Lahore School of Economics

Financial Management II
Review of FM I – 1

Q1) 0 1 2 3 4

PV = $10,000 FV = ?

I = 5% n = 4 FV = $12,155.063

Q2) 0 3

PV = ? FV = $115.76

n=3 I = 5% PV = $100

Q3) 0 10

PV = $585.43 FV = $1,000

n = 10 I = 5.5%

Q4) 0 n=?

PV = $1,000 FV = $2,000

I = 6%, n = 11.9 years

Q5) N = 8; I = YTM = 9%; PMT = 70; FV = 1000; PV = VB = $889.30 - DISCOUNT BOND

N = 12; I = YTM = 8%; PMT = 0.10  1,000 = 100; FV = 1000; PV = VB = $1,150.72 - PREMIUM BOND

Q6) N = 7; PV = VB = -$975; PMT = 90; FV = 1000; YTM = I = 9.51%.

Q7) 0 1 2 ……………………………… 47

1,825 1,825 . . . . . . . . 1,825

FV = ?

n = 47 PMT = $1,825 I = 8% FV = $826,542.78

Q8) 0 1 2 ……………………………… 10

100 100 . . . . . . . . . . 100

PV = ?

n = 10 I = 8% PMT = $100 PV = $671.09

beginning:
0 1 2 ………………………………..9 10

100 100 . . . . . . . . . . . . 100

PV = ?

n = 10 I = 8% PMT = $100 PV = $724.69

or
PV (at 8% from above) x (1 + 0.08) = $671.09 x (1.08) = $724.69

Q9) 0 1 2 3 4

PMT PMT PMT PMT

FV = $10,000

I = 6% n = 4 FV = $10,000 PMT = $2,285.91

Q1) N = 20; PV = -1275; PMT = 120; FV = 1000; I = YTM = 8.99%.

For YTC:
N = 5; PV = -1275; PMT = 120; FV = 1120; I = YTC = 7.31%.

Q2) N = 2  20 = 40; I = 7/2 = 3.5; PMT = (0.08/2) × 1,000 = 40; FV = 1000; PV = $1,106.78.

Q3) D1 = $1; g = 5%; rs = 11%

D1 $1
Pˆ0    $16.67.
rs  g 0.11  0.05

Q4) Expected price = P1 = P0(1 + g) = 40(1 + 0.06) = $42.4

Expected return = r^ s = Dividend yield + Capital Gains Yield

D1 P1  P0

P P0
= 0
= 2/40 + (42.4 – 40)/40
= 5% + 6%
= 11%

Q5) D1 = $2, b = 0.9, rRF = 5.6%, RPM = 6%, P0 = $25.

Required rate of return:
rs = rRF + (rM – rRF)b = 5.6% + (6%)0.9 = 11%.

To calculate g:
D1
P̂0 rs  g
=
 D1
rs = P0 +g
$2
0.11  g
$25

g  0.03  3%.

Dp $10
Vp    $125 .
rp 0.08
Q6)