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The Final Exam will be 2 hours and covers Ratio analysis to the end of the course.
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MGMT2023 Financial Management 1- Final Exam of Semester 2, 2014 Study Guide Mona School of Business & Management Mona School of Business & Management UWI Exam format & instructions 1) The Final Exam will be 2 hours and covers Ratio analysis to the end of the course. 2) Answer all questions in SECTION A (30 marks). 3) Choose any TWO questions from SECTION B (25 marks each). 4) The paper is worth 60% of the final grade. 5) Be sure to state ALL formulae being used and work all questions thoroughly outlining each step. 6) Please use Standard English in your answers. 7) Carry your own non-programmable calculator to the exam. 8) Arrive 30 minutes before the start time of the exam- this is very important! 9) Do not gamble by studying selective topics as some questions are mixed from two or more topics. 10) Two of the following topics will be used in testing the compulsory question a. Ratio analysis b. Time value of money c. Risk & return. N.B. Remember all concepts are equally important. You can never say you have studied well if you did not: I. Review thoroughly the detailed lecture notes- with emphasis on concepts. II. Review in-class examples and additional insights given III. Work ALL problem papers thoroughly. IV. Attempt end of chapter questions and past papers V. Simulate an exam scenario by timing yourself and completing exam type questions. MGMT2023 Financial Management 1- Final Exam of Semester 2, 2014 Study Guide Mona School of Business & Management Mona School of Business & Management UWI Here are a few questions to practice: Question 1. (20 marks) (a) A 5-year corporate bond with a 6.8% coupon rate is trading at $952.63 (the face value is $1000). Assuming semi-annual coupon payments: (i) Estimate the yield to maturity on this bond. (5 marks) (ii) Now assume that the rating of the corporation that issued the bond declines from AA to BBB and that the default spread increases from 0.5% (which is what it is now) to 0.8%. Estimate the effect on the bond price. (5 marks) (b) You are valuing First Bank, a large commercial bank. The bank reported earnings per share of $4.00 last year, and paid out dividends of $2.40 per share. The earnings are expected to grow 4% a year in perpetuity, and the firm is expected to maintain its existing payout ratio. The firm’s equity beta is 1.25, the risk-free rate is 5% and the return on the market portfolio is 8.2%. (i) Estimate the value of equity per share. (5 marks) (ii) If the stock is trading at $42 per share, estimate the implied growth rate (the growth rate that the market is assuming for this stock). (5 marks) Question 2. (20 marks) (a) Your subscription to Jogger’s World Monthly is about to run out and you have the choice of renewing it by sending in the $10 a year regular rate or of getting a lifetime subscription to the magazine by paying $100. Your cost of capital is 7 percent. How many years would you have to live to make the lifetime subscription the better buy? Payments for the regular subscription are made at the beginning of each year. (Round up if necessary to obtain a whole number of years.) (5 marks) (b) Today is your 25th birthday. Your parents just gave you $5,000 that you plan to use to open a stock brokerage account. Your plan is to add $500 to the account each year on your birthday. Your first $500 contribution will come one year from now on your 26th birthday. Your 40th and final $500 contribution will occur on your 65th birthday. You plan to withdraw $5,000 from the account five years from now on your 30th birthday to take a trip to Europe. You also anticipate that you will need to withdraw $10,000 from the account 10 years from now on your 35th birthday to take a trip to Asia. You expect that the account will have an average annual return of 12 percent. (i) In present value terms (t=0), what is the total cost of the vacations you plan to take on your 30th and 35th birthdays? (6 marks) (ii) How