Formula sheets, the key method steps for every topic and 20 practice problems, with full solutions at the back.
You need €50 000 in 3 years. An account pays 4% per year, compounded quarterly. How much must you deposit today? Find the present value PV.
You save €150 at the end of every month for 27 years. The account pays 5.4% per year, compounded monthly. How much have you saved at the end? Find FV.
An investment of €75 000 gives these cash flows at the end of years 1 to 4: €30 000, €30 000, €23 000, €37 000. The cost of capital is 10%. Find the net present value NPV.
A project costs €25 000 and returns €15 000, €11 500 at the end of years 1 to 2. Find its internal rate of return IRR in percent.
A bond with a face value of €1 000 matures in 4 years and pays annual coupons. It sells for €935 when the yield to maturity is 9%. Find the coupon rate c in percent.
A bond trades at €1 005 with a yield to maturity of 5% (annual compounding) and a Macaulay duration of 6.4 years. Use the modified duration to estimate the new price P if the yield rises by 25 basis points.
A company has a debt-to-equity ratio (at market values) of 1. Its cost of equity is 13%, its pre-tax cost of debt is 6% and the tax rate is 30%. Find the WACC.
A company's shares have a beta of 1.3 at its current debt-to-equity ratio of 0.5. It plans to raise its debt-to-equity ratio to 0.75. The tax rate is 25%, the risk-free rate 4% and the market risk premium 5%. Find the cost of equity re after the change.
Find the sample standard deviation s of the data: 52, 40, 11, 60, 16, 54.
Exam scores are normally distributed with mean 170 and standard deviation 5. Find the z-score z of a score of 167.5.
A fair die is rolled 5 times. What is the probability P of getting at least one six?
X has the distribution shown, and Y = 2X + 5. Find the standard deviation σY of Y.
The bag weights are normally distributed with mean 250 g and standard deviation 5 g. What fraction lies between 248.75 and 256 g? Give P as a decimal.
The heights of adult men are normally distributed with mean 178 cm and standard deviation 7 cm. Find the value x below which 75% of them lie (the 75th percentile).
The blood pressure of 8 patients is measured before and after a treatment. The differences d = before − after (mmHg) have mean 4 and standard deviation 3.9. Find the lower limit of the 90% confidence interval for the mean difference.
The diameters of 10 machined shafts have a sample standard deviation of 5.5 µm. Assuming the diameters are normally distributed, find the upper limit σ of the 95% confidence interval for the population standard deviation. With df = 9, 2.5% of the χ² distribution lies below 2.7 and 2.5% lies above 19.023.
A sample of 81 students has a mean score of 499 and a sample standard deviation of 5. Find the test statistic t for H₀: μ = 500.
A sample of 16 measurements has mean 97.3. The population standard deviation is 10. Find the upper limit U of the 90% confidence interval for the mean.
The table gives 6 paired observations of x = temperature in °C and y = ice creams sold. Their sums are given. Find Pearson's correlation coefficient r from these sums.
The table gives 6 paired observations of x = temperature in °C and y = ice creams sold. Use the least-squares line ŷ = a + b·x. A new observation (21.5, 112) is made. Find its residual e = y − ŷ.
Answer: PV = 44372 €
Time value of money: money today is worth more than the same amount later, because it can earn interest. With interest rate i per period, an amount grows as FV = PV·(1 + i)n. A series of equal payments (an annuity) is valued by adding up each payment, which gives the annuity formulas.
Answer: FV = 109444 €
Time value of money: money today is worth more than the same amount later, because it can earn interest. With interest rate i per period, an amount grows as FV = PV·(1 + i)n. A series of equal payments (an annuity) is valued by adding up each payment, which gives the annuity formulas.
You paid in €48 600 yourself; the rest is interest.
Answer: NPV = 19618 €
Net present value: discount every cash flow back to today with the required rate of return r, then add them up: NPV = Σ CFₜ/(1 + r)ᵗ. A project with NPV > 0 earns more than r and adds value. The internal rate of return (IRR) is the rate at which NPV = 0.
NPV is positive, so the project earns more than the required return.
Answer: IRR = 4.162 %
Net present value: discount every cash flow back to today with the required rate of return r, then add them up: NPV = Σ CFₜ/(1 + r)ᵗ. A project with NPV > 0 earns more than r and adds value. The internal rate of return (IRR) is the rate at which NPV = 0.
NPV falls as the rate rises, so the IRR lies between a rate with positive NPV and one with negative NPV.
Linear interpolation gives a first estimate; repeating it (or a calculator's IRR function) gives the exact rate.
Answer: c = 6.994 %
Bond pricing: a bond’s price is the present value of its cash flows, discounted at the yield to maturity (YTM): the coupons form an annuity and the face value is paid back at maturity. P = C·(1 − (1 + y)⁻ⁿ)/y + F/(1 + y)ⁿ. When the yield is above the coupon rate the bond trades below face value, and the other way round.
Answer: P = 989.7 €
Duration: the Macaulay duration is the weighted average time at which a bond pays its cash flows, with the present values of the cash flows as weights: D = Σ t·PVₜ/P. The modified duration D/(1 + y) estimates the percentage price change for a small change in yield: %ΔP ≈ −Dmod·Δy.
Duration is a linear estimate; for large yield changes convexity makes the true price a little higher.
