Assignment 1 Please read all questions and instructions carefully. Note that you only need to enter answers in terms of numbers and without any symbols (including $, %, commas, etc.). Enter all monetary answers to the nearest dollar (no decimal/cents) and all interest rates to the nearest on hundredth of a percent (two decimal places). Read the syllabus for examples. The points for each question are listed in parentheses at the start of the question, and the total points for the entire assignment add up to 100.
Question 1 (5 points) $100 today is worth the SAME as $100 tomorrow. True False
Question 2 (5 points) $100 invested for 10 years at 12% interest is worth more in FV terms than $200 invested for 10 years at 4% interest. True False
Question 3 (5 points) Megan wants to buy a designer handbag and plans to earn the money babysitting. Suppose the interest rate is 6% and she is willing to wait one year to purchase the bag. How much babysitting money (to the nearest whole dollar) will she need to earn today to buy the bag for $400 one year from now? (Enter just the number without the $ sign or a comma) Answer for Question 3 377
Question 4 (10 points) Jeff has $1,000 that he invests in a safe financial instrument expected to return 3% annually. Marge has $500 and invests in a more risky venture that is expected to return 7% annually. Who has more after 20 years? And how much does he/she have in FV terms? Marge; 1935 Jeff; 1935
Jeff; 1604 Marge; 1806 Marge; 1604 Jeff; 1806
Question 5 (10 points) Your dad invested $25 for you in 1942 in a fund and you have not withdrawn any money since.If the fund has averaged a return of 8 percent over the last 70 years, what is the current value of that investment? (Round to the nearest whole dollar; enter just the number without the $ sign or a comma) Answer for Question 5 5465
Question 6 (10 points) Bridgette’s grandparents opened a savings account for her and placed $500 in the account. The account pays 3.5% interest. Bridgette wants to be a singer and she has her heart set on a new karaoke machine. The machine costs $150. How much less will the account be worth in 8 years if she buys the karaoke machine now versus leaving the account untouched? (Enter just the number without the $ sign or a comma; round to the nearest whole dollar.) Answer for Question 6
Question 7 (10 points) The Johnson family is worried about their ability to pay college tuition for their daughter Chloe. Tuition rates are currently $9,500 per year at the state college and have been increasing at a rate of 7% annually. Chloe will begin college in 7 years. The Johnson’s have $9,500 set aside now in a college plan that will earn 6% per year. They recently heard about a plan to pre-pay tuition at current rates, that is pay $9,500 per year of college. Should they prepay Chloe’s first year now or keep the money invested and pay the tuition 7 years from now? How much are they saving in FV terms with this decision? Pre-pay; 970 Don't Pre-pay; 781 Don't Pre-pay; 685
Don't Pre-pay; 970 Pre-pay; 685 Pre-pay; 781
Question 8 (15 points) Ralph knows that he is going to have to replace his roof soon. If he has the roof replaced now, it will cost $10,000. He could wait 5 years, but it will then cost him $20,000. At what rate will these options cost the same. (Hint: This is also known as the break-even point. Exact calculation up to two decimals is not difficult. If stuck, trial and error will help. (No more than two decimals in the percentage interest rate but do not enter the % sign.) Answer for Question 8
Question 9 (15 points) Rondo is in the market for a new car. He has narrowed his search down to 2 models. Model A costs $32,000 and Model B costs $28,000. With both cars he plans to pay cash and own them for 4 years before trading in for a new car. His research indicates that the trade in value for Model A after 4 years is 60% of the initial purchase price, while the trade in value for Model B is 45%. The interest rate is 5%. For simplicity assume that operating and maintenance costs for the models are identical. Which model is the better decision and how much "cheaper" is it than the alternative? Model A; 4000 Model B; 1430 Model B; 1207 Model B; 4000 Model A; 1257 Model A; 1430
Question 10 (15 points) College tuition has been rising at a rate of 7% per year. Currently the average tuition of a state college is $9,500/year. Andrea’s son Trevor will begin college in 12 years. Andrea’s portfolio is making 5% annually. How much does Andrea need to have set aside today/now to pay for 4 years of college for Trevor? (Note:Tuition will continue to change annually and Andrea’s portfolio balance will continue to accrue interest while Trevor is in school. Also, tuition is due at the beginning of each year.)
