Corporate Finance – compounding 02
Tomas Heryan, Ph.D.
FV, PV of growing annuity
1. What is the present value of your inheritance if your trustee is obliged to pay you an amount of 10%
annually starting this year for 10 years, while this year you will be paid 20 thousand USD (right now).
We assume alternative costs of 11%.
2. What amount of funds will you dispose of in 2028, if you save 40 thousand CZK and next year by 4%
more? While you will stop saving in 2026, the money will be left in your account. Your account bears
an interest rate of 6% p.a.
3. You plan to deposit a certain amount into your account every year for 10 years. This year it will be
CZK 20 000 and every other year it will be 3% more. How much will you be able to withdraw from your
account each year for the next 5 years? The amount will be the same each year and the account bears
interest at 3% p.a.
4. After 15 years you want to withdraw 50 thousand CZK each year with a regular increase of 3% for
five years. You want to save on that by renting land. How much do you have to ask the tenant if you
know that the alternative cost will be 6% ?
Present value of perpetuity and growing perpetuity
1. Calculate the market price of the share if the alternative cost is 5% and this year's dividend is 100
CZK per share. The company's dividend policy is stable.
2. What is the market price of a share if DPS a) was 100 CZK this year; b) will be 100 CZK. Do we expect
PCBs to increase by 10% each year and alternative costs of 15%?
3. What is the market price of a share if the dividend per share (DPS) was CZK 100 per share last year?
Do we expect PCBs to increase by 10% each year and alternative costs of 15% this year and beyond?
4. The company has decided to pay a dividend of CZK 400 per share next year, with the dividend
increasing by 4% per year. What is the current value of dividend income if the interest rate is 14%.
5. What should be the market value of one share of the company, if the expected profit this year is 5
million CZK, the company has 10 thousand of outstanding shares and shareholders will pay 50% of
earnings in the form of dividends? The expected annual increase in profit is 5%. The alternative cost is
12%.
Corporate Finance – compounding 02
Tomas Heryan, Ph.D.
Budgeting methods
1. Evaluate the following project using the NPV method when the alternative cost is 5% p.a .:
2. Evaluate and assess the following projects using the NPV method if you know that the alternative
cost is 8%. Please comment on the results.
3. The project requires an investment of CZK 10,000 and will bring CZK 10,700 after a year. Use the IRR
method to determine whether you will invest in a project if the interest rate on deposits redeemable
at notice is 6% and 9% p.a.
4. Assess the project by the profitability index when alternative costs are 12% p.a .:
Corporate Finance – compounding 02
Tomas Heryan, Ph.D.
5. Consider whether the following 4-year project should be implemented when the cost of capital
(discount rate) is 15%. Make a decision based on the Pay Back Period method. Find out the exact
maturity. Use the discounted maturity option as well. Please comment on the results.
6. According to the PBP method, evaluate two different projects alternative costs are 12% p.a.