MU Business Finance Worksheet

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Economics

Miami University

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Question 1.1 What is the relationship between discounting and compounding? (5 marks) Question 1.2 Suppose you were considering depositing your savings in one of three banks, all of which pay 5 percent interest; bank A compounds annually, bank B compounds semiannually, and bank C compounds daily. Which bank would you choose? Why? (5 marks) Question 2 Themis Papadopulos has been offered $1,200 today, $11,000 in 12 years, or $26,650 in 25 years. If he can earn 12 percent on his money, which offer should he choose? (10 marks) Question 3 You have just borrowed $100,000, and you agree to pay it back over the next 25 years in 25 equal end-of-year payments plus 10 percent compound interest on the unpaid balance. What will be the size of these payments? (5 marks) Question 4 What is the present value of a $1,000 perpetuity discounted back to the present at 8 percent? (5 marks)Question 5.1 How can the riskiness of an asset be measured? How should the proposed measurement of risk be interpreted? (5 marks) Question 5.2 Given the following data for High Tec Inc., find the standard deviation. (10 marks) Probability 1 2 0.35 3 0.20 4 0.20 0.25 Question 6.1 From the price data here, compute the holding-period returns for Earnest Holdings and Shapard Group for periods 2 through 4. (10 marks) Period Earnest Holdings Shapard Group $8 $28 13 Return 9 8% 12 3% 20% 15% 30 34 28 Question 6.2 How would you interpret the meaning of a holding-period return? (5 marks)Question 7 Pietro Mammon owns a portfolio consisting of the following stocks below: Stock Security 1 2 3 4 5 Question 8 Percentage of portfolio Question 7.2 Calculate the portfolio beta. 15% 25% 20% 30% 10% Question 7.1 Calculate the expected return of the portfolio. Question 8.1 The risk-free rate is 4 percent. Also, the expected return on the market 12 percent. Question 8.2 Beta 1.05 0.75 1.15 0.75 1.80 Question 8.3 Compute the bond's expected rate of return. (5 marks) Expected Return 11% 7% 13% 9% 18% San Pedro Company's 18-year, $1,000 par value bonds pay 6.5 percent interest annually. The market price of the bonds is $1,105, and your required rate of return is 8.5 percent. Should you purchase the bond? (5 marks) rtfolio is (5 marks) (5 marks) Determine the value of the bond to you given your required rate of return. (5 marks)Question 9 You own a 12-year bond that pays 8.5 percent interest annually. The par value of the bond is $1,000, and the market price of the bond is $915. What is the yield to maturity of the bond? (5 marks) Question 10 You are planning to purchase 100 shares of preferred stock and must choose between stock in the Sambonoza Corporation and stock in the Armadillo Corporation. Your required rate of return is 9 percent. If the stock in Sambonoza pays a dividend of $2 and is selling for $23 and the stock in Armadillo pays a dividend of $3.25 and is selling for $31, which stock should you choose? (10 marks)
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Qn 1.1What is the relationship between discounting and compounding?
Discounting also referred to present value is a methodology used to determine the present
value by using the discount rate and future sum offered. Compounding is the opposite of
discounting as it determines the future value using present value and the discount rate
offered.
Qn 1.2.
Bank C which compounds daily. As per the compound interest, the more the amount is
compounded we receive that much amount of interest on the amount. Therefore, as it compounds
daily, the principal amount increases daily yielding higher interest returns.
Qn 2.
Solution:
Option 1

Option 2

Option 3

Cash inflow

1,200

11,000

26,650

Year

0

12

25

PVIF

1

PVIF @ 12 % for 12 years

0.2567

PVIF @ 12 % for 25 years
Present value of o...


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