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Financial
management 1

Revision


Future value (FV)
Question:
You saved VND 10 million in 3 years with the compound interest of 7%
per year. How much will you receive at the end of the third year?
Answer :

FVn = P0 (1 + i)n


Present value (PV)
Question:
The future value is $300 after one year at annum interest
rate of 8%, the present value will be …?
Answer:

PV0 = FVn / (1 + i)n


Compound interest
Question:
Loan present value is $200 and future value is $233 after
2 years; value of interest rate will be …?
Answer:
FVn = P0 (1 + i)n

Collect Basis
Question:
X company is looking for a 4-month term source of $100
million to supplement working capital. A bank accepts
loans at annual nominal rate of interest of 12% a year.
Calculate the annual effective rate of interest.
Answer:
The annual effective rate of interest = (1 + [ i / m ] )m

–1


Discount interest rate (discount
basis)
Question:
X company is looking for a 4-month term source of $100
million to supplement working capital. A bank accepts
loans at discount interest rate of 12% a year. Calculate
the annual effective rate of interest.
Answer:
Interest is deducted from the initial loan.
The annual effective rate of interest = (1+ Interest/
Usable funds)^m – 1


Compensating Balances (deposits)
Question:
X company is looking for a 3-month term source of VND 100 million. A
bank accepts a loan with interest rate of 8% per year and deposits rate

at 10%. What is the annual effective rate of interest?
Answer:
Demand deposits maintained by a firm to compensate a bank.
Deposit = 10; Interest = 100 x 8%/4 = 2; Usable fund = 100 – 10 = 90
The annual effective rate of interest
= (1+ Interest/ Usable funds)^m – 1


Equal annual instalments
Question:
Mr. X takes a loan of $100 million from HSBC Bank. The rate of interest
is 7% per annum. The first installment will be paid at the end of year 1.
Determine the amount of equal annual installments if Mr. X wishes to
repay the amount in 10 installments.
Answer:
PVA = R/(1 + i)1 + R/(1 + i)2 + ... + R/(1 + i)n
PVA = 100; i = 7%, n = 10


The Baumol-Allais-Tobin (BAT) model
Question:
X Company has total demand for money is $4 billion. The
cost of transferring securities in cash is $270,000, the
return on securities is 15% a year. According to the
Baumol-Allais-Tobin (BAT) optimal reserve model, the
optimal reserve amount is …?
Answer :
The optimal reserve amount = = √2AF/ O

The average accounts receivable
(AR) and The average collection
period (ACP)

Question:
Given an accounts receivable turnover of 10 times, annual credit sales
of $500,000, the average accounts receivable is ?
Question:
Given an accounts receivable turnover of 10 times, annual credit sales
of $500,000, the average collection period (360-day year) is?


The average accounts receivable
(AR)
Question:
Given an accounts receivable turnover of 10 times, annual credit sales
of $500,000, the average accounts receivable is ?
Answer:

Average accounts
receivable (AR)

=

annual credit sales
accounts receivable
turnover


The average collection period (ACP)

Question:
Given an accounts receivable turnover of 10 times, annual credit sales
of $500,000, the average collection period (360-day year) is?
Answer:

Average collection
period (ACP)

=

360

accounts receivable
turnover


EOQ Model : size of the order
Question:
Annual demand is 4,000 units, spread evenly throughout
the year. The cost of placing and receiving an order is
$30. The annual carrying cost is $12/unit. What is the
size of the order company should place with its supplier
to minimize its inventory cost?
Answer : O = $30; S= 4,000; C= $12


EOQ Model : the re-ordering point
Question:
X company has the total demand of materials is 3600 units a year.
The price is VND 300.000/unit. The cost of placing and receiving an

order is VND 100.000. The annual carrying cost is 5% of the price.
According to EOQ model what is the company's re-ordering point?
Suppose that a year has 360 days, the time of purchase is 6 days.
Answer :
Oder point (OP) = Lead time x Daily usage
A daily usage (3600/360) = 10 units
Lead time = 6 days
OP = Lead time x Daily usage


The commercial credit cost
Question:
A credit transaction has conditional payment of 2/10 net 50. In case the
buyer pays on the 50th day of delivery; what is the commercial credit
cost?
Answer:
Cost to Forgo a Discount :
The commercial credit cost =
% discount x
(100% - % discount)

365 days
(payment date - discount period)


The Payback Period (PBP)
Question:
X company has determined that the after-tax cash flows (net cash
flow) for the project will be $20,000; $24,000; $28,000; $28,000; and
$30,000, respectively, for each of the Years 1 through 5. The initial cash

outlay will be $60,000. The Payback Period (PBP) is ?


Net cash flow
Question:
X company has determined that the before-tax cash flows (earning
before tax) for the project will be $14,000; $18,000; $15,000; $18,000,
respectively, for each of the Years 1 through 4. The initial cash outlay
will be $60,000. Final salvage value of asset is $1,000. Assuming that
the marginal tax rate equals 22% (not on salvage value of asset). The
Company expects to depreciate its assets on a straight-line basis. Net
cash flow for year 1 to 4 is?


The net present value (NPV)
Question:
X company has determined that the earning after tax for
the project of buying a new machine will be VND 55; 45;
48; 45 million, respectively, for each of the Years 1
through 4. The initial investment is VND 400 million. Final
salvage value of the machine after 4 year is VND 7
million. Assuming that the marginal tax rate equals 22%
(not on salvage value of asset). The Company expects to
depreciate its assets on a straight-line basis. The cost of
capital of the company is 12% per year. What is the net
present value (NPV) of this project?


Cost of preferred stock
Question :

X company's $200 par value preferred stock just paid its
$20 per share annual dividend. The preferred stock has a
current market price of $186 a share. The component
cost of preferred stock of X is ?
Answer :
kP = DP / P0
DP: Dividend per share = $20
P0: current market value per share = $186


The Weighted Average Cost of
Capital (WACC)
Question :
If the weighting of equity in total capital is 3/5, that of debt is 2/5, the
return on equity is 16% that of debt is 10% and the corporate tax rate is
25%, what is the Weighted Average Cost of Capital (WACC)?
Answer :

WACC = ∑ kx(Wx) = ki x Wi + ke x We