Exam nr.

: 54
Finance Exam

Problem 1
12 months word travel
Loan of 500.000 DKK
Equal yearly payments in 10 years
Interest rate 4.8% compounded monthly
12
a) EAR: (1 + (0,048/12)) − 1 =0,049
b)
=PMT (rate, nper, pv, [fv], [type])
rate: 0,049
nper: 10
pv: 500.000
fv: 0
= DKK 64.438,21..PMT (Periodic Payment) pr. year

c)
=PMT (rate, nper, pv, [fv], [type])
Rate: 0,049
nper: 1
pv: 250.000
fv: 0
= DKK 262.250,00 PMT (Periodic Payment) first payment on the half of the debt

=PMT (rate, nper, pv, [fv], [type])

Rate: 0,049
nper: 9
pv: 250.000
fv: 0
= DKK -35.016,06 PMT (Periodic Payment) equal payments of 9 years

d)
=(500.000*0,049)^10= 7,79221E+43

e)
Time value of money considers the value at time and interest rate in order to determine the
future value.

Problem 2
Investment in 2 machines
Machine 1 Machine 2
Year 0 -100.000 105.000
Year 1 20.000 20.000
Year 2 20.200 20.000
Year 3 20.402 20.000
Year 4 20.608 20.000
Year 5 -50.000 20.000

1
Machine 1:
- Investment 100.000DKK
- Pr year = 20.000 DKK
- 1% every year
- Renovation - 50.000 DKK after 5 years

Machine 2:
- CF year 0= -105.000 DKK
- CF year 1 = 20.000 DKK
- CF year 2 = 20.000 DKK
- CF year 3= 20.000 DKK
- CF year 4 = 20.000 DKK

Beta= 2
Market Expected Return (Rm)= 10 % pr. year
Risk free rate (Rf) = 2% pr. year
Yield maturity on bonds = 4% pr. year
Debt/ Equity ratio (D/E) = 20%
Corporate taxes= 25%

a)
Cost of equity (CAPM)
RE = 0.02 + 2(0.10) = 22%

b)
WACC: 349-350,358
RA = (E/V) x RE + (D/V) x RD

Borrows 100.000 at 4% interest, total interest pr. year =4000 DKK

Interest reduces the tax bill: 0,25*4000 DKK= 1000 DKK
Tax bill: 4000-1000= 3000 DKK
After tax rate: 1000/100.000= 0,01 (p.358)
RD*(1-Tc)= 4%*(1-0,25)= 3%
𝐸 𝐷
WACC= 𝐷+𝐸* Re+𝐷+𝐸*RD* (1-Tc)

Cost of equity capital:

𝛽 2
𝛽 u=⌈1+(1−𝑡) = ⌈1+(1−0,25)20⌉ = 0,125
𝐷/𝐸⌉
𝛽 = 𝛽𝑢 ∗ [1 + (1 − 𝑡) ∗ 𝐷/𝐸] = 0,125 ∗ [1 + (0,75) ∗ 20] =2

Cost of equity capital Re:

Re = R f +  ( Rm − R f )
R e = 1% + 2.1093 ( 5% − 1% ) = 9.4375%
𝑅𝑒 = 𝑅𝑓 +𝛽(𝑅𝑚 − 𝑅𝑓 ) = 0,02+2(0,1 − 0,02) = 0,18 =18%
𝐷 1 𝐸 2
D/E= 20%=𝐷+𝐸 = 3 = 𝐷+𝐸 = 3

2
 1 2
WACC= 3* 0,18+3*0,04*(1-0,25)= 0,08
WACC= 8%

c)
Discount rate = 8%
20.000 20.200 20.402 20.608
NPV Machine 1, 8% = −100.000 + (1+0,8) + (1+0,8)2 + (1+0,8)3 + (1+0,8)4 − 50.000
20.000 20.000 20.000 20.000
NPV Machine 2, 8% = −150.000 + (1+0,8) + (1+0,8)2 + (1+0,8)3 + (1+0,8)4

d)
Machine 2 is the best option as it secures CF of 20,000 constantly.

e)
WACC as a discount rate does not reflect the systematic risk of the investments

Problem 3
Stock Beta Expected Return (per year)
A 3 12%
B 1 5%

a)
Assume firs’s debt is risk-free
Rd=Rf
Define firm’s asset Beta (unlevered Beta)
A =U
Firm’s equity Beta=E (or beta levered L)
CAPM with MM proposition II to show that E = A *(1+D/E*(1-t))

b) E(Re) = Rf + beta E(Rm – Rf)

c)
d)

Problem 4
Put = 100 DKK
Call = 100 DKK
Stock price = 80 DKK
Call cost = 40 DKK
Maturity 1 year

a)
Call is an option which means out of the money
Put is an option which means in the money

b)P = Ee-Rt + C - S

c)
Hiller et al 2017. Fundamentals of corporate finance