much money do you anticipate that you will have in the account on your 65th birthday, following your final contribution? (9 marks) MGMT2023 Financial Management 1- Final Exam of Semester 2, 2014 Study Guide Mona School of Business & Management Mona School of Business & Management UWI Question 3. (20 marks) (a) Complete the balance sheet and sales information in the table that follows for HI Ltd. using the following financial data (all sales are on credit): (15 marks) Debt Ratio: 50% Current Ratio: 1.8x Total assets turnover: 1.5x Accounts receivable turnover: 10x Gross profit margin on sales: 25% Inventory turnover ratio: 5x BALANCE SHEET Cash Accounts Payable Accounts Receivable Long-Term Debt 60,000 Inventories Common Stock Fixed Assets Retained Earnings 97,500 Total Assets $300,000 Total Liabilities & Equity Sales Cost of Goods Sold (b) S.M. Ltd. had sales of $400,000 in 2011 (70% of its sales are credit). The company's gross profit margin is 10%, its ending inventory is $80,000, and its accounts receivable is $25,000. What amount of funds can be generated by the company if it increases its inventory turnover ratio to 10 and its accounts receivable turnover ratio to 18? (5 marks) Question 4. (20 marks) Brick’s Brewery Inc. manufactures and distributes fruit juice products. Brick is considering the development of a new prune juice product. Bricks’ CFO has collected the following information regarding the proposed project. The project can be operated at the company’s Dayton plant, which is currently vacant. The project will require that the company spend $1 million today (t = 0) to purchase a new machine. For tax purposes, the equipment will be depreciated on a straight-line basis. The company plans to use the machine for all 3 years of the project. At t = 3, the equipment is expected to have no salvage value. The project will require a $200,000 increase in net operating working capital at t = 0. The cost of the net operating working capital will be fully recovered at t = 3. The project is expected to produce incremental sales of $1 million a year for three years (t = 1, 2, and 3). The annual operating costs (excluding depreciation) are expected to be 60 percent of sales. The company’s tax rate is 40 percent and it has a WACC equal to 10 percent The company is extremely profitable, so any losses incurred from the prune juice project can be used to partially offset taxes paid on the company’s other projects. (a) Determine the project’s NPV and MIRR? (18 marks) MGMT2023 Financial Management 1- Final Exam of Semester 2, 2014 Study Guide Mona School of Business & Management Mona School of Business & Management UWI (b) Should the company undertake this project? Explain your response. (2 marks) Question 5. (20 marks) (a) John Brown is 20 years old and has recently started his first job. Since he knows you are studying financial management he has come to you for some advice. After a brief discussion you discovered the following information about John. - He would like to purchase a car 2 years from now. He anticipates that the vehicle will cost $2,500,000.00. His bank has indicated that they will require a 20% deposit and will finance the remainder at 12% per annum interest with equal monthly installments for 5 years. - On his 30th birthday he will have access to $1,000,000.00 from a savings plan started by his parents. He intends to use this to open a retirement savings account that will mature in 35 years on his 65th birthday. This account will provide a return of 7% per annum and will require that John makes additional deposits of $60,000 at the end of each year in the account. (i) How much would John need to save at the end of each month to be able to afford the deposit on the car, assuming his savings could earn interest at 4% per annum? (2 marks) (ii) What will be the principal balance on the vehicle loan after 3 years of payments? (4 marks) (iii) How much interest would John have paid after 3 years of payments? (2 marks) (iv) What will be the balance on the retirement account on John’s 65th birthday? (3 marks) (b) (i) Differentiate between the nominal and the effective interest rates? (3 marks) (ii) Define perpetuity and give two examples of such investments. (3 marks) (iii) Why is the concept of the time value of money so important to financial managers?