Section Week

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Section Week6

• ESM 209 Financial management
• Winter 2003

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Practice question 1. Chapter 3. Brealey Myers

• Use the discount factors shown in Appendix Table
  1 at the end of the book to calculate the PV of
  100 received in
• a) year 10 (at a discount rate of 1)
• PV QPV factor10 years, 1
• PV 100(0.905) 90.50
• b) year 10 (at a discount rate of 13)
  PV 100(0.295)29.50
• c) year 15 (at a discount rate of 25)
  PV100(0.035)3.50
• d) Each of years 1 through 3 (at a discount
  rate of 12)
• PV 100PV Annuity 3 years, 12
  100(2.402)240.20

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Practice question 2. Chapter 3. Brealey Myers

• Use the annuity factors shown in Appendix Table 3
  to calculate the PV of 100 in each of
• Years 1 to 20 (discount rate of 23)
• PVQPVIAF(20years, 23) 1004.279 427.9
• b) Years 1 to 5 (discount rate of 3)
• PV1004.580 458.00

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Practice question 2. Chapter 3. Brealey Myers

• Years 3 to 12 (discount rate of 9).
• We can think of cash flows in this problem as
  being the sum of two separate streams of cash
  flows. The first stream is 100 a year received
  in years 1 through 12 the second is 100 a year
  paid in years 1 through 2.
• The PV of 100 received in years 1 to 12 is
• PV100PVIAF 12 years, 91007.161 716.10
• The PV of 100 paid in years 1 to 2 is
• PV100PVIAF2 years, 91001.759179.50
• Thus, the PV of 100 received in years 3 to 12
  is
• 716.10 - 179.50 540.20
• (Alternatively, we can think of this as a 10-year
  annuity starting in year 3)

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Practice question 8. Chapter 3. Brealey Myers

• You have to choose between the following prizes
• 100,000 now
• 180,000 at the end of five years
• 11,400 a year forever
• 19,000 for each of 10 years
• 6,500 next year and increasing thereafter by 5
  a year forever.
• If the interest rate is 12, which is the most
  valuable prize?

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Practice question 8. Chapter 3. Brealey Myers

• We calculate the Present value for each of the
  alternatives
• PV 100,000
• b. PV C /(1 r)t
• PV 180,000/1.125 102,137
• c. Perpetuity
• PV C/r 11,400/0.12 95,000

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Practice question 8. Chapter 3. Brealey Myers

• d. Annuity
• PVC (1/r) - 1/r(1r)t)
• PV19,000 1/0.12 1/0.12(1.12)10 107,350
• Growing perpetuity
• PVC /(r-g)
• PV6,500/(0.12-0.05) 92,857
• Prize (d) is the most valuable because it has the
  highest present value

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Practice question 10. Chapter 3. Brealey Myers

• Mr. Basset is buying a security worth 20,000
  now. That is its present value. The unknown is
  the annual payment. Using the present value of an
  annuity formula, we have
• PV C(1/r) - 1/r(1r)t)
• C PV
  (1/r) - 1/r(1r)t)
• C 20,000
  2,654
• 1/0.08 1/0.08(10.08)12