706111: BUSINESS IN FINANCE

CHAPTER 2: HOW TO CALCULATE PRESENT VALUES

EX1: An amount of $100 is invested in 3 years at annual interest rate of 7%. Simple interest
rate is applied.
Calculate the amount of money that will be received after 3 years.
EX2: An amount of $100 is invested in 3 years at annual interest rate of 7%. Compound
interest rate is applied.
Calculate the amount of money that will be received after 3 years.
EX3:
a) What is the one-year discount factor of $1 at an interest rate of 35% per year?
b) What is the discount rate/ interest rate per year of $1 if the two-year discount factor is
0.7222?
EX4: An amount of $2,000 was invested at the beginning of year 1 at annual interest rate
of 6%. Calculate the value of the investment at the end of year 3.
a) Compounding is done on annually basis.
b) Compounding is done on quarterly basis.
EX5: An amount of $100 was invested at the beginning of year 1. Calculate the value of
the investment at the end of year 6. Knowing that compounding is done on annually basis.
a) If the annual interest rate is 5%
b) If the annual interest rate is 10%
c) If the annual interest rate is 15%
EX6
a) You buy a smart phone for $1,100 but you don’t have to make the payment until next
year (it means, one year later). Suppose the interest rate is 5%, compounded annually.
What is the amount of money that you have to save at the present to pay for the smart
phone?
b) If the year of payment is deferred for 2 more years. What is the amount of money that
you have to save at the present to pay for the smart phone?
EX7: You has won the prize of $100,000 to be paid the whole amount after 3 years. At the
same time, you receive an offer of $80,000 to sell the right of receiving that prize. If the
market interest rate is 12% and the interest is compounded annually. Whether the offer
should be accepted or not?
EX8: Mr. Anh is planning to invest in a project that costs $9mil. The project is expected to
have a life of 4 years. The cash flows expected to receive at the end of each year are 0;
$3mil; $3mil; $5mil, respectively. Know that annual interest rate is 10%.
a) What is the present value of the uneven cash flows?
b) Should Mr. Anh invest in the project?

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EX9: Ms. Mai plans to deposit some amounts of money of $500, $800, $700 at the
beginning of each year. Know that the annual interest rate is 10%.
a) How much money will Ms. Mai receive at the end of year 3?
b) If Ms. Mai deposits money at the end of each year. How much money will she receive
at the end of year 3?
EX10: What is the present value of the following cash flows? Knowing that the discount
rate is 7%.
Year Cash flow

1 $3,000

2 0

3 - $4,000

4 $2,000

EX11:
Suppose that your farm land brings an amount of $40 million every end of the year forever,
the annual interest rate is 10%.
a) What is the present value of the perpetuity?
b) If you receive the income at the beginning of the year. What is the present value of the
perpetuity?
EX12:
Suppose that your farm land brings an amount of $40 million every end of the year forever
and it grows by 5% per year, the annual interest rate is 10%.
a) What is the present value of the perpetuity?
b) If you receive the income at the beginning of the year. What is the present value of the
perpetuity?
EX13:
What price would you be willing to pay for a preferred share of stock in the ABC
corporation, that promises to pay a cash dividend to you at the end of the year of $25, which
will increase every year by 1%, forever. Know that the interest rate is 4.75%?
EX14:
a) What is the present value of $1 billion every year, for all eternity, if you estimate the
perpetual discount rate to be 10%?
b) What if the investment does not start making money for 3 years?
EX15: Ms. Mai plans to deposit the same amounts of money of $100 at the beginning of
each 3 year, starting from year 1. Know that the annual interest rate is 15%.

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 a) How much money will Ms. Mai receive at the end of year 3?
b) If Ms. Mai deposits money at the end of each year. How much money will she receive
at the end of year 3?
EX16: You agree to lease a car for 4 years at $300 per month. You are not required to pay
any money up front or at the end of your agreement. If your opportunity cost of capital is
0.5% per month, what is the cost of the lease?
EX17: The state lottery advertises a jackpot prize of $295.7 million, paid in 25 installments
over 25 years, at the beginning of each year. If interest rates are 5.9% what is the true value
of the lottery prize?
EX18: Ms. Oanh has to pay school fee of $12,500 at the end of the next 6 years. Know that
the compounding annual interest rate is 8%.
a) How much should she set aside today to cover these amounts?
b) If she has $70,476 today. How much remaining money will she have after paying all
school fees?
EX19: What is the future value of $20,000 paid at the end of each of the following 5 years,
assuming your investment returns 8% per year?
EX20: An investment produces an income that grows by 4% each next 7 years. If the first
year’s income is $10,000 and interest rate is 11%, what is the present value of the
investment?
EX21: Given a monthly rate of 1%, what is the Effective Annual Rate (EAR)? What is the
Annual Percentage Rate (APR)?
EX22: Given the 10.25% EAR compounded monthly. What is the Annual Percentage Rate
(APR)?

