Aberystwyth University - STATS 202

Week 2, Chapter 3

1)What makes an investment decision a good one?

3.Why are market prices useful to a financial manager?

5.Can we directly compare dollar amounts received at different points in time?

7.If there is more than one project to take, how should the financial managers choose among them?

Problems

3. Suppose your employer offers you a choice between a $5000 bonus and 100 shares of the company’s stock. Whichever one you choose will be awarded today. The stock is currently trading for $63 per share.
   1. Suppose that if you receive the stock bonus, you are free to trade it. Which form of the bonus should you choose? What is it`s value?

1. 2. Suppose that if you receive the stock bonus, you are required to hold it for at least one year. What can you say about the value of the stock bonus now? what will your decision depend on?

5. Brett has almond orchards, but he is sick of almonds and prefers to eat walnuts instead. The owner of the walnut orchard next door has offered to swap this year’s crop with him in an even exchange. Assume he produces 1000 tons of almonds and his neighbour produces 800 tons of walnuts. If the market price of almonds is $100 per ton and the market price of walnuts is $1.10 per ton:
   1. Should he make the exchange?

1. 2. Does it matter wheter he prefers almonds or walnuts? Why or why not?

6. You have $100 and a bank is offering 5% interest on deposits. If you deposit the money in the bank, how much will you have in one year?

11. You run a construction firm. You have just won a contract to build a government office building. Building it will require an investment of $10 million today and $5 million in one year. The government will pay you $20 million in one year upon the building’s completion. Suppose the interest rate is 10%.

1. What is the NPV of this opportunity?

2. How can your firm turn this NPV into cash today?

Week 2, Chapter 4, questions 2,3,5,6 problems 2,3,10,19

2. What is compound interest?

3. What is the intuition behind the geometric growth in interest?

5. What is the intuition behind the fact that the present value of a stream of cash flows is just the sum of present values of each individual cash flow?

6. What must be true about the cash flow stream in order for us to be able to use the shortcut formulas?

Problems

2. You currently have a one-year-old loan outstanding on your car. You make monthly payments of $300. You have just made a payment. The loan has four years to go (i.e., it had an orginal term of five years). Show the timeline from your perspective. How would the timeline differ if you created it from the bank’s perspective?

10. You have a loan outstanding. It requires making three annual payments at the end of the next three years of $1000 each. Your bank has offered to allow you to skip making the next two payments in lieu of making one large payment at the end of the loan’s term in three years. If the interest rate on the loan is 5%, what final payment will the bank require you to make so that it is indifferent between the two forms of payment?