Need help with some DCF questions

CFA Level I
#1

Hello everyone , need help with these questions .

Q. Given below are the facts of Star Fund -

· On 1 January 2010, the Star Fund had a market value of $200 million.

· During the period 1 January 2010 to 30 April 2010, the stocks in the fund showed a capital gain of $20 million.

· On 1 May 2010, the stocks in the fund paid a total dividend of $4 million. All dividends were reinvested in additional shares.

· Because the fund’s performance had been impressive, institutions invested an additional $40 million in Star Fund on 1 May 2010, raising assets under management to $264 million ($200 + $20 + $4 + $40).

· On 31 December 2010, the Star Fund received total dividends of $5.28 million. The fund’s market value on 31 December 2010, not including the $5.28 million in dividends, was $280 million.

· The fund made no other interim cash payments during 2010.

Based on the information given, calculate Star Fund’s the time-weighted and money-weighted return. Select one: A. Time-weighted = 21.03% , Money-weighted = 20.05% B. Time-weighted = 19.36% , Money-weighted = 22.67% C. Time-weighted = 22.46% , Money-weighted = 21.33%

Q.As an analyst at the WB Corporation, you are evaluating its employee training program for the current year. Management has announced that it intends to invest $1.5 million in the employee training program. Incremental net cash flows are forecasted to be $120,000 per year in perpetuity. WB Corporation’s opportunity cost of capital is 7 percent.Using the information given in the previous WB Corporation example, where the initial outflow is $1.5 million and the cash flows are $120,000 for perpetuity, determine the program’s internal rate of return.

Select one: A. 9% B. 8% C. 7% I am taking these steps in this question cf0 = -1.5 million cf1 = 120000 I/Y 7% Cpt IRR . Whats with this perpetuity term ? Is the solution related to this ?

This last question includes table so took a screen , We have to calculate using the ending amount of all the quarters right ? http://i60.tinypic.com/2lvbiax.jpg

Q.Chocoholic Ltd. is considering whether or not to open a new manufacturing plant in Australia. The project will require an initial investment of AUD 2 million. The plant is expected to generate cash flows of AUD 500,000 for the next 8 years. Chocoholic Ltd. has a cost of capital of 10 percent. Determine if the project is beneficial using the NPV rule as well as the IRR rule. Select one: A. NPV=No, IRR= No. B. NPV=No, IRR= Yes. C. NPV=Yes, IRR= Yes I got the solution of this question but have a doubt , here it is mentioned " The plant is expected to generate cash flows of AUD 500,000 for the next 8 years." so we gonna count cf of.5 million once right as per year is not mentioned . If i am counting .5 million for 8 years then i am getting the answer . Is it a typo in the question ? Thank you Also i am having problem with time weighted return method , any video or notes that explain that concept .

#2

TWR:

Find the geometric growth of the subperiods: Period Jan 1 - May 1: 200 --> 224: 224/200 = 1.12 Period May 1 - Dec 31: 264 --> 285.28 = 1.081

Calculate the geometric growth for the year, which is equal to the TWR: (1.12 x 1.081)-1 = 21.03. Note: No square root needs to be taken here since you are dealing with subperiods for a year.

Answer A should be correct.

The calculation of the MWR with unequal subperiods is quite tricky. Too late for me right now to try this manually as I would normally solve IRRs for unequal subperiods in Excel (there is a dedicated formula for this called XIRR()).

#3

Take the net present value formula for a perpetuity, equal it to zero (=definition of the IRR) and solve for the capital cost:

-1.5+0,12/IRR = 0 <=> IRR=0.12/1.5 <=> IRR = 8% Note: The capital costs given are not relevant here. For calculating the IRR they do not matter. They only matter in that you can conclude that the NPV of the project is positive since IRR>cost of capital.

Answer B should be correct.

#4

From the text I would assume that it means that the 0.5 million cash-flow is per year for 8 years. If so, you’ll get a NPV of 0.668 and an IRR of 18.62%. Note that NPV and IRR need to yield to the same decision.

Answer C should be correct.

#5

Calculate the TWR as per the 1st question: Note that you need to take the amount invested after the contributions as beginning values.

In-house account:

Q1: 7,000/6,000 = 1.17 Q2: 6,500/6,775 = 1.04 Q3: 7,000/7,720 = 1.10 Q4: 7,120/6,508 = 0.91 TWR = (1.17 x 1.04 x 1.10 x 0.91)-1 = 22.58% Fintastic services account:

Q1: 14,200/13,000 = 1.09 Q2: 13,000/13,240 = 1.019 Q3: 6,240/6,659.2 = 1.067 Q4: 6,259.2/6,469.568 = 1.034 TWR = (1.09 x 1.019 x 1.067 x 1.034)-1 = 22.71%

Answer B should be correct.

#6

Thanks