58905 49035 75400 87432
Assignment 2 Please read all questions and instructions carefully. Note that you only need to enter answers in terms of numbers and without any symbols (including $, %, commas, etc.). Enter all dollars without decimals and all interest rates with up to two decimals. Read the syllabus for examples. The points for each question are listed in parentheses at the start of the question, and the total points for the entire assignment adds up to 100.
Question 1 (5 points) Qin deposits his first paycheck in the bank. The annual interest rate is 12%, but interest is compounded quarterly. The EAR is: 12.68 12.55 12.44 12.00
Question 2 (5 points) Gloria is 35 and trying to plan for retirement. She has put a budget together and plans to save $4,800 per year, starting at the end of this year, in a retirement fund until she is 65. Assume that she can make 7% on her account. How much will she have for retirement at age 65? 499245 453412 345514 144000
Question 3 (5 points) Mohammad has just turned 21 and now has access to the money his parents have been putting away in an account for him since he was 5 years old. His mother has asked him to guess what his account is worth given that they have invested $1,000 every year in the account starting on his 5th birthday and have just made one. The interest rate on the account has been 3.5%
annually. How much is Mohammad’s account worth today? (Enter just the number without the $ sign or a comma; round off decimals.) Answer for Question 3
Question 4 (5 points) Gerard has estimated that he is going to need enough in his retirement fund to withdraw $75,000 per year beginning on his 66th birthday and for 19 additional years thereafter. How much will Gerard need in his retirement account at age 65 if his fund is expected to earn an annual return of 9.5%? 644324 660929 995733 1500000
Question 5 (10 points) Rachna is considering a life insurance plan that will require her to pay a premium of $200 every year for the next 40 years. She wants to make sure that she is able to make this payment and wants to put away a lump sum today in her bank to cover all future payments. How much would she need to deposit in her bank if the annual interest rate on her deposit account is 4%? (Enter just the number without the $ sign or a comma; round off decimals.) Answer for Question 5
Question 6 (10 points) Melanie and Stephen Jackson are purchasing their first house. The house costs $360,000. They have put a 20 percent down payment (that is, an amount that banks should require you to pay out-of-pocket), but will therefore finance the rest. They are considering a fixed rate 30-year mortgage at a 5.25% APR with monthly payments. How much will the Jacksons' first monthly payment be? 1630 1590 1487
800
Question 7 (15 points) Abebi, who has just celebrated her 29th birthday, will retire on her 55th birthday, and she has just set up a retirement plan to pay her income starting on her retirement day, and to continue paying for 19 more years. Abebi's goal is to receive $120,000 for each of these twenty years. In creating her retirement account, Abebi has committed to set aside equal payments at the end of each year, for the next 25 years starting on her 30th birthday. If the annual interest rate is 9%, how big should Abebi's equal payments be?(Enter just the number without the $ sign or a comma; round off decimals.) Answer for Question 7
Question 8 (15 points) Two years ago Abilia purchased a $10,000 car; she paid $2000 down and borrowed the rest. She took a fixed rate 60-month installment loan at a stated rate of 8% per year. Interest rates have fallen during the last two years and she can refinance her car by borrowing the amount she still owes on the car at a new fixed rate of 6% per year for 3 years. Should Abilia refinance her loan? How much will she save per month for the next three years if she decides to refinance? (no, 5) (yes, 2) (no, 7) (yes, 5) (yes, 7) (no, 2)
Question 9 (15 points) You have been living in the house you bought 10 years ago for $300,000. At that time, you took out a loan for 80% of the house at a fixed rate 15-year loan at an annual stated rate of 9%. You have just paid off the 120th monthly payment. Interest rates have meanwhile dropped steadily to 6% per year, and you think it is finally time to refinance the remaining balance. But there is a catch. The fee to refinance your loan is $4,000. Should you refinance the remaining balance? How much would you save/lose if you decided to refinance? (yes, gain 4647) (no, lose 2300)
(no, lose 2331) (no, lose 1323) (yes, gain 4053) (yes, gain 3300)
Question 10 (15 points) You have just started your first job and you want to have the basic appliances (fridge, washer, dryer, etc.) in your apartment. You face the following choices: (i) Purchase all appliances at the store using a bank loan. There is no down payment as the bank can take your appliances if you default on the loan. The loan is at the annual market rate of 5%, and the loan amount is $6,000 to be repaid monthly over 4 years.(ii) Rent-to-buy from the same store. The monthly rental is $125 for 48 months and then you pay $1,000 to own all the appliances. What is the net cost today of the cheapest option? (Enter just the number without the $ sign or a comma; round off decimals. Since this asks for a cost, you just enter the number without a negative sign.)