(3 marks) Question 6. (20 marks) (a) (i) What is an efficient portfolio? (2 marks) (ii) List 5 types of events that influence systematic (non-diversifiable) risk. (3 marks) (iii) How can standard deviation be used in investment analysis? (2 marks) (b) (i) Richtex Brick has a current dividend of $1.70 and the market value of its common stock is $28. The expected market return is 13 percent and the risk-free rate is 9 percent. If Richtex stock is half as volatile as the market (that is, the stock price moves on average at half the rate of the movement in the market index), and the market is in equilibrium, what rate of growth is expected for Richtex's dividends assuming a constant growth valuation model? (5 marks) (ii) The beta of Sanafil is 1.2. Sanafil is evaluating a merger with Matra, a firm that has a beta of 0.95. Sanafil's stock sells for $40 per share and there are 10 million shares outstanding. Matra's stock sells for $60, but there are only 2 million shares outstanding. MGMT2023 Financial Management 1- Final Exam of Semester 2, 2014 Study Guide Mona School of Business & Management Mona School of Business & Management UWI If these two firms merge, what will be the merged firm's beta? (2 marks) (iii) Lotte Group is planing on diversifying into the transportation industry. As a result, Lotte's beta would rise to 1.3 from 1.1 and the expected long-term growth rate in the firm's earnings would increase from 11% to 14%. Currently the risk-free rate is 5.0% and the market risk premium is 8.6%. If Lotte's current dividend is $1.30, should Lotte diversify into the transportation industry? (6 marks) Question 7. (20 marks) (a) (i) What are the advantages and disadvantages of long-term debt financing? (4 marks) (ii) According to the fundamental principle of intrinsic value, how does a firm value an asset? (4 marks) (iii) Suppose you buy a 9.75 percent coupon, 30-year bond when the bond is first issued. If interest rates suddenly fall to 8.25 percent, what happens to the value of your bond? Why? Suppose your bond is convertible. Does your answer change? (Note: You are not required to perform any mathematical calculations. Discuss the relationships only.)(4 marks) (b) (i) What is the market value of a zero coupon bond with 5 years to maturity? The bond was originally sold with a yield to maturity equal to 11 percent, but the market rate today is 9 percent. (2 marks) (ii) Determine the value of a LASKA 6.25% cumulative preferred stock, series D, par value $75 to an investor who requires a 9.5% rate of return on a security with this risk.(3 marks) (iii) WPI has a bond issue outstanding that has a coupon rate of 10%, and a current yield of 11%. The yield to maturity on this bond is 12%. What is the market price, to the nearest dollar, of the WPI bond if it pays interest semi-annually and has 10 years to mature?(3 marks) Question 8. (20 Marks) (a) Two mutually exclusive projects are being evaluated. Each project has an initial outlay of $50,000 and a required return of 15%. The after-tax cashflows for the two projects are: Year Project A Project B 1 $5,000 $20,000 2 18,000 20,000 3 25,000 20,000 4 32,000 20,000 (i) Compute each project’s Payback Period, NPV and MIRR? (13 marks) (ii) Using the information calculated, which project should be selected? (1 marks) (b) (i) What are the principles that should be applied when estimating cash flows for capital budgeting purposes? (3 marks) MGMT2023 Financial Management 1- Final Exam of Semester 2, 2014 Study Guide Mona School of Business & Management Mona School of Business & Management UWI (ii) Explain why the internal rate of return method is more popular than the net present value method. What are some potential problems with relying on the IRR method?