Time is Money
To Market, To Market
Following the Rules
On a Budget
That's WACC!
100
A very careful new father wants to set money aside for baby daughter's wedding. If the wedding will take place in 25 years, he expects the wedding will cost $80,000. The father can earn 8% APR with quarterly compounding on his investments. This is how much he needs to invest today to reach his goal.
What is $11,042.64? [n=100,I/Y=2,PV=?,PMT=0,FV=80,000]
100
Dawgpound Incorporated has a bond trading on the secondary market that will mature in four years. The bond pays an annual coupon with a coupon rate of 8% and has a face value of $1,000. Based on the economy and risk associated with Dawgpound, you seek a 12% return on Dawgpound debt. This is the price you are willing to pay for the bond.
What is $878.51? [n=4,I/Y=12,PV=?,PMT=80,FV=1000]
100
A franchisee for a top fast food company had to invest $1,000,000 up front to buy into the business. He believes that if he runs that business effectively, he can generate a cash flow of $100,000 per year. This is the payback period for buying this franchise.
What is 10 years? [1,000,000/100,000]
100
Roy Hobbs Bats began producing a special bat for the 2014 season. The bat will require investment in new equipment priced at $300,000. The equipment will be straight-line depreciated to zero over a 10-year period. This is the book value of the equipment after the fourth year.
What is $180,000? [300,000-4*30,000]
100
Stanley's Bakery is an all equity firm. It is privately owned, but a comparable public firm has a beta of 2.25. The risk-free rate is 4.25%, and the historical market portfolio risk premium is 6%. This is a good estimate for the firm's cost of equity.
What is 17.75%? [4.25%+2.25*(6%)]
200
A student is trying to value an internship opportunity for the upcoming summer. The internship will last three months and pay her $2,235 at the end of each month. She will also get a "signing" bonus at the beginning of the internship of $495. She values the opportunity with a 4.32% APR (monthly compounding). This is the value of the internship today.
What is $7,152.01? [CF0=495,C01=2,235,F01=3,I=4.32/12,NPV=?]
200
A stock has a standard deviation of 40% and a correlation with the overall market of 0.2. If the market portfolio has a standard deviation of 20%, this is the Beta of the stock.
What is 0.40? [Beta=(0.2*40%)/20%]
200
A new IT server for a company will cost $400,000 today. The company expects the server will create an incremental cash flow to the firm of $125,000 per year. The company wants an 8% return for all capital budgeting projects. The company will run the server for the next 5 years. This is the IRR of the project.
What is 16.99%? [CF0=-400,000,C01=125,000,F01=5,IRR=?]
200
A firm just spent $3 million conducting a marketing survey. The survey looked at consumer interest in a new home gaming system. The firm has examined the results and will now invest $100 million in developing the new system. This is the incremental cash flow today from reaching this decision.
What is -$100 million? [FCF0=-(change in gross PPE)]
200
A college student wants to enroll in a study abroad program this summer in Germany. The program estimates the student will spend 6,000 Euros for room and board during the program. The exchange rate is 1.40 Euros/$. This is the number of dollars the student should budget for room and board this summer.
What is $8,400? [6,000 Euros*1.40($/Euro)]
300
A young graduate wants to own the latest, greatest cell phone plan from Horizon Wireless. The graduate purchases a plan that costs $200 per month. Let's assume that the cost of this plan is constant. Assume that the graduate has a 6% APR discount rate. This is the cost of the plan in today's dollars if he will hold this plan forever.
What is $40,000? [200/(0.06/12)]
300
Three years ago, you purchased a Tangerine Republic bond for $975. Today, the bond has six years until maturity and the yield to maturity on the bond is 8%. If the bond pays an annual 5% coupon and has a face value of $1,000, this is the realized return you will earn if you sell today.
What is 1.29%?
300
A business school graduates students that make an average initial salary of $50,000. Let's assume that salaries will grow at 4% in perpetuity for these graduates. We will assume that students want a 6% return on their tuition investment. If we simplify college tuition, this is the NPV of attending college if the cost of attending a 4-year college is valued at $200,000 today.
What is $2,300,000? [PV of future salaries=50,000/(0.06-0.04)=2,500,000 and NPV of college=2,500,000-200,000]
300
Suppose that Coca-Cola decides to introduce a new diet soft drink in the market. The product is expected to sell well, but it will likely reduce the sales of some of their other products. Analysts expect that the other diet drinks that Coke sells will lose $15 million in sales per year. The after-tax operating margin on sales for Coke is 20%. This is the yearly side effect for introducing the new product.
