Reference no: EM131508913
Diagnostic for Corporate Finance Class
Name
Please answer these questions to the best of your ability. They are simply to diagnose your knowledge so the class can best meet your need
1. Show how you would calculate the present value of $100 received one year from now if the cost of capital/Discount rate is 10%.
100 x 10% x10=$100
2. Show how to calculate the net present value of an investment that costs $100 now and will pay $200 in on year from now with a cost of capital of 10%.
100x10%X20=$200
3. If you invest $100 at an interest rate of 8%, how much money will you have at the end of 8 years?
Year1: (100 x 1.08)= 108
Year 2: (108 x 1.08)= 116.64
Year 3: (116x1.08)=125.28
Year 4: (124x1.08)=133.92
Year 5:(132x1.08)=142.56
Year 6:(140x1.08)=151.2
Year 7:(148x1.08)=159.84
Year 8:(156x1.08)=168.48
4. A perpetuity pays a dividend of $10 a year. The discount rate is 5%. What is the present value of the perpetuity?
10/5%=200
5. Describe the relationship between bond prices and interest rates.
When interest rates go up existing bonds prices go down and when interest rates are low bond prices are high.
6. A stock pays a dividend of $5 per year. The cost of capital is 10% and the growth rate of the dividend is 5% per year. What is a fair price for the stock?
10.05/5%=201
7. Describe the concept of beta in finance.
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model CAPM, which calculates the expected return of an asset based on its beta and expected market returns.
8. Barcelona company stock has a beta of 1.5. The return on a risk free investment is 5% per year. The return on the overall stock market is 10% per year.
What is the expected rate of return on Barcelona Company stock according to the capital assets pricing model?
The total assets according to the asset pricing model are 1.65