(3 marks) Question 9. (20 marks) You have finally saved $10,000 and are ready to make your first investment. You have the three following alternatives for investing that money: • Capital Cities ABC, Inc. bonds with a par value of $1,000, a coupon interest rate of 8.75 percent, are selling for $1,314 and mature in 12 years. • Southwest Bancorp preferred stock paying a dividend of $2.50 and selling for $25.50. • Emerson Electric common stock selling for $36.75. The stock recently paid a $1.32 dividend and the firm's earnings per share has increased from $1.79 to $3.06 in the past five years. The firm expects to grow at the same rate for the foreseeable future. Your required rates of return for these investments are 6 percent for the bond, 7 percent for the preferred stock, and 15 percent for the common stock. Required: (a) Calculate the value of each investment based on your respective required rates of return. (11 marks) (b) Which investment would you select? Why? (2 marks) (c) Assume Emerson Electric's managers expect an earnings downturn and, as a result, lower their growth forecast by 3 percent. Would this change your decision in (b) above? (2 marks) (d) What economic factors determine the yield to maturity for a bond? (5 marks) Question 10. (20 marks) You recently graduated with a major in finance and have just landed a job as a financial planner with RNJ Investments Limited. Your first assignment is to invest $100,000 for a client. You have been restricted to the following investment alternatives – Alta Industries, an electronics firm; Repo Men Ltd., a debt collection agency; Jamaican Foam, manufacturers of mattresses and other foam products; and your company’s “index fund”, which owns a market-weighted fraction of all publicly traded stocks. In addition to estimating the risk free rate of return at 8% and the market rate of return at 15%, you have assessed the following relevant information on each investment: Alta Industries Repo Men Jamaica Foam Index Fund Expected Return 17.5% 1.9% 14.6% 15.2% Standard Deviation 20.0% 13.5% 17.2% 15.3% Beta 1.35 (0.85) 0.70 1.00 MGMT2023 Financial Management 1- Final Exam of Semester 2, 2014 Study Guide Mona School of Business & Management Mona School of Business & Management UWI Required: (a) Briefly discuss why there is no reason to believe that the market will reward investors with additional returns for assuming unsystematic risk. (4 marks) (b) Assuming you could invest in only one of the above choices, on the basis of their stand-alone risk, which investment offers the best opportunity? (4 marks) (c) Now assume you could form two stock portfolios by investing equally (50/50) in either (i) Alta Industries and Repo Men – correlation coefficient of -0.75 (negative) between their returns, or (ii) Alta Industries and Jamaican Foam – correlation coefficient of 0.60. Again, on the basis of their stand-alone risk, which portfolio offers the best opportunity? (6 marks) (d) You have now decided that the final choice will be between either of the two portfolios in part (c) and the index fund. What is the market risk and required return for each of these three portfolios based on the capital asset pricing model? (4 marks) (e) Based on the results in parts (c) and (d) which portfolio would you select? Why? (2 marks) Question 11. (20 Marks) Jamie Dermott graduated from Midland State University in June and has been working for about a month as a junior financial analyst at Caledonia Products. He has been given the assignment of evaluating two proposed projects whose cash flow forecasts are as follows: Project A Project B Initial Outlay $(110,000) $(110,000) Year 1 20,000 40,000 Year 2 30,000 40,000 Year 3 40,000 40,000 Year 4 50,000 40,000 Year 5 70,000 40,000 Since these projects involve additions to Caledonia's highly successful Avalon product line, the company requires a rate of return on both projects equal to 12 percent. Required: (a) Compute the NPV and MIRR for both projects. (12 marks) (b) Rank the two projects and make a recommendation as to which (if either) should be accepted under the assumption that the projects are mutually exclusive. (2 marks) (c) Briefly explain why each of the following should or should not be considered in