Answer: WACC = 8.6 %
Cost of capital: CAPM gives the return shareholders require: re = rf + β·(rm − rf). The weighted average cost of capital mixes equity and debt by their market values: WACC = E/V·re + D/V·rd·(1 − T), with V = E + D. Interest is tax-deductible, hence the (1 − T).
Answer: re = 11.39 %
Levered beta (Hamada): debt makes equity riskier. βL = βU·(1 + (1 − T)·D/E), where βU is the beta of the business without debt. To move a beta to another capital structure, unlever it first and then relever it at the new D/E.
Answer: s = 20.73
Descriptive statistics: the mean is the sum divided by n; the median is the middle value of the sorted data (the average of the two middle values when n is even). The sample standard deviation is s = √(Σ(x − x̄)²/(n − 1)). A z-score z = (x − μ)/σ says how many standard deviations a value lies from the mean.
Answer: z = −0.5
Descriptive statistics: the mean is the sum divided by n; the median is the middle value of the sorted data (the average of the two middle values when n is even). The sample standard deviation is s = √(Σ(x − x̄)²/(n − 1)). A z-score z = (x − μ)/σ says how many standard deviations a value lies from the mean.
Answer: P = 0.5981
Probability: with equally likely outcomes, P(A) = favourable/total. For independent events multiply: P(A and B) = P(A)·P(B). The complement often helps: P(at least one) = 1 − P(none). Binomial: in n independent trials with success probability p, P(X = k) = C(n, k)·pᵏ·(1 − p)ⁿ⁻ᵏ.
Answer: σY = 2.088
Discrete random variables: a probability distribution lists every value x a variable can take with its probability p(x); the probabilities are between 0 and 1 and add up to 1. The expected value (mean) is E(X) = Σx·p(x), the long-run average. The variance is Var(X) = Σ(x − μ)²·p(x) = E(X²) − μ², and the standard deviation σ = √Var(X). For a linear change Y = aX + b: E(Y) = a·E(X) + b, Var(Y) = a²·Var(X) and σY = |a|·σX; adding a constant does not change the spread.
The mean does move: E(Y) = 2·2.1 + 5 = 9.2.
Answer: P = 0.4836
Normal distribution: convert a value x to a z-score, z = (x − μ)/σ, which counts standard deviations from the mean. A z-table (or Φ(z)) gives the area to the left of z, which is P(X < x). The area to the right is 1 − Φ(z), and the area between two values is the difference of their two areas.
Answer: x = 182.7 cm
Normal distribution: convert a value x to a z-score, z = (x − μ)/σ, which counts standard deviations from the mean. A z-table (or Φ(z)) gives the area to the left of z, which is P(X < x). The area to the right is 1 − Φ(z), and the area between two values is the difference of their two areas.
Answer: lower limit = 1.387 mmHg
Interval for a difference: estimate ± critical value × standard error. For two independent means with known σ: SE = √(σ₁²/n₁ + σ₂²/n₂) and z. With equal unknown variances: pooled s_p and t with n₁ + n₂ − 2 degrees of freedom. For paired data, work with the differences: d̄ ± t·s_d/√n.
Answer: σ = 10.04 µm
Interval for a variance: (n − 1)s²/σ² has a χ² distribution with n − 1 degrees of freedom. The 95% interval for σ² runs from (n − 1)s² divided by the upper χ² value (2.5% above it) to (n − 1)s² divided by the lower χ² value (2.5% below it); the interval for σ is the square root of both limits. It is not symmetric around s.
95% interval for σ: [3.783, 10.04] µm.
Answer: t = −1.8
Testing a mean: the test statistic measures how many standard errors the sample mean lies from the value claimed in H₀: z = (x̄ − μ₀)/(σ/√n) when σ is known, t = (x̄ − μ₀)/(s/√n) when it is estimated from the sample. A confidence interval is x̄ ± (critical value)·(standard error).
|t| < 1.99, so H₀ is not rejected at the 5% level (two-sided).
Answer: U = 101.4
Testing a mean: the test statistic measures how many standard errors the sample mean lies from the value claimed in H₀: z = (x̄ − μ₀)/(σ/√n) when σ is known, t = (x̄ − μ₀)/(s/√n) when it is estimated from the sample. A confidence interval is x̄ ± (critical value)·(standard error).
Answer: r = 0.9526
Least-squares regression: with x̄ and ȳ the means, Sxx = Σ(x − x̄)², Syy = Σ(y − ȳ)² and Sxy = Σ(x − x̄)(y − ȳ), the line ŷ = a + b·x has slope b = Sxy/Sxx and intercept a = ȳ − b·x̄, so it always passes through (x̄, ȳ). Pearson's correlation coefficient r = Sxy/√(Sxx·Syy) lies between −1 and 1; r² is the fraction of the variation in y explained by the line.
Answer: e = −1.5
Least-squares regression: with x̄ and ȳ the means, Sxx = Σ(x − x̄)², Syy = Σ(y − ȳ)² and Sxy = Σ(x − x̄)(y − ȳ), the line ŷ = a + b·x has slope b = Sxy/Sxx and intercept a = ȳ − b·x̄, so it always passes through (x̄, ȳ). Pearson's correlation coefficient r = Sxy/√(Sxx·Syy) lies between −1 and 1; r² is the fraction of the variation in y explained by the line.
The point lies below the line.
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