What is $3 million? [$15 million*0.20]
300
A company is trying to estimate the cost of debt for a new project. For their estimate, they will find the yield to maturity on existing company bonds. They have on outstanding bond issue at the moment that will mature in 15 years. The bond pays an annual coupon of 9% with a face value of $1,000. The bond currently trades at 90% of face value. This is the yield to maturity on the existing debt.
What is 10.34%? [n=15,I/Y=?,PV=-900,PMT=90,FV=1,000]
400
A loan shark charges interest of 1% per day on outstanding balances. This is the EAR for the loan.
What is 3678.34%? [EAR=(1+0.01/365)^365-1]
400
Analysts believe that Millipede Incorporated will gain market share in the construction equipment market globally in the next 10 years. Currently, dividends are $0.60 per quarter. Dividends grow at 0.50% per quarter. Investors require 8% APR to own the stock. This is the intrinsic value of Millipede.
What is $40.20? [($0.60*1.005)/(0.02-0.005)]
400
A young couple just had their first baby and are looking for additional income. They are considering renting out the space above their garage as an apartment. To convert the space, the couple will have to invest $30,000 today. It will take one year before they can begin renting the space. Let's suppose they can rent the apartment for $750 per month for ten years. (The first payment will be in one year--annuity due.) The couple would like to earn 6% APR on this investment. This is the NPV of the opportunity.
What is $33,948.65? [PV of rent: set calc to BGN n=120,I/Y=0.5,PV=?=67,892.87,PMT=750,FV=0 take PV of rent back one year so PV=67,892.87/(1.005^12)=63,948.65 then NPV=63,948.65-30,000]
400
A firm is thinking about replacing an assembly line. The assembly line was purchased 25 years ago for $2.5 million. It has been straight-line depreciated over a 40-year time frame (straight-line to zero). Today, 25 years after the purchase, the firm believes it can sell the assembly line to a buyer for $625,000. It will use the cash flow from this transaction to offset the cost of a new assembly line. The tax rate facing the firm is 40%. This is the NSV from selling the old assembly line today.
What is $750,000? [BV25=2,500,000-25*62,500=937,500 then NSV=625,000-0.4*(625,000-937,500)]
400
Taco World Corporation has a capital structure of 40% debt and 60% common stock. Currently, the cost of debt for Taco World is 6% and the cost of equity is 12%. The tax rate is 35%. The firm is considering a project that has an IRR of 9.5%. This is the weighted average cost of capital for Taco World.
What is 8.76%? [0.4*6%*(1-.35)+0.6*12%]
500
A family takes out a mortgage for $250,000 from the local bank. The loan is for 30 years of monthly payments at a 6% APR (monthly compounding). This is the family's balance on the mortgage after 5 years.
What is $232,635.89?
500
A young graduate is investing his graduation money today in Apple Corporation stock. He invests $5,400 today. The stock is currently priced at $450.00 per share. The graduate is hoping to earn 12% per year for the next five years. A friend who works on Wall street has projected that dividends will be $12.60, $12.80, $13.00, $13.00, and $13.00 for the next five years. This is the price Apple's stock should be in five years for the graduate to get his desired return.
What is $711.38? [CF0=0,C01=12.60,C02=12.80,C03=13,F03=3,I=12,NPV=?=46.35 then P5=((450.00-46.35)*1.12^5)=711.38]
500
Suppose A is a repeatable project. The cash flows for years 0, 1, 2, 3, and 4 are -$40, $18, $15, $12, and $9, respectively. The cost of capital for the firm is 12%. This is the EAA for the project.
What is $0.75? [n=4,I/Y=12,PV=NPV=2.29,PMT=?,FV=0]
500
Daily Enterprises is purchasing a $10.3 million machine. It will cost $50,000 to transport and install the machine. The machine has a depreciable life of five years using the straight-line depreciation and will have no salvage value. The machine will generate incremental revenues of $4.6 million per year along with incremental costs of $1.1 million per year. Daily's marginal tax rate is 35%. This is the yearly cash flow from the project (not FCF0).
What is $2,999,500? [Dep=(10.3+.05)/5=2.07 and FCF=(4.6-1.1-2.07)*(1-.35)+2.07]
500
Daily Double!
http://www.youtube.com/watch?v=wVGmP6QlufY
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