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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 -
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Finance Revision Exercise 1 15. How long does it take £14,500 to grow into £23,352 at 10% interest? 16. A company is expecting £4000 a year from a contract for the next 8 years (first cash flow at the end of year 1). What is the present value of this contract if the interest rate is 7%? 17. A company wants to redeem a bond at the end of five years time. The amount outstanding is £250m. If the company can earn 7% on its cash, how much must it save each year to have the £250m in 5 years time to pay off the bond? 18. If you can borrow at 9% compounded daily, what is your effective rate of interest (your true borrowing rate that reflects the daily compounding? If you borrowed £15,000 for 5 years, how much would you pay back? 19. If you were charged 3% interest per month, how much would you pay back over the life of a £5,000, two year loan? 20. You have twins that are five years old just now. You estimate that you will need a fund of £80,000 at the end of six years to be able to fund their schooling. A financial product is offering a saving rate of return of 6% per annum. i) How much do you have to deposit now to grow to £80,000 over the six years? ii) How much would you have to save each year for it to grow to £80,000 at the end of six years? 21. Assume Vodafone has a required rate of return of 8%, it has earnings per share (eps) for fiscal year 2011 of 13.8p. How long will it take for the eps to double at that required rate of return? 22. Tesco had a total capital expenditure in 1998 of £841m, in 2002 this was £2027m, in 2006 it was £2.8bn, in 2009 it was £3.1bn and in 2011 it was £3.7bn. What was the annualised growth rate in capex at Tesco from ’98-02, 02-06, 06-09, and for the entire period? 23. Tesco’s eps in 1998 was 8.64p, in 2002 it was 11.86, in 2006 it was 20.20p, in 2009 it was 27.50p and in 2011 it was 33.1p. What was the growth rate in eps from ’98-02, 02-06, 06-09, 09-11, and for the entire period? 24. Tesco’s dividend was 3.87p in 1998 and in 2002 it was 5.60p, in 2006 it was 8.63p, in 2009 it was 11.96p, and in 2011 it was 14.46p. What was the dividend growth rate from ’98-02, 02-06, 06-09, 09-11, and for the entire period? 25. What would you pay for an asset that produces a level cash stream of £50,000 every six months for the next 10 years, if your opportunity cost of capital is 8% (annual rate), compounded per period? 26. A company has borrowed £100,000 to buy new machinery. It has to repay the loan in equal instalments over a 5 year period. If the borrowing rate is 12 %, what is the annual repayment? src.doc 2010 - 2 -
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Finance Revision Exercise 1 27. You run a small business and you buy a fleet of four delivery vans. You arrange the deal through a finance company. They lend you £120,000, but you have to repay the loan in equal repayments over the next 30 months. The payments are £4649.72 per month, what is the annualised interest rate being charged? 28. Bryan Griggs is a world renowned corporate guru and has signed a £34m contract with Mckenzies the giant Scottish consulting firm. The contract will entail Griggs being paid £2m per annum for three years and then £5m per annum for the next 4 years, and assuming he makes it to the end of the contract, he will be paid a bonus of £8m. If the opportunity cost of capital is 8%, what is the present value of the contract? 29. A rival company in your sector is offering you a joint venture deal – if you pay £200,000 to the other company today, it will pay you a cash flow of £30,000 per annum at the end of year 5 and then for a further 12 years. If your cost of capital is 10%, would you sign the contract? 30. Your company has the following four options: - sell the division today for £10m cash - accept an earn out with four fixed payments of £3.25m each, with the first payment today - accept royalties of £1m per annum for the next 20 years with the first payment today - accept £5m now and £10m in 6 years time. The relevant interest rate is 8%. 31. Your company can buy a machine for £350,000 that will generate cash savings of £70,000 per annum for the next 6 years as a result of lower labour costs. If the opportunity cost of capital is 9%, should you buy the machine? 32. You have gone on ‘Who wants to be a millionaire anyway’ and won the star prize of £1m, but find out that your prize will be paid in equal annual instalments of £100,000 starting today. You were so confident of winning that you have already spent £500,000. You are contacted by a financial company who are willing to buy your stream of cash flows off you for a single payment today. Your opportunity cost of capital is 8%. They offer you £700,000, do you accept or reject? 33. What is a convertible bond and what are the advantages and disadvantages of it? 34. What are the agency problems between shareholders and managers and how are they resolved? How effective are the resolution techniques you have identified? 35. What justification is there for shareholder wealth maximisation being the main corporate aim, why not any of the other common goals? src.doc 2010 - 3 -
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Finance Revision Exercise 1 36. How would you describe the key differences between shareholders in a company and bondholders in a company? 37. What is the usual order of preference for financing a company and why is this the case? 38. How far do listed company responsibilities go? Any further than the shareholders? 39. How should chief executives be rewarded? Is Larry Ellison worth $705m? Should the average remuneration package of a top S&P 500 or FTSE 100 CEO run into the tens of millions of dollars per year? What risks are they taking? src.doc 2010 - 4 -
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