CHAPTER 3: VALUING BONDS

EX1: What is the price of a 10-year annual coupon bond that has a coupon rate of 9% with
a face value of $1,000. Know that:
Yield to maturity is 5%
Yield to maturity is 9%
Yield to maturity is 12%
EX2: What is the price of a bond that has a coupon rate of 4% with a face value of $1,000
and pays interest semi-annually? Know that it matures exactly 3 years from today and a
yield to maturity is 7%.
EX3: A $1,000 treasury bond expires in 5 years. It pays a coupon rate of 10.5%. If the
market price of this bond is $1,078.8, what is the yield to maturity?

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EX4:
What is the price of a 3-year annual coupon bond that has a coupon rate of 3.25% with a
face value of $1,000, if:
a) Yield to maturity is 4%
b) Yield to maturity is 6%
Calculate the change in bond price when yield to maturity increases from 4% to 6%.
EX5: What is the price of a 30-year annual coupon bond that has a coupon rate of 3.25%
with a face value of $1,000, if:
a) Yield to maturity is 4%
b) Yield to maturity is 6%
Calculate the change in bond price when yield to maturity increases from 4% to 6%.
EX6: What is the duration of a bond with 5 years till maturity and a 7% coupon rate with
a face value of $1,000. Given that yield to maturity is 8%.
EX7: What is the duration of a zero-coupon bond with a face value of $1,000. Know that
the maturity is 5 years and the yield to maturity is 8%.
EX8: Given a bond with 5 years till maturity and a 7% coupon rate with a face value of
$1,000. Know that yield to maturity is 8%.
a) Calculate modified duration of a bond
b) If yield to maturity increases from 8% to 9%, what is the price of bond after yield to
maturity changes
EX9: A bond has a face value of $1,000, maturity is 5 years, coupon rate is 12%, YTM is
14%.
a) Calculate the price of the bond?
b) Calculate the duration of the bond?
c) Calculate the modified duration of the bond? What does the modified duration imply?

CHAPTER 4: THE VALUE OF COMMON STOCKS

EX1: A firm has 100 outstanding common stocks selling at $60 per share. What is the
firm’s market capitalization?
EX2: ABC Company is expected to pay a dividend of $1.5 per share. Knowing that the
current stock price is $46 and the P/E is 10.2. Calculate the plowing back ratio.
EX3: A firm has an income statement of 2022 as below. The firm has 100 outstanding
common stocks selling at $60 per share. Calculate Earnings per Share and P/E ratio.

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 2022

Revenue $725
Cost of good sold $390
Selling, general, and administrative expenses $121
Depreciation $80
Earnings before interest and tax ?
Interest payment $37
Earnings before tax ?
Tax (20%) ?
Net income ?

EX4: Company A is expected to pay a dividend of $5 per share next year and stock A is
expected to sell for $110 one year from now. If the required rate on the stock is 15%, what
is the current price of the stock?
EX5: Company A is expected to pay dividend of $5 and $5.5 per share over the next 2
years, respectively. At the end of year two, the stock will be sold for $121. If the required
rate on the stock is 15%, what is the current price of the stock?
EX6: Company A is expected to pay dividend of $3 at the end of year one. The dividend
is expected to grow 5% each year until year three. At the end of year three, the stock will
be sold for $134. If the required rate on the stock is 12%, what is the current price of the
stock?
EX7: Company A is expected to pay dividend of $10 a share forever. If the required rate
on the stock is 7%, what is the current price of the stock?
EX8: Company B is expected to pay a dividend of $5 next year. Thereafter, dividend
growth is expected to be 4% a year forever. If the required rate on the stock is 7%, what is
the current price of the stock?
EX9: Company C is expected to pay a dividend of $5 next year. Thereafter, dividend
growth is expected to be 10% a year for 2 years and 3% thereafter. If the required rate on
the stock is 7%, what is the current price of the stock?
EX10: Northwest Natural Gas stock was selling for $42.45 per share at the start of 2009.
Dividend payments for the next year were expected to be $1.68 a share. What is the
dividend yield and required return, assuming no growth?

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EX11: Northwest Natural Gas stock was selling for $42.45 per share at the start of 2009.
Dividend payments for the next year were expected to be $1.68 a share. What is the
dividend yield and required return, assuming a growth rate of 6.1%?
EX12: Northwest Natural Gas just reported earnings of $2 million and decided to pay out
60% of its earnings as dividends. The book value of equity is $10 million. What is the
dividend growth rate of the firm?