forecasting incremental cash flows from a project: MGMT2023 Financial Management 1- Final Exam of Semester 2, 2014 Study Guide Mona School of Business & Management Mona School of Business & Management UWI (i) The cost of building a prototype of a new product to see if it was feasible. (2 marks) (ii) Market research suggests that after buying a company's "smart phone" customers will begin to buy more of the same company's notebook computers. (2 marks) (iii) A company decides to use existing space for storage. The company could have rented the space to another business for $2,500 a month. (2 marks) Question 12. (20 Marks) Emily Dao, 27, just received a promotion at work that increased her annual salary to $3,700,000. She is eligible to participate in her employer's retirement plan to which the employer matches dollar-fordollar workers' contributions up to 5% of salary. However, Emily wants to buy a new $2,500,000 car in three years, and she wants to have enough money to make a $700,000 down payment on the car and finance the balance. Fortunately, she expects a sizable bonus this year that she hopes will cover that down payment in three years. A wedding is also in her plans. Emily and her boyfriend, Paul, have set a wedding date two years in the future, after he finishes medical school. In addition, Emily and Paul want to buy a home of their own as soon as possible. This might be possible because at age 30, Emily will be eligible to access a $5,000,000 trust fund left to her as an inheritance by her late grandfather. Her trust fund is invested in 7% government bonds. Required: (a) Justify Emily's participation in her employer's retirement plan using the time value of money concepts by explaining how much an investment of $100,000 will grow to in 40 years if it earns 10%. (4 marks) (b) Calculate the amount of money that Emily needs to set aside from her bonus this year to cover the down payment on a new car, assuming she can earn 6% on her savings. What if she could earn 10% on her savings? (4 marks) (c) What will be the value of Emily's trust fund at age 60, assuming she takes possession of half of the money ($2,500,000 of the $5,000,000 trust fund) at age 30 for a house down payment, and leaves the other half of the money untouched where it is currently invested? (2 marks) (d) List at least two actions that Emily and Paul could take to accumulate more for their retirement (think about i and n). (4 marks) (e) Assume that Emily and Paul borrowed $9,500,000 at 12% interest (compounded monthly) to finance the house purchase. The loan is to be repaid monthly over 15 years. After making MGMT2023 Financial Management 1- Final Exam of Semester 2, 2014 Study Guide Mona School of Business & Management Mona School of Business & Management UWI payments for 10 years they then decided to pay off the principal balance outstanding from their accumulated savings. (i) How much would they need to have saved up to pay off the loan at that time? (4 marks) (ii) How much interest in total would they have paid on the loan over the 10 years of making payments? (2 marks) Question 13. (20 marks) The Nealon Manufacturing Company is in the midst of negotiations to acquire a plant in Farout, Westmoreland. The cost of the purchase is $40 million, which is roughly one-half the size of the company today. The company CFO is very concerned about making such a large commitment of money to the new plant. In this regard, the CFO has launched the firm's first-ever cost of capital estimation. The company's current balance sheet, restated to reflect market values, has been converted to percentages as follows: Nealon, Inc., Balance Sheet-2010 Type of Financing Percentage of Future Financing Bonds (8%, $1,000 par, 30-year maturity) 38% Preferred stock (5,000 shares outstanding, $50 par, $1.50 dividend) 15% Common stock 47% Total 100% The company paid dividends to its common stockholders of $2.50 per share last year, and the projected rate of annual growth in dividends is 6% per year for the indefinite future. Nealon's common stock trades over-the-counter and has a current market price