FREE DCF Valuation Question and Answers

Question 1

EAR = [1 + (APR/m]^m -1
Remember that the APR is the quoted rate
Always use the decimal format (12% = .12)
m = number of compounding periods

Accepted Answer

EAR - Formula

Answer

Perpetuities - basic formulas

Answer

Effective annual rate (ear)

Answer

Treasury Bills

Question 2

Formulas for Amortization Table: Principal Payment

Accepted Answer

Total Annual Payment - Interest Paid

Answer

Beginning balance - principal payment

Answer

Beginning Balance - Principal Payment

Answer

Beginning balance x interest rate

Question 3

Annuity - Car Loan:
After carefully going over your budget, you have determined you can afford to pay $350 per month towards a new sports car. You call up your local bank and find out that the going rate is 6.99% for 5 years. How much can you borrow?

Accepted Answer

Always convert your interest rate and number of payments to the same frequency as your cash flows
r: .0699/12 = .005825
t: 5 x 12 = 60 months
PV =
350
x
[1 - 1/(1.005825)^60]/ .005825}
= 17,679.91

Answer

Find the PV of each cash flows and add them
Year 1 CF: 200 / (1.12)1 = 178.57
Year 2 CF: 400 / (1.12)2 = 318.88
Year 3 CF: 600 / (1.12)3 = 427.07
Year 4 CF: 800 / (1.12)4 = 508.41
Total PV = 178.57 + 318.88 + 427.07 + 508.41 = 1432.93

Answer

Annual Payment:
5,000 = C x [(1 - 1/1.084) / .08]
C = 1,509.60

Answer

PV =
333,333.33
x
[(1 - 1/(1.05)^30)/.05}
= 5,124,150.29

Question 4

Multiple Cash Flows - FV Example 4:
Suppose you plan to deposit $100 into an account in one year and $300 into the account in three years. How much will be in the account in five years if the interest rate is 8%?

Accepted Answer

FV = 100(1.08)^4 + 300(1.08)^2 = 136.05 + 349.92 = 485.97

Answer

PV =
333,333.33
x
[(1 - 1/(1.05)^30)/.05}
= 5,124,150.29
FV = 500(1.09)^2 + 600(1.09)^1 = 1248.05

Answer

FV = 2000 x (1.075^40 - 1)/.075 = 454,513.04

Answer

FV = 500(1.09)^2 + 600(1.09)^1 = 1248.05

Question 5

Pure Discount Loans - Example 5.12:
If a T-bill promises to repay $10,000 in 12 months and the market interest rate is 7 percent, how much will the bill sell for in the market?

Accepted Answer

PV = 10,000 / 1.07 = 9345.79

Answer

Total annual payment - interest paid

Answer

Pv = c / r

Answer

Fv = 500(1.09)^2 + 600(1.09)^1 = 1248.05

Question 6

This is the annual rate that is quoted by law
By definition APR = period rate times the number of periods per year

Accepted Answer

Annual Percentage Rate

Answer

Effective Annual Rate

Answer

Credit Score

Answer

Compound Rate Of Interest

Question 7

Infinite series of equal payments

Accepted Answer

Perpetuity

Answer

Annuity

Answer

Amortized Loans

Answer

Ordinary Annuity

Question 8

Are excellent examples of pure discount loans.
The principal amount is repaid at some future date, without any periodic interest payments.

Accepted Answer

Treasury Bills

Answer

Corporate Bonds

Answer

Ordinary Annuity

Answer

Treasury Bonds

Question 9

This is the actual rate paid (or received) after accounting for compounding that occurs during the year
If you want to compare two alternative investments with different compounding periods you need to compute the EAR and use that for comparison.

Accepted Answer

Effective Annual Rate (EAR)

Answer

Negotiated Legal Rate (nlr)

Answer

Annual Percentage Rate (apr)

Answer

Perpetuity

Question 10

Beginning Balance x Interest Rate

Accepted Answer

Formulas for Amortization Table: Interest Paid

Answer

Formulas for Amortization Table: Ending Balance

Answer

Perpetuity

Answer

Formulas for Amortization Table: Principal Payment