Assignment 3 Please read all questions and instructions carefully. Note that you only need to enter answers in terms of numbers and without any symbols (including $, %, commas, etc.). Enter all dollars without decimals and all interest rates in percentage with up to two decimals. Read the syllabus for examples.The points for each question are listed in parentheses at the start of the question, and the total points for the entire assignment adds up to 100.
Question 1 (5 points) Sachin has asked his flat mate Jason for a $500 loan to cover a portion of his rent and utility costs. Sachin proposes repaying the loan with $300 from each of his next two financial aid disbursements, the first 4 months from now and the second 12 months from now. Jason's alternative is to earn 5% annually in his money market account. Assume there is no risk of default, and that compounding is monthly. What is the NPV of the loan? (Enter just the number without the $ sign or a comma; round off decimals.) Answer for Question 1
Question 2 (5 points) Juanita has an opportunity to invest in her friend's clothing store. The initial investment is $10,000 and her expected cashflows are as follows: Year 1: $300 Year 2: $500 Year 3: $1200 Year 4: $2000 Year 5: $2000 Year 6: $5000 Year 7: $5000 What is Juanita's IRR
on this investment?(No more than two decimals in the percentage interest rate, but do not enter the % sign.) Answer for Question 2
Question 3 (5 points) Fabrice is looking to buy a new plug-in hybrid vehicle. The purchase price is $12,000 more than a similar conventional model. However, he will receive a $7,500 federal tax credit that he will realize at the end of the year. He estimates that he will save $1,200 per year in gas over the conventional model; these cash outflows can be assumed to occur at the end of the year. The cost of capital (or interest rate) for Fabrice is 6%. How long will Fabrice have to own the vehicle to justify the additional expense over the conventional model?( i.e, What is the DISCOUNTED payback period in years? Discount future cash flows before calculating payback and round to a whole year.) Answer for Question 3
Question 4 (10 points) Wen Seng operates an ice cream shop. He is trying to decide whether to expand his business to include ice cream cakes. He will need some additional space that will cost him $7,200 per year at the end of each year and some additional equipment that will cost $10,000 up front. The ice cream cakes will provide an extra income of $10,000 per year at the end of each year. The business is expected to last 20 years. The discount rate (or interest rate) for Wen Seng's new business is 10%. What is the Net Present Value of the ice cream cake project project? (Assume there are no taxes.) 12435 12898 14742 13838
Question 5 (10 points) Da Feng is looking to refinance his home because rates have gone down since he purchased the house 5 years ago. He started with a 30-year fixed-rate mortgage of $240,000 at an annual rate of 6.75%. He has to make monthly payments. He can now get a 25-year fixed-rate
mortgage at an annual rate of 5.5% on the remaining balance of his initial mortgage. This loan also requires monthly payments. In order to re-finance, Da Feng will need to pay closing costs of $4,500. These costs are out of pocket and cannot be rolled into the new mortgage. How much will refinancing save Da Feng? (i.e. What is the NPV of the refinancing decision?) 23686 28156 25022 20522
Question 6 (10 points) Chandra has the opportunity to buy a vacant lot next to several commercial properties for $50,000. She plans to buy the property and spend another $60,000 immediately to put in a parking lot. She has talked to the local businesses and has some contracts lined up to fill the parking spaces. The profits from the contracts will provide $25,000 per year and the contracts will last 10 years. What is the NPV of Chandra's plan if the appropriate discount/interest rate is 10%?(Enter just the number without the $ sign or a comma; round off decimals.) Answer for Question 6
