# Spring 2021 Final Exam XXXXXXXXXXFIN 200 Problem 1 (20 Points) A bond is maturing in 7 years and paying annual coupons of 5% If the annual required rate of return is 4%, compute: 1. The PV of the...

Spring 2021
Final Exam
XXXXXXXXXXFIN 200
Problem 1 (20 Points)
A bond is maturing in 7 years and paying annual coupons of 5%
If the annual required rate of return is 4%, compute:
1. The PV of the bonds;
2. The duration of the bond;
3. The modified duration (volatility);
4. Interpret your result in question 3.
Problem 2 (20 Points)
You have the following bond maturing in 4 years:
Face Value = 1.000\$;
Semiannual dividends = 35\$;
Annual Interest rate= 5%
1. Compute the PV of the cash flows?
2. What will happen to the bond price if the interest rate decreases to 6%?
3. What will be the price if the annual interest is 4%?
Problem 3 (30 Points)
Valuation of companies can be done by forecasting a series of cash flows and then estimating a horizon value.
Your firm projects net cash flow in years 1 through 5 as follows:
Year 1
Year 2
Year 3
Year 4
Year 5

100 Million \$

120 Million \$

135 Million \$

140 Million \$

147 Million \$
Assume that the company is expecting a growth rate of 6% starting year 5 and a discount rate of 12%; compute the PV of the company?
Show the details of all your calculations.
Problem 4 (30 Points)
Compute the pay back, discounted pay back, NPV and IRR of the following projects;
Assume a discount rate of 10%

C0
C1
C2
C3

Project A
-2000
500
500
5000

Project B
-2000
500
1800
0

Project C
-2000
1800
500
0

XXXXXXXXXXSpring 2021
XXXXXXXXXXFinal Exam
FIN 350
Use your own words to answer the exam questions in order to demonstrate your understanding of the course material.
Problem 1
A retiree strongly believe that investing in a non-dividend paying growth firm will eventually cause him to lose all his shares.
Explain why and how this happens?
Problem 2
Managers are reluctant to make dividend changes. Why ?
Problem 3
High dividend policy is more difficult to manage for a weak firm than a strong firm. Explain in details why?
Problem 4
The company has the following simplified Balance Sheet
Asset value XXXXXXXXXX XXXXXXXXXXDebt XXXXXXXXXX
XXXXXXXXXXEquity 750
Total XXXXXXXXXX1250 XXXXXXXXXX1250
The cost of debt is 6% and the cost of equity is 12%
Compute the company’s WACC ?
Problem 5
Rio is a company specialized in producing healthcare products.
Its free cash flows in millions are expected to be as follow:
Year 1
Year 2
Year 2
Year 4
Year 5
Year 6
3.5
3.2
3.4
5.9
6.1
6.0
Cash flows will settle down starting year 6 and will record a growth of 3% per year.
Assume a WACC of 9%.
1. Compute the horizon value at year 6 ?
2. Compute the present value of the company?
2. If the market value of debt is \$36 million, compute the total value of equity?
Answered Same DayMay 19, 2021Charles Sturt University

## Solution

Akshay Kumar answered on May 19 2021
Problem 1
Given
Par Value    1000
Annual Coupon    Coupon Rate*Par Value    5%*1000    50
Number of Years    7
Required Rate of Return    4%
1. PV of Bond
Years    Amount (Coupon/Par Value    Discounting Factors @ 4%    PV
1    50    0.96    48.08
2    50    0.92    46.23
3    50    0.89    44.45
4    50    0.85    42.74
5    50    0.82    41.10
6    50    0.79    39.52
7    50    0.76    38.00
7    1000    0.76    759.92
Total            1,060.02
Thus, PV of Bond is 1060.02
2. Duration of Bonds         1
Years    Amount (Coupon/Par Value)    Discounting Factors @ 4%    PV    Weight PV
1    50    0.96    48.08    48.08
2    50    0.92    46.23    92.46
3    50    0.89    44.45    133.35
4    50    0.85    42.74    170.96
5    50    0.82    41.10    205.48
6    50    0.79    39.52    237.09
7    50    0.76    38.00    265.97
7    1000    0.76    759.92    5,319.42
Total            1,060.02    6,472.81
Duration of Bonds    Weighted PV / PV
6472.81/1060.02
6.11
Duration of Bonds is 6.11 years
3. The modified duration (volatility)    Duration of Bonds/(1+r)
6.11/(1+4%)
5.88
The modified duration (volatility) is 5.88 years
4. Interpret your result in question 3
Modified duration helps in measuring the sensitivity of price of bond with respect to change in YTM of Bond.
Change In price of Bond =-Modified Duration *Change in YTM*Price
Problem 2
Given
Face Value    1.000\$;
Semiannual dividends    35\$;
Annual Interest rate    5%
Number of Years    4
Number of Periods    4*2    8
Semiannual...
SOLUTION.PDF