of $35 per share. In addition, the firm's bonds are currently selling at $1,124.09 each. The preferred stock has a current market price of $19 per share. Required: (a) If the firm pays taxes at a rate of 34% of its profits, what is its weighted average cost of capital (i.e., Firm WACC)? (10 marks) (b) Assume now that Nealon is raising a total of $40 million using the above financing mix. New debt financing will require that the firm pay 50 basis points (i.e., one-half a percent) in issue costs, the sale of preferred stock will require the firm to pay 200 basis points in flotation costs, and the common stock issue will require flotation costs of 500 basis points. (i) What are the total flotation costs the firm will incur to raise the needed $40 million? (3 marks) MGMT2023 Financial Management 1- Final Exam of Semester 2, 2014 Study Guide Mona School of Business & Management Mona School of Business & Management UWI (ii) How should the flotation costs be incorporated into the analysis of the $40 million investment the firm plans to make? (1 mark) (iii) Briefly identify and describe three important uses of a firm's weighted average cost of capital Question 14. (20 Marks) (a) You have been provided with the following information about Producers Jamaica Ltd. Use the information to determine the firms weighted average cost of capital. The market value of the firm’s sources of finances are: Debt $ 40 million Preferred stock $ 20 million Common stock $ 140 million The market return is 12%, the risk-free rate is 6% and the firm’s beta is 1.4 The 10% Preferred stock has a face value of $1 and currently has a market value of $1.25 per share The firm’s 7.5% annual coupon bonds that mature in 5 years are priced at $1,020.50. The firm faces a 33% tax rate (12 marks) (b) State whether the following statements are true or false. Explain your answer: (i) The Capital Asset Pricing Model can be used to estimate a firm’s cost of external common equity. (2 marks) (ii) General interest rates have no effect on a firm’s weighted average cost of capital. (2 marks) (iii) In most instances, as the amount of debt increases, the common stockholders will decrease their required rate of return. (2 marks) (iv) As the tax rate increases, the weighted average cost of capital decreases. (2 marks) Question 15 (15 marks) You have been hired as an analyst for Mellon Bank and your team is working on an independent assessment of Daffy Duck Food Inc. (DDF Inc.) DDF Inc. is a firm that specializes in the production of freshly imported farm products from France. Your assistant has provided you with the following data for Flipper Inc. and their industry. MGMT2023 Financial Management 1- Final Exam of Semester 2, 2014 Study Guide Mona School of Business & Management Mona School of Business & Management UWI Ratio 1999 1998 1997 1999- Industry Average Long-term debt 0.45 0.40 0.35 0.35 Inventory Turnover 62.65 42.42 32.25 53.25 Depreciation/Total Assets 0.25 0.014 0.018 0.015 Days’ sales in receivables 113 98 94 130.25 Debt to Equity 0.75 0.85 0.90 0.88 Profit Margin 0.082 0.07 0.06 0.075 Total Asset Turnover 0.54 0.65 0.70 0.40 Quick Ratio 1.028 1.03 1.029 1.031 Current Ratio 1.33 1.21 1.15 1.25 Times Interest Earned 0.9 4.375 4.45 4.65 Equity Multiplier 1.75 1.85 1.90 1.88 a. In the annual report to the shareholders, the CEO of Flipper Inc wrote, “1997 was a good year for the firm with respect to our ability to meet our short-term obligations. We had higher liquidity largely due to an increase in highly liquid current assets (cash, account receivables and short-term marketable securities).” Is the CEO correct? Explain and use only relevant information in your analysis. b. What can you say about the firm's asset management? Be as complete as possible given the above information, but do not use any irrelevant information. c. You are asked to provide the shareholders with an assessment of the firm's solvency and leverage. Be as complete as possible given the above information, but do not use any irrelevant information. Continued……. MGMT2023 Financial Management 1- Final Exam of Semester 