CORPORATE FINANCE

Problem Set 2

Question 1
Your grandmother has been putting $1000 into a savings account on every birthday since your
first (i.e. when you turned one). The account pays an interest rate of 3%. How much money
will be in the account immediately after your grandmother makes the deposit on your 18th
birthday?

Question 2
Consider a business project that generates a stream of cash flows of $600 every year. Assume
that the appropriate discount rate to evaluate the cash flows of this project is 16%.
a) What is the present value of the project if it will generate a yearly $600 forever?
b) What is the present value of the project if it will generate a yearly $600 for the next 10
years and then ends?
c) What is the present value of the project if it will generate a yearly $600 for the next 25
years and then ends?

Question 3
The interest rate is 10% p.a. What is the present value of a stream of five annual payments of
$50 each, if …
a) the first payment is received three years from now?
b) the first payment is received today?

Question 4
Your client is interested in buying a small company that has fairly reliable cash flows in the
future. The projected cash flows are as follows. What is the maximum price that your client
should pay for this company if the appropriate discount rate for evaluating this type of company
is 12%?

YEAR NET CASH INFLOW

1 $20,000
2-5 $30,000
6-infinity $50,000

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CORPORATE FINANCE

Question 5
Five years ago, Chris entered into a mortgage agreement with Bangkok Bank to borrow
$200,000 and repay the loan over 20 years through equal monthly instalments. If the interest
rate was fixed at 8% p.a. for the entire term of the loan, what is the amount of each monthly
instalment?

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