Corporate Finance Week 1 Slide Solutions

Corporate Finance
Week 1
Slide Solutions
Chartered Professional Accountants of Canada, CPA Canada, CPA

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2020-07-16
Corporate Finance Week 1 — Slide Solutions
WEEK 1 — SLIDE SOLUTIONS
Solution to Slide 39, Exercise 1 — Simple interest

Interest earned = $100 × 0.10 × 3 = $30
FV = $100 (1 + 0.10 × 3) = $130
Solution to Slide 40, Exercise 2 — Compound interest

Year 1 $100 + 10% interest = $100 × 1.10 = $110
Year 2 $110 + 10% interest = $110 × 1.10 = $121
Year 3 $121 + 10% interest = $121 × 1.10 = $133.10
FV = PV (1 + i)n = 100 (1 + 0.10)3 = $133.10
Financial calculator:
PV = –100; N = 3; I/Y = 10; PMT = 0; CPT FV = 133.10
Solution to Slide 41, Exercise 3 — Present value

PV = FV ÷ (1 + i)n = $1,250 × (1.08)–5 = $850.73
FV = 1,250; N = 5; I/Y = 8; CPT PV = –850.73
Thus, at an interest rate of 8%, $1,250 in five years’ time is equivalent to $850.73 today.
Solution to Slide 42, Exercise 4 — Comparing two cash flows

The amounts can be compared either today (PV) or at the end of two years (FV):
PV: FV = 1,250 I/Y = 9.5 N = 2 CPT PV = –1,042.51
Since $1,042.51 > $1,000, Suzanne should choose the payment of $1,250 in two years.
FV: PV = −1,000 I/Y = 9.5 N = 2 CPT FV = 1,199.03

Since $1,250 > $1,199.03, Suzanne should choose the payment of $1,250 in two years.
Solution to Slide 43, Exercise 5 — Uneven cash flows

PV = $1,000 + $1,500 + $2,000 = $3,957.63
1.06 (1.06)2 (1.06)3
FV = $1,000 × (1.06)2 + $1,500 × 1.06 + $2,000 = $4,713.60
These amounts are equivalent at an annual interest rate of 6%.
1/3
Given PV = $3,957.63 FV = $3,957.63 (1.06)3 = $4,713.60

Given FV = $4,713.60 PV = $4,713.60 ÷ (1.06)3 = $3,957.63
Solution to Slide 45, Exercise 6 — Ordinary annuity

 (1.05)10 − 1  1 − (1.05)− 10 
FV = $2,500   = $31,444.73 PV = $2,500   = $19,304.34
 0.05   0.05 
   
PMT= –2,500; N = 10; I/Y = 5; PV = 0; CPT FV = 31,444.73
PMT= –2,500; N = 10; I/Y = 5; FV = 0; CPT PV = 19,304.34
Solution to Slide 46, Exercise 7 — Ordinary annuity — Comparing two cash flows
If she accepted the payments:
 1 − (1.04)− 10 
Based on PV PV = $110,000  = $892,198.5 4
 0.04 
 
 (1.04)10 − 1
Based on FV FV = $110,000  = $1,320,671 .78
 0.04 
 
If she invested the lump sum:
FV = 1,000,000 (1.04)10 = $1,480,244.29
Today, $1,000,000 is greater than $892,198.54. In 10 years, $1,480,244 is greater than

$1,329,671.78. Sally should choose the lump-sum payment of $1,000,000 today.
The PV and FV amounts can also be calculated using a financial calculator.
For the PV of the annuity:

N = 10; I/Y = 4; PMT = $110,000; CPT PV = –$892,198.54
For the FV of the annuity:

N = 10; I/Y = 4; PMT = $110,000; PV = 0; CPT FV = –$1,320,671.78
Solution to Slide 47 Exercise 8 — Determining the annuity amount

N = 10; I/Y = 4; PV = –$1,000,000; FV = 0
CPT PMT = $123,290.94
2/3
Solution to Slide 48, Exercise 9 — Determining the annuity amount

N = 20; I/Y = 6; FV = $2,000,000; PV = 0
CPT PMT = –$54,369.11
You’ll need to save $54,369 at the end of each year to accumulate the $2,000,000 that
you’ll need at the time of retirement.
Solution to Slide 49, Exercise 10 — Annuity due

Set calculator to [BGN]
N = 4; I/Y = 11; PMT = –$10,000
CPT PV = $34,437.15
Paying four annual payments of $10,000 is more expensive. Paying the $30,000 is the
better option.
Solution to Slide 50, Exercise 11 — Perpetuity
 $10,000 
PV =   = $166,666.6 7
 0.06 
Solution to Slide 52, Exercise 12 — Interest at different compounding periods

1. Annually
FV = $1,000 × 1.09 = $1,090.00
2. Semi-annually
Semi-annual interest rate = 9 / 2 = 4.5%
Effective annual interest rate = (1.045)2 – 1 = 0.092 (9.20%)
ICONV; NOM = 9; C/Y = 2; CPT EFF = 9.20%
FV = $1,000 × (1.045)2 = $1,092.03
3. Monthly
Monthly interest rate = 9 / 12 = 0.75%
Effective annual interest rate = (1.0075)12 – 1 = 0.0938 (9.38%)
ICONV; NOM = 9; C/Y = 12; CPT EFF = 9.38%
FV = $1,000 (1.0075)12 = $1,093.81
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Corporate Finance

Chartered Professional Accountants of Canada, CPA Canada, CPA

WEEK 1 — SLIDE SOLUTIONS

Solution to Slide 39, Exercise 1 — Simple interest

Solution to Slide 40, Exercise 2 — Compound interest

Solution to Slide 41, Exercise 3 — Present value

Solution to Slide 42, Exercise 4 — Comparing two cash flows

FV: PV = −1,000 I/Y = 9.5 N = 2 CPT FV = 1,199.03

Solution to Slide 43, Exercise 5 — Uneven cash flows

FV = $1,000 × (1.06)2 + $1,500 × 1.06 + $2,000 = $4,713.60

These amounts are equivalent at an annual interest rate of 6%.

Given PV = $3,957.63 FV = $3,957.63 (1.06)3 = $4,713.60

Solution to Slide 45, Exercise 6 — Ordinary annuity

PMT= –2,500; N = 10; I/Y = 5; FV = 0; CPT PV = 19,304.34

If she invested the lump sum:

FV = 1,000,000 (1.04)10 = $1,480,244.29

Today, $1,000,000 is greater than $892,198.54. In 10 years, $1,480,244 is greater than

The PV and FV amounts can also be calculated using a financial calculator.

For the PV of the annuity:

For the FV of the annuity:

Solution to Slide 47 Exercise 8 — Determining the annuity amount

Solution to Slide 48, Exercise 9 — Determining the annuity amount

Solution to Slide 49, Exercise 10 — Annuity due

Solution to Slide 50, Exercise 11 — Perpetuity

Solution to Slide 52, Exercise 12 — Interest at different compounding periods

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