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

The formula you provided is indeed the formula for calculating the Effective Annual Rate (EAR). It is used to determine the annual rate of return taking into account compounding.

Question 2

Formulas for Amortization Table: Principal Payment

Accepted Answer

Total Annual Payment - Interest Paid

Answer

The total annual payment is the sum of all payments made in a year towards a loan or mortgage. It includes both the principal repayment and the interest paid during the year.Formula:
Total Annual Payment
=
Principal Payment
+
Interest Paid
Total Annual Payment=Principal Payment+Interest Paid

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

You can borrow approximately $17,679.91 to purchase the sports car, given a monthly payment of $350 at an annual interest rate of 6.99% over a 5-year period. This amount accounts for the present value of the annuity payments over the loan term.

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

The future value of the account after five years, considering the $100 deposit in one year and $300 deposit in three years, at an interest rate of 8% per year, will be approximately $485.97. This calculation demonstrates how future values of different cash flows can be determined using compound interest formulas.

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

The Treasury bill will sell for approximately $9,345.79 in the market today, considering a market interest rate of 7% per year and the promise of repayment of $10,000 in 12 months. This demonstrates how the present value of a future cash flow is determined using a discount rate, reflecting the concept of pure discount loans in financial markets.

DCF - Discounted Cash Flow Practice Test

DCF - Discounted Cash Flow Practice Test

Free DCF Valuation Question and Answers