Question 7 (10 points) This question introduces you to the concept of an annuity with growth. The formula is given on p.3, equation (7), of the Note on Formulae, but I would encourage you to try doing it in Excel as well. (If the first cash flow is C, the next one will be C(1+g), and so on, where g is the growth rate in cash flow). As an example, the present value of an annuity that starts one year now at $100, and grows at 5%, with the last cash flow in year 10, when the discount rate is 7%, is $860. Confirm this before attempting the problem using both the formula and excel. What is the NPV of of a new manufacturing project that costs $100,000 today, but has a cash flow of $15,000 in year 1 that grows at 4% per year till year 12? Similar investments earn 7.5% per year. (Enter just the number without the $ sign or a comma; round off decimals.) Answer for Question 7
Question 8
(15 points) Diane has just 18 and also completed high school and is wondering about the value of a college education. She is pretty good with numbers, and driven by financial considerations only, so she sits down to calculate whether it is worth the large sum of money. She knows that her first year tuition will be $12,000, due at the beginning of the year (that is, right away). Based on historical trends she estimates that tuition will rise at 6% per year for the 4 years she is in school. She also estimates that her living expense above and beyond tuition will be $8,000 per year (assume this occurs at the end of the year) for the first year and will increase $500 each year thereafter to keep up with inflation. She does not plan to work at all while attending school. Were she to forgo college she would be able to make $25,000 per year out of high school and expects that to grow 3% annually. With the college degree, she estimates that she will earn $45,000/year out of college, again with annual 3% increases in salary. Either way, she plans to work until 60 (she begins college right away). The interest/discount rate is 6%. What is the NPV of her college education? (Note: All cash flows except tuition payments occur at the end of the year.) 142062 134021 92821 127072
Question 9 (15 points) Reggie has just taken over management of a family business. He wants to make sure that it makes financial sense to keep the business going. He could sell the building today for $520,000. Keeping the business going will require a $50,000 renovation now and will yield an annual profit of $72,000 for the next 20 years (for simplicity assume these occur at year end, beginning one year from now). The discount/interest rate is 10%? What are the NPV and IRR of this decision? (-$92,977; -12.54%) ($87,255; 11.09%) ($42,977; 11.09%) (-$42,997; -11.09%) ($92,977; 12.54%)
Question 10 (15 points) Sairah purchased an investment property for $350,000, 3 years ago. The after-tax cashfow of the property has been $35,000 per year to date, but market conditions have improved and Sairah expects the cashflow to improve to $42,000 per year for the next 25 years (assume these are year end cashflows). The annual cost of capital (or cap rate) for this area is 9%. What is the value of the property today?(Enter just the number without the $ sign or a comma; round off decimals.) Answer for Question 10
Assignment 4 Please read all questions and instructions carefully. Note that you only need to enter answers in terms of numbers and without any symbols (including $, %, commas, etc.). Enter all dollars without decimals and all interest rates in percentage with up to two decimals. Read the syllabus for examples.The points for each question are listed in parentheses at the start of the question, and the total points for the entire assignment adds up to 100. You are strongly encouraged to use spreadsheets. Refer to Note on Sample Cash Flow Template.