2, 2014 Study Guide Mona School of Business & Management Mona School of Business & Management UWI Question 16 (30 marks) i) Given the following information for the Quest Company, calculate the ratios as requested. December 31, December 31, Year 1 Year 2 Current assets $100,000 $150,000 Noncurrent assets 400,000 500,000 Current liabilities 50,000 100,000 Long-term debt 300,000 300,000 Common stock, 10,000 shares 100,000 100,000 Retained earnings 50,000 150,000 Year 2 Net income $ 100,000 Interest expense 40,000 Income taxes (tax rate is 30%) 30,000 Total revenues 1,000,000 Required: Calculate the following ratios: a. Rate of return on assets b. Return on Sales c. Asset Turnover Ratio d. Rate of return on common shareholders' equity e. Earnings per share of common stock f. Current ratio (both dates) MGMT2023 Financial Management 1- Final Exam of Semester 2, 2014 Study Guide Mona School of Business & Management Mona School of Business & Management UWI g. Leverage h. Debt-equity ratio (both dates) ii) Selected balance sheet and income statement data for Southern Skateboard Distributors are provided below: Cash $ 90 $ 75 Marketable securities (at market) 60 45 Accounts receivable (net) 135 90 Inventories 180 150 Prepaid items 45 60 Total current assets $ 510 $420 Net sales $900 Costs and expenses Cost of goods sold 660 Selling, general, and administrative 90 Interest expense 15 Income before taxes $ 135 Income taxes 60 Net income $ 75 Required: a. Compute the inventory turnover ratio b. Compute the accounts receivable ratio A copy of the formulae sheet that will be provided in the exam is attached below. MGMT2023 Financial Management 1- Final Exam of Semester 2, 2014 Study Guide Mona School of Business & Management Mona School of Business & Management UWI Supplemental Information – Present Value Tables Table 1: Present Value of an Annuity of $1 per Period for n Periods: Equation: Number of Periods 1% 2% 5% 7% 8% 9% 10% 12% 14% 18% 1 0.9901 0.9804 0.9524 0.9346 0.9259 0.9174 0.9091 0.8929 0.8772 0.8475 2 1.9704 1.9416 1.8594 1.8080 1.7833 1.7591 1.7355 1.6901 1.6467 1.5656 3 2.9410 2.8839 2.7232 2.6243 2.5771 2.5313 2.4869 2.4018 2.3216 2.1743 4 3.9020 3.8077 3.5460 3.3872 3.3121 3.2397 3.1699 3.0373 2.9137 2.6901 5 4.8534 4.7135 4.3295 4.1002 3.9927 3.8897 3.7908 3.6048 3.4331 3.1272 6 5.7955 5.6014 5.0757 4.7665 4.6229 4.4859 4.3553 4.1114 3.8887 3.4976 7 6.7282 6.4720 5.7864 5.3893 5.2064 5.0330 4.8684 4.5638 4.2883 3.8115 8 7.6517 7.3255 6.4632 5.9713 5.7466 5.5348 5.3349 4.9676 4.6389 4.0776 9 8.5660 8.1622 7.1078 6.5152 6.2469 5.9952 5.7590 5.3282 4.9464 4.3030 10 9.4713 8.9826 7.7217 7.0236 6.7101 6.4177 6.1446 5.6502 5.2161 4.4941 15 13.8651 12.8493 10.3797 9.1079 8.5595 8.0607 7.6061 6.8109 6.1422 5.0916 18 16.3983 14.9920 11.6896 10.0591 9.3719 8.7556 8.2014 7.2497 6.4674 5.2732 36 30.1075 25.4888 16.5469 13.0352 11.7172 10.6118 9.6765 8.1924 7.0790 5.5412 48 37.9740 30.6731 18.0772 13.7305 12.1891 10.9336 9.8969 8.2972 7.1296 5.5536 50 39.1961 31.4236 18.2559 13.8007 12.2335 10.9617 9.9148 8.3045 7.1327 5.5541 Table 2: Present Value of $1 Due at the End of n Periods: Equation: Number of Periods 1% 2% 5% 7% 8% 9% 10% 12% 14% 18% 1 0.9901 0.9804 0.9524 0.9346 0.9259 0.9174 0.9091 0.8929 0.8772 0.8475 2 0.9803 0.9612 0.9070 0.8734 0.8573 0.8417 0.8264 0.7972 0.7695 0.7182 3 0.9706 0.9423 0.8638 0.8163 0.7938 0.7722 0.7513 0.7118 0.6750 0.6086 4 0.9610 0.9238 0.8227 0.7629 0.7350 0.7084 0.6830 0.6355 0.5921 0.5158 5 0.9515 0.9057 0.7835 0.7130 0.6806 0.6499 0.6209 0.5674 0.5194 0.4371 6 0.9420 0.8880 0.7462 0.6663 0.6302 0.5963 0.5645 0.5066 0.4556 0.3704 7 0.9327 0.8706 0.7107 0.6227 0.5835 0.5470 0.5132 0.4523 0.3996 0.3139 8 0.9235 0.8535 0.6768 0.5820 0.5403 0.5019 0.4665 0.4039 0.3506 0.2660 9 0.9143 0.8368 0.6446 0.5439 0.5002 0.4604 0.4241 0.3606 0.3075 0.2255 10 0.9053 0.8203 0.6139 0.5083 0.4632 0.4224 0.3855 0.3220 0.2697 0.1911 15 0.8613 0.7430 0.4810 0.3624 0.3152 0.2745 0.2394 0.1827 0.1401 0.0835 18 0.8360 0.7002 0.4155 0.2959 0.2502 0.2120 0.1799 0.1300 0.0946 0.0508 36 0.6989 0.4902 0.1727 0.0875 0.0626 0.0449 0.0323 0.0169 