FIN 3320 Review 1

NPV 1

100

What is NPV?

Net Present Value; The value you get from an investment after the costs are removed.

200

You invest $1,000 at 8%. How long will it take to grow to $2,000?

Around 9 years

300

An investment costs $8,000 and returns $2,000 per year for 5 years. What is the interest rate?

7.93%

400

Project A

• Initial: $10,000
• Cash flows: $4,000 per year for 3 years
• Discount rate = 10%

Project B

• Initial: $10,000
• Cash flows: $2,000, $3,000, $7,000
• Discount rate = 10%

Which project has higher NPV?

Project A is greater though both are negative

500

You invest $10,000 today and receive:

• Year 1: $3,000
• Year 2: $4,000
• Year 3: $5,000
  If the discount rate is 8%, what is the investment's NPV?

$176

NPV 2

100

What is IRR?

Internal Rate of Return; rate when NPV = 0

200

You invest $2,000 today and it grows to $2,800 in 4 years. What is the annual interest rate (I/Y)?

8.78%

300

You invest $10,000 today and receive:

• Year 1: $3,000
• Year 2: $4,000
• Year 3: $5,000

What is the IRR?

8.90%

400

You borrow $15,000 and repay $3,500 annually for 6 years. What is the interest rate?

9.41%

500

If the initial investment is $9,000. There are no cash flows for the first 2 years. And $3,000 per year for years 3–6. If the discount rate is 9%, what is the NPV?

-$818.11

Stocks

100

What is the similarity between preferred and common stock? What is the difference?

Both of them pay dividends, but the preferred stock dividend does not change. 

200

Given the following information, what is the weighted average beta of the portfolio?

Asset             Weight            Beta

A                   50%               1.2

B                   30%               0.8

C                   20%              1.5

1.14

300

A company pays a constant dividend of $4 per share. Investors require a return of 8%. What is the price of the preferred stock?

$50

400

Stock A pays a $3 dividend and sells for $30. Stock B pays a $5 dividend and sells for $50. Which stock has a higher required return?

Same return

500

A preferred stock currently sells for $60 and pays a $6 dividend. The company plans to issue new stock with a flotation cost of 8%.

a) What is the cost of existing preferred stock?
b) What is the cost of new preferred stock?
c) Why is the new cost higher?

10%, 10.87%, Because flotation costs reduce the return that the firm receives

Annuities

100

What is the difference between an annuity and an annuity due?

An annuity due has payments at the start of each year, whereas an annuity's payments are at the end of each year. 

200

Give one real-life example of an annuity due and an ordinary annuity.

Annuity Due: Rent payment

Annuity: Credit Card payment

300

When would an annuity be better than an annuity due?

When you are the payer (you don't have to pay the extra interest)

400

$1,000 is received at the end of each year for 5 years at 8%. What is the present value? What would be the present value if the payments were received at the beginning of each period?

$3.992.71, $4,312.13

500

With the given information, what would be the future value if it were an annuity? If it were an annuity due?

• Payment = $1,000 per year
• Interest rate = 6% annually
• Time = 4 years

$4,375, $4,636.5