Question 1 (5 points) There is always one IRR of every project. False True
Question 2 (10 points) Ann Arbor is considering offering public bus service for free. Setting up the service will cost the city $0.6M (where M stands for million). The useful life of the buses is 25 years. Annual maintenance of the buses would cost $50,000 per year and they would need a major overhaul in year 15 that will cost a total of $350,000. This overhaul is in addition to the annual maintenance. Annual operating costs will begin at $90,000 in year 1 and grow at 2% per year thereafter. By using the buses as advertisement space, the city will generate a revenue of $75,000 in year 1 and it will grow at 4% per year thereafter. Reduced parking requirements and other benefits generated by the project will save the city $100,000/year. The salvage value (price city can get in the future after maintenance) of the used buses in year 25 is expected to be $150,000. What is the NPV of the bus proposal? Ann Arbor does not pay taxes and the discount rate is 5%.(Again, all cash flows except initial investments happen at the end of the year.) (You are strongly encouraged to use a spreadsheet.) 19323 29847 -10223 31222
Question 3
(5 points) Your manager has the following two projects that he is considering, and wants to choose between them. Project A has an investment outlay/expense today of $10,000, and its cash flows over the next three years are $6,000, $6,000, $7,000. Project B has an outlay of $20,000, and cash flows of $10,000, $12,000, and $14,000. Which project should you advise your manager to choose? Project B Cannot decide based on information Project A Either one is fine
Question 4 (10 points) GE has the following two projects that it is considering; it can choose only one. Project A has an investment outlay/expense today of $10M, and its cash flows over the next three years are $4M, $4M, $5M. Project B has an outlay of $10M, and cash flows of 0, 0, and $14M. Which project should GE choose if the cost of capital for similar projects is 5%? Project B Do not have enough information Project A Should not choose either.
Question 5 (5 points) All else equal, firms that provide more financing to their customers will in turn have higher net working capital. False True.
Question 6 (5 points) Last year your firm had revenue of $20 million, cost of goods sold (COGS) of $12 million, Selling, General, & Administration costs (SG&A) of $2 million, Account Receivables (AR) of $6 million, Account Payables (AP) of $4 million and Inventory of $4 million. What will be the free cash flow next/this year if you boost revenue 6% and AR 12%, while holding COGS growth to 3% and everything else remains the same as last year? (Assume no taxes and no new capital expenditures.) (You are encouraged to use a spreadsheet even for this specific type of question.) 5250000 6120000
4170000 7240000
Question 7 (15 points) Silver Bear Golf (SBG) is a manufacturer of top quality golf clubs with a specialty of putters. Currently, each putter they sell brings in $200 of revenue at a cost of $150. This past year, they sold 1,000 putters and they expect this number to grow each year by 12% until this model becomes obselete after 10 more years. The foreman at the SBG factory recently brought to your attention a new technology that could lower the cost of production. This technology requires an upfront fixed investment of $100,000 and has the capacity to produce all the putters you want to sell per year at a unit cost of $135. There is no increased working capital need due to this new technology, and no value of the machine/technology after 10 years. What is the NPV of investing in the new technology? Ignore taxes and assume a discount rate of 9%. (Hint: Think incrementally; the difference between the world without and with this new technology! Also, ignoring taxes will be a big help if you think right.) (Enter just the number without the $ sign or a comma; round off decimals.)(You are strongly encouraged to use a spreadsheet.) Answer for Question 7
Question 8 (15 points) A smooth saleperson comes to visit your office with a proposal to sell your firm some new machinery to install in your vacant warehouse building on the property that has no alternative use. The salesperson claims that this technology produces products that should provide you with revenues next year of $7 million with a cost of goods to be $5 million. Both of these are expected to grow at a rate of 15% per year till year 6. Your firms faces a 35% tax rate, a 12% discount rate and you can depreciate your new investment using the straight line method over the six years, at which point the value of the venture moving forward will be $2 million. (This $2 million is the terminal value that is in year 6 dollars and is the PV of all cash flows year 7 and beyond.) The capital expenditure of this project is $6M. What is the NPV of the project? Assume that you have no significant working capital costs.(Enter just the number without the $ sign or a comma; round off decimals.) (You are strongly encouraged to use a spreadsheet.) Answer for Question 8
Question 9