0.0089 0.0026 48 0.6203 0.3865 0.0961 0.0389 0.0249 0.0160 0.0103 0.0043 0.0019 0.0004 50 0.6080 0.3715 0.0872 0.0339 0.0213 0.0134 0.0085 0.0035 0.0014 0.0003 PVIFr,n ( ) ( ) ( ) ( ) r r r r r r PVIFA n n t n n r n t + − = + + − = + =∑= 1 1 1 1 1 1 1 1 1 , ( )n + r = 1 1 MGMT2023 Financial Management 1- Final Exam of Semester 2, 2014 Study Guide Mona School of Business & Management Mona School of Business & Management UWI Table 3: Future Value of an Annuity of $1 per Period for n Periods: Equation: Number of Periods 1% 2% 5% 7% 8% 9% 10% 12% 14% 18% 1 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 2 2.0100 2.0200 2.0500 2.0700 2.0800 2.0900 2.1000 2.1200 2.1400 2.1800 3 3.0301 3.0604 3.1525 3.2149 3.2464 3.2781 3.3100 3.3744 3.4396 3.5724 4 4.0604 4.1216 4.3101 4.4399 4.5061 4.5731 4.6410 4.7793 4.9211 5.2154 5 5.1010 5.2040 5.5256 5.7507 5.8666 5.9847 6.1051 6.3528 6.6101 7.1542 6 6.1520 6.3081 6.8019 7.1533 7.3359 7.5233 7.7156 8.1152 8.5355 9.4420 7 7.2135 7.4343 8.1420 8.6540 8.9228 9.2004 9.487 10.089 10.730 12.142 8 8.2857 8.5830 9.5491 10.260 10.637 11.028 11.436 12.300 13.233 15.327 9 9.3685 9.7546 11.027 11.978 12.488 13.021 13.579 14.776 16.085 19.086 10 10.462 10.950 12.578 13.816 14.487 15.193 15.937 17.549 19.337 23.521 15 16.097 17.293 21.579 25.129 27.152 29.361 31.772 37.280 43.842 60.965 18 19.615 21.412 28.132 33.999 37.450 41.301 45.599 55.750 68.394 103.740 36 43.077 51.994 95.836 148.913 187.102 236.125 299.127 484.463 791.673 2144.65 48 61.223 79.354 188.025 353.270 490.132 684.280 960.17 1911.59 3841.48 15664.3 50 64.463 84.579 209.348 406.529 573.77 815.08 1163.91 2400.02 4994.52 21813 Table 4: Future Value of $1 Due at the End of n Periods: Equation: Number of Periods 1% 2% 5% 7% 8% 9% 10% 12% 14% 18% 1 1.0100 1.0200 1.0500 1.0700 1.0800 1.0900 1.1000 1.1200 1.1400 1.1800 2 1.0201 1.0404 1.1025 1.1449 1.1664 1.1881 1.2100 1.2544 1.2996 1.3924 3 1.0303 1.0612 1.1576 1.2250 1.2597 1.2950 1.3310 1.4049 1.4815 1.6430 4 1.0406 1.0824 1.2155 1.3108 1.3605 1.4116 1.4641 1.5735 1.6890 1.9388 5 1.0510 1.1041 1.2763 1.4026 1.4693 1.5386 1.6105 1.7623 1.9254 2.2878 6 1.0615 1.1262 1.3401 1.5007 1.5869 1.6771 1.7716 1.9738 2.1950 2.6996 7 1.0721 1.1487 1.4071 1.6058 1.7138 1.8280 1.9487 2.2107 2.5023 3.1855 8 1.0829 1.1717 1.4775 1.7182 1.8509 1.9926 2.1436 2.4760 2.8526 3.7589 9 1.0937 1.1951 1.5513 1.8385 1.9990 2.1719 2.3579 2.7731 3.2519 4.4355 10 1.1046 1.2190 1.6289 1.9672 2.1589 2.3674 2.5937 3.1058 3.7072 5.2338 15 1.1610 1.3459 2.0789 2.7590 3.1722 3.6425 4.1772 5.4736 7.1379 11.9737 18 1.1961 1.4282 2.4066 3.3799 3.9960 4.7171 5.5599 7.6900 10.5752 19.6733 36 1.4308 2.0399 5.7918 11.4239 15.9682 22.2512 30.9127 59.1356 111.834 387.037 48 1.6122 2.5871 10.4013 25.7289 40.2106 62.5852 97.0172 230.391 538.807 2820.57 50 1.6446 2.6916 11.4674 29.4570 46.9016 74.3575 117.391 289.002 700.233 3927.36 FVIFr,n ( ) ( ) ∑= − + − = + = n t n n t r n r r FVIFA r 1 , 1 1 1 ( ) n = 1+ r MGMT2023 Financial Management 1- Final Exam of Semester 2, 2014 Study Guide Mona School of Business & Management Mona School of Business & Management UWI Supplemental Information – Formula Sheet (i) Present Value of a single payment: PV = FVn x (PVIFi,n) (ii) Future Value of a single payment: FVn = PV x (FVIFi,n) (iii) Present Value of an ordinary annuity: PV = PMT x (PVIFAi,n) (iv) Future Value of an ordinary annuity: FVn = PMTx (FVIFAi,n) (v) PV and FV for an Annuity Due: PV = PMT x (PVIFAi,n) x (1 + i) FVn = PMT x (FVIFAi,n) x (1 + i) (vi) Net Present Value IO 1 ( k ) FCF NPV n t 1 t t − + =∑= (vii) Internal Rate of Return IO 1 ( IRR ) FCF n t 1 t t = + ∑= (viii) Dividend Growth Model: ( ) k g D P s − = 1 0 (ix) Bond Valuation: B0 = PV(coupon payments) + PV(par value) ( ) ( ) = CPN PVIFAk %,n + Par PVIFk %,n (x) Bond Yield to Maturity Approximation: 3 2 0 0 Par P n Par P CPN YTM + − + = (xi) Capital Asset Pricing Model: k (k k ) ki RF i M RF ˆ = + β − (xii) Weighted Average Cost of Capital: WACC = wdkd(1-t) + wpkp + wsks Note: PV and FV formulas are provided on the Financial Tables. 

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