Notes
CF last year paper:
Question 1
1), (D) N= 35, PMT=-1450, i=3% we get: FV= 87670
2), (B) PV= -1,000,000, N= 15 *12 i= 2.4/12 we get : PMT= 6621
3), (B) Because: E(r)x> E(r)y, Std Dev x < Std Dev y
Std Dev x/ E(r)x < Std Dev y/ E(r)y, which is the B.
4), (D) Because: Short term Bonds is less fluctuation than long term Bonds. Then
we have A & D, 1 year. zero coupon bonds have higher interest rate risk
than bonds that pay coupon payments. Then we get D.
5). (D) N= 15 *2, PMT= 1000 * 8.75%/2=43.75 PV= -1213.55 FV= 1000,
Then we get rd= 3.25% ( because it is semiannual) so we need 3.25%
*2=6.5%
EAR= ( 1+ ip)^m-1= ( 1+ 6.5%/2)^2-1= 6.61%
6) (E) E(r)= D1/P0+g= D0*(1+g)/P0= 2.75*(1+3%)/ 36=10.87%
7) ( C) Step 1: WACC= Ks= 3%+5.5%*1.2= 9.6%
Step 2: D0= 1.25 g=25% after next 4 years we get D1= 1.56, D2= 1.95, D3=
2.44, D4= 3.05. at Year 5 g=0% so D5= 3.05.
Step 3 ^P4= 3.05/Ks-g = 3.05/ 9.6%-0%= 31.77
Then 31.77+ D4= 34.82
Step 4: Using calculator: Cash flow model: i%= 9.6%, F0= 0, F1=
D2=1.95, F2= D3= 2.44, F4= 34.82 NPV= 29 so we choose 29.05.
(8) (B) TNOWC just completed year= 300+ 2200=2500
TNOWC last year= 200+ 1800= 2000
FCFF= NOPAT- (TNOWC just completed year- TNOWC last year)
= $925-500= $425
(9) (D) Because WACC= Wd Rd(1-T)+ Ws Rs
(a) wrong because they are no relationship. (b) wrong because is lower
than not higher than. Cost of retained earing no flotation cost. (c) Preferred
stock has flotation cost.
(10) (C) Because A and D are sunk cost, as for B, Wacc is already include the
interest expense. No need to include again.
1
(11) (A) NPV will be negative
(12) (B) because (a) is different from the case. (c) the first sentence is right, but we
assume the shareholders have more comparative advantage than manager.
(13) (A) V is not correct.
Question 2 :
Using calculator STAT model
After input the numbers
Ste Ved A= 18.26% using CASIO calculator press 5 find X-1 and Y-1
Ste Ved M= 9.13%
βx, m= 1 using CASIO calculator press 7 find r
βx = (σx/σm)* βx,m= 18.26%/9.13% *1= 2
Question 3:
Using calculator Cash flow model to find NPV
Project A and B are Mutually exclusive, C D E are Independent.
Project A i%= 9%, F1= -200,000. F2= 66,000. F3= 66,000. F4= 66,000 .
F5= 66,000 we get NPV= 13,821.51
Project B i%= 9%, F1= -100,000. F2= 30,000. F3= 30,000. F4= 40,000 .
F5= 40,000 we get NPV= 11,997.68
Project C i%= 11%, F1= -100,000. F2= 30,000. F3= 30,000. F4= 30,000 .
F5= 40,000 we get NPV= - 339.32
Project D i%= 13%, F1= -100,000. F2= 30,000. F3= 30,000. F4= 40,000 .
F5= 50,000 we get NPV= 8431.02
Project E i%= 13%, F1= -100,000. F2= 40,000. F3= 25,000. F4= 30,000 .
F5= 35,000 we get NPV=- 2765.44
So We choose A and D, Because Positive NPV. A & B are Mutually exclusive, we
choose the Higher NPV……..
2
Q4:
Step 1 calculate βu, because we have 3 comparable company, we use the Mean βu.
βu=βL / (1+ ( 1-T) (D/S))
Japan Foods βu=βL / (1+ ( 1-T) (D/S)) = 0.26/ ( 1+ (1- 16.13%)*0) = 0.26
Neo Group Ltd βu=βL / (1+ ( 1-T) (D/S)) = 0.81/ ( 1+ (1- 12.36%)*2.623) = 0.246
BreadTalk Group βu=βL / (1+ ( 1-T) (D/S)) = 1.31/ (1+(1-29.88%)* 1.522)= 0.634
Mean βu= 0.38
Step 2: Calculate βL for the new restaurant
βL= βu * (1+ ( 1-T) (D/S))= 0.38* ( 1+ (1- 17%) * 1)= 0.695
Step 3: Calculate Ks
Ks = kRF + [km - kRF]βx = 2.5% + 6.0% * 0.695 = 6.67%
Step 4 : WACC= Wd * Kd (1-T)+ Ws Ks = 0.5 * 4.5% ( 1-17%) + 0.5 *6.67%= 5.20%
Thanks Prof. Ram! Good luck to everyone!
Best regards: Annie