TVM
Perpetuity/Annuity
Investment Criteria
Fixed Income
Portfolio Theory, CAPM and WACC
100
The price of NVIDIA shares on October 22, 2021, was €22.89. Three years later, on October 22, 2024, it was €142.60, which implies an approximate annual compound return of 84%. If you had invested €1,500 at that time (2021), how much money would you have at October 22, 2024?. Choose the closest figure.
A. $ 12,459
B. $ 9,344
C. $ 6,230
D. $ 3,680
B. $ 9,344
100
In the amortization of a mortgage loan with equal payments, the fraction of each payment devoted to interest steadily decreases over time and the fraction devoted to reducing the loan balance increases steadily.
True/False
TRUE
100
An initial investment of $200,000 is expected to produce an end-of-year cash flow of $260,000. What is the NPV of the project at a discount rate of 14 percent?
- $60,000
- $28,070
- $0 (zero)
- $216,666
It is $28,070
100
If a company’s financial health deteriorates and its bonds are downgraded from investment grade to junk status, how would this likely affect the bond’s pricing and YTM?
A: Bond prices would increase, and YTM would decrease
B: Bond prices would decrease, and YTM would increase
C: Bond prices would remain the same, and YTM would decrease
D: Bond prices would decrease, and YTM would remain the same
E: Bond prices would increase, and YTM would remain the same
B: Bond prices would decrease, and YTM would increase
100
According to Markowitz, in a scenario without the risk-free asset, the efficient frontier represents: -
The set of optimal portfolios that offer the best possible combination of risk and expected return
The graphical representation of dispersion around the mean
The set of portfolios which render positive expected real returns
The best combination of the risk free rate, bonds and equities
The set of optimal portfolios that offer the best possible combination of risk and expected return
200
Assume that we are using a compound annual interest rate of 5% to estimate the present value of €20,000. If we assume that the €20,000 are received 20 years from today, will the present value be higher than if we assume that the €20,000 are received 10 years from today?
PV of 20,000 received in 20 years will be HIGHER /LOWER than PV of 20,000 received in 10 years.
LOWER
200
You have seen an apartment which can be rented by €25,000 per year, and you think it could be a good investment. Assuming an average annual increase for leases of 0.5%, and a target compound annual return of 4%, which of the following prices matches more approximately the maximun price to be paid (use the perpetuity formula):
A. €500,000
B. €624,755
C. €714,285
C. € 714,285
200
Assume an investment assessment gives a positive NPV using an expected return (or discount rate) of 5%. If we think the expected return should be higher, the NPV of this project will experience
- a reduction
- an increase
- no change
- we don't have enough information to answer
The NPV will experiece a reduction if we increase the discount rate or expected return in its valuation
200
A corporate bond issued by Tesla has annual coupons of 10%, a face value of $ 1,000, and matures in 5 years at the face value. Calculate the price of the bond (in $) for a yield to maturity of the bond of 7%.
A. $ 1,700
B. $ 1,000
C. $ 990
D. $ 1,123
D. $ 1,123
200
The beta of the market portfolio is:
+1.1
+0.5
0
+1
+1
300
If you know the APR of a mortgage with monthly payments is 6%, which will be its EAR? (think first if it should be higher or lower than 6%?)
A. 5.97%
B. 6.17%
C. 6,33%
D. 6.00%
B. 6.17%
300
What is the fixed annual payment for a 20-year mortgage of $325,000 at an annual interest rate of 4.5%?
- $24,985
- $27,202
- $33,601
- $29,137
It is $24,985
300
Which method is considered the least reliable due to its lack of consideration for the time value of money when evaluating investment projects?
Payback Period
Internal Rate of Return (IRR)
Net Present Value (NPV)
Profitability Index
Payback Period
300
Calculate the YTM of a zero-coupon bond with maturity in 15 years, a current market price of €3,140 and a maturity value of €5,000.
2.84%
3.15%
2.28%
2.48%
3.45%
It is 3.15%
300
You are given the following information of MakeLifeBeautiful company:
Debt: $5,000,000
Expected rate of return on stock (r_equity): 12%
Yield to Maturity (r_debt): 9%
Annual coupon of issued debt: 6%
Price per share: $40
Book value per share: $15
Number of shares of common stock: 100,000
Calculate the company cost of capital. Ignore taxes.
