
How do you calculate the coupon rate?
Find the difference between cash flows in each year Divide by (1+r)^t Add up cash flows and set equal to zero, solve for r
How do you calculate the crossover rate?
When the compound period is greater than one, the EAR is always greater than the APR
If the compound period is greater than one, the effective annual interest rate is: A) always greater than the APR B) always less than the APR C) equal to the APR D) can be greater than or less than the APR E) none of these choices
True
True or false? Long term bonds will offer lower returns if held to maturity than short term bonds
False; the equation is PV=CF[1-(1-r)^-n]/r Take the PV of an ordinary annuity of $1 for t years on the given equation sheet, and multiply the whole right side of the equation by the value of the cash flow
True or false? The following is the equation for finding the PV of an ordinary annuity: PV=(1-CF(1-r)^-n)/r
False - the PI equals the PV - initial cost/initial cos
True or false? The profitability index is equal to the PV of investment divided by the initial cost
The IRR is the discount rate that makes the NPV an investment of zero
What is the IRR/how is it calculated?
First, determine the number of payment streams. In this problem, there are 14 payment streams because 18-5=13, but there are payments in BOTH year 5 and year 18, so the total number of payments is 14. Then, plug the number of payment streams into the PV annuity formula for t; plug in the discount rate for r and multiply the right side of the PV annuity formula by the payment stream value. In this example, t=14, r=.07, and the payment stream=$2687 Solve for the PV of the annuity. This is the PV of the annuity in year 5, which is the FV of the annuity in year 0. Then, divide this number by (1+r)^(4) and solve.
What is the PV of an annuity that pays $2687 a year, starting in year 5 and ending in year 18, with a discount rate of 7%? How is this calculated?
APR = (Interest rate per period)(number of periods per year)
What is the equation to find the APR?
EAR=(1+APR/m)^m - 1
What is the equation to find the effective annual rate?
The cash flows change signs twice - there is a negative cash flow in addition to the initial investment (which is also negative)
What is the telltale sign that there are two IRRs?
The fixed coupon payments determined by the fixed coupon rate are not as valuable when interest rates rise.
Why do interest rates and bond prices move in opposite directions?
Increase interest rates have greater effect on long-term bonds.
Will an increase in interest rates have a greater effect on long or short term bonds?
Increased interest rates have a larger effect on lower-coupon bonds
Will an increase in interest rates have a larger effect on a higher-coupon bond or a lower-coupon bond?
Capital investment + change in NWC 35,000,000+2,000,000 = $37,000,000
You are considering opening up a new production plant, which would cost $35,000,000 to build. The project also requires an increase in NWC of $2,000,000 that will be returned at the end of the project. What is your year zero cash outflow, given these numbers?
In year zero, subtract both $681250 and $26,500 because they are cash outflows. Subtract $3,750 from operating cash flows in years 1, 2 & 3 In year 4, add back total spent on NWC, which is $37,750 26,500+3750+3750+3750=37,500=NWC The $3750 spent on NWC in year 4 is irrelevant because the project is over, and you'd get the money back immediately
You're calculating the NPV of buying a new machine, which cost $681,250. It will also require an initial investment in spare parts inventory of $26,500, and an additional inventory investment of $3,750 for each of the four years of the project. When determining your annual cash flows, how and when would you use these figures?
