FINA1310 Tutorial 1 PDF

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Tutorial 1 THE UNIVERSITY OF HONG KONG FACULTY OF BUSINESS AND ECONOMICS FINA1310 ABC – CORPORATE FINANCE FIRST SEMESTER, 2020-2021

Frankie Ho Tutor: Email [email protected] Live Tutorial Sessions Mon 10:30 - 11:20 Mon 11:30 - 12:20 Tues 15:30 - 16:20 Wed 16:30 - 17:20 Thur 10:30 - 11:20 Q&A Sessions/ Office Tues 11:30 - 12:20 Hours Tues 14:30 - 15:20 Wed 17:30 - 18:20 Thur 11:30 - 12:20 Thur 17:30 - 18:20 Assessments: Professor: Dr. Alex Kopytov Participation 4 Group-based Assignments Midterm Exam Final Exam

Chapter 1 Introduction to Corporate Finance ➢

1.2 Three Forms of Business Organization

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1.4 The Agency Problem

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1.5 Financial Markets and the Corporation ✓ Primary Markets vs. Secondary Markets ✓ Dealers vs. Auction Markets

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Tutorial 1 Chapter 5 Introduction to Valuation: The Time Value of Money ➢

Timeline

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Financial Calculator ✓ Texas Instruments BA-II Plus Keys: FV = Future Value PV = Present Value I/Y = Period Interest Rate N = Number of Periods CPT = Compute Must Press 2nd CLR TVM for removing memory after solving each problem! At least one of the cash flow parameter must be negative! (The sign convention)

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5.1 Future Value and Compounding ✓

Simple Interest vs. Compound Interest

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Problem Suppose you have $500 to invest and you believe that you can earn 8% per year over the next 30 years. ▪ How much would you have at the beginning of 16 years using compound interest?

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How much would you have at the end of 15 years using simple interest?

5.2 Present Value and Discounting ✓ The relationship between present value and future value ✓

Problem Suppose you need $15,000 in 3 years and you can earn 6% annually. ▪ How much do you need to invest today?

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If you could invest the money at 8%, would you have to invest more or less than 6%? How much?

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5.3 More about Present and Future Values ✓

Finding implied interest rate

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Scenario You are given three investment options from a bank: Investment 1: Invest $500 today and receive $600 in 5 years. Investment 2: You can invest $500 in a bank account paying 4% per year. Investment 3: 4 years ago, you invested in a stable fund offered by Pictet with $1000 and the gross value today is $1192.52 and you decide to withdraw the money today. The fund has a policy to charge 2% withdrawal fee on the gross value. Pictet is also offering an aggressive fund which you are considering to invest today and you expect the aggressive fund will earn 1.5% more than the stable fund per year. ▪

What is the implied interest rate of Investment 1?

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What is the implied return of the aggressive fund (hint: after the withdraw fee is counted)?

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Which investment will you choose?

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Finding number of periods

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Problem You want to invest in a property in Japan and you currently have $15,000. You need to have a 10% down payment and an additional 5% of the loan amount for closing costs. The property will cost about $150,000 and you can earn 7.5% per year. How long will it be before you have enough money for the down payment and closing costs?

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