(15 points) Walmart is considering opening a small experimental store in New York city. A store is expected to have a long economic life, but the valuation horizon is 10 years. The store in New York is likely to generate revenues of $33M in the first year and then it grows at 5%. but the costs of running the business is high because the margins on all the products sold are low (it is a volume business!) The cost of goods sold are $12M in year 1 and they are expected to grow at 4% per year thereafter. Selling and administration costs are likely to be $1M every year as it is a small store. The tax rate is 35%. Walmart is so good at managing its stores that working capital increases can be assumed to be negligible. But since New York city is an expensive place, Walmart will have to invest $200 million in purchasing a building (with land) even though it is a much smaller property than a usual Walmart store. The good news is that this outlay can be depreciated straight line over 10 years. Also, Walmart has estimated that the terminal value in year 10 dollars is $100 million. This value is the value of all cash flows in year 11 and beyond. What is the NPV of opening this new store if the appropriate discount rate is 5%?(Again, all cash flows except initial investments happen at the end of the year. Enter just the number without the $ sign or a comma; round off decimals.)(You are strongly encouraged to use a spreadsheet.) Answer for Question 9
Question 10 (15 points) Big Blue Granite (BBG) needs to purchase a new saw for creating their top quality countertops. Saw A costs $250,000 with $4,000 of annual maintenance costs for the first year that will increase by 5% each year for the 7-year life of the saw. Saw B costs $150,000 with $10,000 of annual maintenance costs for the first year that will increase by 15% each year for the 4-year life of the saw. Which saw should BBG choose? What is the annualized cost of this choice? Assume a discount rate of 12%, and ignore all taxes. (A, 59331) (A, 38682) (B, 46794) (B, 61624) (A, 40367) (B, 49983)
Assignment 5 Please read all questions and instructions carefully. To be consistent with the real data and across questions in this assignment, all bond pricing questions assume semi-annual compounding. Also, though not necessary, you may want to use the "rate" function to calculate the yield to maturity (YTM) on bonds. Note also that you only need to enter answers in terms of numbers and without
any symbols (including $, %, commas, etc.). Enter all dollars without decimals and all interest rates in percentage with up to two decimals. Read the syllabus for examples.The points for each question are listed in parentheses at the start of the question, and the total points for the entire assignment adds up to 100. NOTE THAT DRAWING TIME LINES AND MAKING SURE THAT YOU HAVE THE TIMING OF CASH FLOWS RIGHT IS IMPORTANT.
Question 1 (5 points) A pure discount (or zero-coupon) government bond is issued today that promises to pay $10,000 in 5 years. If the current interest rate on similar bonds is 3%, what is the price of the bond? (Recall that the compounding interval for bonds is 6 months.) 8617 9133 8733 9315
Question 2 (5 points) For two otherwise identical coupon bonds, the one with the higher rating will have a higher yield. False True
Question 3 (5 points) For coupon bonds, the yield to maturity always equals the coupon rate. False True
Question 4 (10 points) What is the yield to maturity (YTM) of a zero coupon bond with a face value of $1,000, current price of $950 and maturity of 2 years? (Recall that the compounding interval is 6 months and the YTM, like all interest rates, is reported on an annualized basis.) (Use no more than two decimals in the percentage number, but do not enter the % sign.) Answer for Question 4
Question 5 (10 points) The government in the U.S. issues zero-coupon bonds up to one year maturity, but STRIPS are "manufactured" zero-coupon bonds with maturities up to 30 years. So, for example, a financial institution could first buy 200 30-year coupon bonds issued by the government that each pay $5 of coupon every six months. The institution could then sell the combined coupons totaling $1,000 as a separate zero-coupon bond with maturities ranging from 6 months up to 30 years. This is a financial innovation that occurred decades ago in the face of volatile inflation and an increased demand for long-term zero coupon government bonds. Given this information, analyze the following statement: "The the yield to maturity (YTM) of a long-term STRIP will typically be higher than that of a short-term STRIP." False True
Question 6 (10 points) Suppose Wolverine Steel Company wishes to issue a $100,000 bond with a maturity of 5 years to raise $79,720. The market requires a yield to maturity (YTM) of 8% for this company's borrowing/debt. How much coupon will the company have to pay every six months?(Enter just the number without the $ sign or a comma, and no decimals.) Answer for Question 6
Question 7 (10 points) Suppose you have $10,000 to invest in either (a) Bond A, a 5-year zero-coupon; or (b) Bond B, a 10-year zero coupon bond. Both are risk free government bonds. You plan to hold the bond for a year and your only objective is to take on as little interest rate risk as possible. Which one should you choose? Bond B. Bond A.
