Finance Revision Exercise 1 Finance – Revision Exercise 1 1. What is the present value of £26,250 to be received at the end of 7 years, if the relevant interest rate is 12%? 2. What is the future value of £1200 if it earns 14% compounded annually for 15 years? 3. What is the Annual Percentage Rate (APR, – or effective rate in USA) if a 10% annual rate is compounded monthly? 4. What is the present value of a stream of cash flows of £500 per annum for 5 years at 8% interest rate? 5. What is the future value of a stream of cash flows of £10,000 per annum for 8 years at 11% interest? 6. What is the return offered if you can invest £1200 now for 6 years and obtain £1900 at the end of that time? 7. If a company’s nominal cost of capital is 12% and inflation is 3%, what is the real cost of capital for the company? 8. What is the nominal return if the real return is 4% and the inflation rate is 3%? 9. If a bond has a coupon of 7.5% and a nominal value of £100, and is priced at £110.22 in the market, what is the interest yield? 10. If you buy shares in BAe Systems today for 462p, sell them in three months time for 488p and receive a quarterly dividend of 6p, what is your holding period return? What is this return annualised? 11. There is a 20% probability of getting a return of –8% (minus 8%), a 25% chance of getting a return of 2%, a 35% chance of getting a return of 9% and a return of 15% has a probability of 20%. What is the expected return and standard deviation of this investment? 12. What will a sum of £7000 at 8% compounded semi-annually be worth in 10 years time? 13. What will a sum of £12,000 at 12% compounded monthly be worth at the end of 2 years? 14. If you were offered £10,000 four years from today, or £1000 a year for ten years and the return you can earn on your investments is 7%, which would you prefer? (only compare the two alternatives as stated) src.doc 2010 1- Finance Revision Exercise 1 15. How long does it take £14,500 to grow into £23,352 at

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