A. 10.33%
B. 9.69%
C. 12.25%
D. 9.34%
A. 10.33%
400
The share price of Hugo Boss was €114 on October 25, 2014. Ten years later, on October 25, 2024, it is at €63. What annual compound return would have been obtained if one had invested on October 25, 2014?. Hint: Estimating the compounded return you would have obtained is the same as solving TVM equation for r (thus, estimating the IRR (Internal Rate of Return)
A. (-8.24%)
B. (-5.76%
C. (-57.69%)
D. (+13.16%)
B. (-5.76%)
400
Estimate the monthly payment of a 10 years loan of €100,000 using an Annual Percentage Rate (APR) of 2.4 %. Assume monthly payments are constant during the term of the loan
A. 833.33 €
B. 938.16 €
C. 200.68 €
D. 2400.00€
B. 938,16
-----------------
APR 2.4% therefore monthly rate 0.2%
10 years are 120 months
PV 100,000
(1+0.2%)^-120 = 0.79
(1-[(1+0.2%)^-120]) = 0,21
CF .(1-[(1+0,20%)^-120]) = 100.000 . 0,20%
CF .(1-[(1+0,20%)^-120]) = 200
CF = 938.16
The monthly payment is 938.16€
400
Phoenix Inc. is considering purchasing a new machine for $5 million. The machine is expected to generate the following end-of-year after-tax cash flows:
· Year 1: $2 million
· Year 2: $2.5 million
· Year 3: $1.5 million
The company plans to sell the machine at the end of Year 3 for $1 million after-tax amount (this cash inflow is not included in previous Year 3 cash flow of $1.5 million). Calculate the Net Present Value (NPV) of the project at a discount rate of 10 percent.
$0.76 million
$1.25 million
$0.85 million
$0.43 million
Its NPV is $0.76 million
400
Five years ago, Almaden Minerals LTD issued a 15-year, 6% annual coupon bond, with redemption value at par. The face value of the bond is $1,000. At that time, the bond had a yield to maturity of 6%.
You have to sell this bond at the market price now (five years after issuance). Assuming you have received the coupons from years 1 to 5 (therefore five Cash Flows) and that you also receive the market price of the bond today which is 90% of its face value, answer:
A. What has been the compound annual return you have obtained in this investment?
B. What is the YTM for the new buyer of the bond?
A. Your compound annual return is 4.2%
B. Buyer's compound annual return is 7.5%
400
After doing a fundamental analysis, an investor expects to obtain a return from buying Deltaone Inc shares of 12%. Deltaone is a listed company, all equity financed, with no debt. Its Beta is 1.09. Knowing that market risk premium is 7.00% and US treasury bond (risk-free rate) YTM 4%, choose the correct answer:
A. The investor should buy Deltaone stock
B. The investor should not buy Deltaone stock
C. The investor must change his expected return
D. None of the other options is true
A. The investor should buy Deltaone stock
500
You have won a national contest for top corporate finance students and you are offered the following prizes. If the annual interest rate is 5%, which prize of the ones below is the most valuable?
- $900 a year forever, the first payment starting today
- $750 a year forever (starting at the end of this year) that will grow forever at a 1.25% growth rate
- $55,000 at the end of 20 years
- 8 semi-annual payments of $2,500 where the first payment starts at the end of the first semester
- $55,000 at the end of 20 years
500
Your corporate finance professor wishes to save €500,000 over the next 20 years to supplement her retirement payments. What uniform annual amount should she deposit, at the end of each year, to meet her goal, in a mutual fund with an expected annual compound return of 8%?
A. 25,000
B. 10,926
C. 16,500
B. 10,926
500
If the Present Value (PV) of the positive FCF of an investment project, using a discount rate of 7%, is €10,000, and the Present Value of the necessary disbursement to carry it out is €4,000, and therefore its NPV is €6,000, then:
A. The IRR of the project is also 7%
B. The IRR of the project is above 7%
C. The IRR of the project is below 7%
D. We don’t have enough information to know whether the IRR of the projects is below or above 7%
B. The IRR of the project is above 7%
500
Which of the following is true when a fixed coupon bond is trading at a discount in relation to its face value and its redemption value is at face value?
A. Yield to Maturity (YTM) < Coupon Rate
B. Yield to Maturity (YTM) > Coupon Rate
C. Yield to Maturity (YTM) = Coupon Rate
D. We don’t have enough information to answer
Yield to Maturity (YTM) > Coupon Rate
500
An investor has a portfolio with a beta of 1.3, allocated between XYZ stock (beta=0.7) and Treasury bills. What does this allocation suggest about the investor’s position?
A. The investor has a leveraged position in the stock with a beta of 0.7, meaning the investor is borrowing funds to invest more than 100% of its equity in this stock with a beta of 0.7
B. The investor is lending part of its equity, investing less than 100% in the stock with a beta of 0.7
C. the investor holds a completely risk-free portfolio
D. None of the options is true
A. The investor has a leveraged position in the stock with a beta of 0.7, meaning the investor is borrowing funds to invest more than 100% of its equity in this stock with a beta of 0.7