Question 8 (15 points) Three years ago, you invested in a zero coupon bond with a face value of $1,000 that had a YTM of 8% and 9 years left until maturity. Today, that bond has a YTM of 5%. Due to a financial emergency, you are forced to sell the bond. What is your capital gain/loss, which is defined as the dollar gain/loss relative to the price of the bond when you bought it? (Recall that the compounding interval is 6 months and the YTM, like all interest rates, is reported on an annualized basis.) (Enter just the number without the $ sign or a comma, and no decimals.)
Answer for Question 8
Question 9 (15 points) Steamliner, Inc. has a project that it expects will produce a cash flow of $4.5 million in 10 years. To finance the project, the company needs to borrow $1.5 million today. The project will produce intermediate cash flows of $125,000 per year that the company can use to service annual coupon payments. The firm's underwriter suggests that the market would be receptive to a 10-year bond with a face value of $2 million with a $125,000 annual coupon (paid at the rate of $62,500 every six months). Alternatively, Steamliner has the option to raise the $1.5 million by issuing 10-year zero coupon bonds with a face value of $3.5 million. What is the annualized yield to maturity (YTM) on the preferred option? (Recall that the compounding interval is 6 months and the YTM, like all interest rates, is reported on an annualized basis.) (Use no more than two decimals in the percentage number, but do not enter the % sign.) Answer for Question 9
Question 10 (15 points) Five years ago, Highland, Inc. issued a corporate bond with an annual coupon of $6,000, paid at the rate of $3,000 every six months, and a maturity of 10 years. The par (face) value of the bond is $1,000,000. Recently, however, the company has run into some financial difficulty and has restructured its obligations.Today’s coupon payment has already been paid, but the remaining coupon payments will be postponed until maturity. The postponed payments will accrue interest at an annual rate of 5% per year and will be paid as a lump sum amount at maturity along with the face value. The discount rate on the renegotiated bonds, now considered much riskier, has gone from 7% prior to the renegotiations to 15% per annum with the announcement of the restructuring. What is the price at which the new renegotiated bond should be selling today? (Recall that the compounding interval is 6 months and the YTM, like all interest rates, is reported on an annualized basis.) (Enter just the number without the $ sign or a comma, and no decimals.) Answer for Question 10
Assignment 6 Please read all questions and instructions carefully. Note that you only need to enter answers in terms of numbers and without any symbols (including $, %, commas, etc.). Enter all dollars without decimals and all interest rates in percentage with up to two decimals. Read the syllabus for examples.The points for each question are listed in parentheses at the start of the question, and the total points for the entire assignment adds up to 100. NOTE THAT DRAWING TIME LINES AND MAKING SURE THAT YOU HAVE THE TIMING OF CASH FLOWS RIGHT IS IMPORTANT.
Question 1 (5 points) In the event of liquidation (that is, a firm shutting down), the firm splits the assets between bondholders and stockholders equally. True. False.
Question 2 (5 points) Becky and Mandy are arguing about the best way to value the rapidly growing MySpaceBook.com. Mandy argues that, since MySpaceBook.com is young and will plow most of their earnings back into the company that the present value of all future earnings represents the best estimate of the stocks value. Becky disagrees. Who is right? Mandy Becky
Question 3 (5 points) (One-period pricing. Recall that since stocks have really long lives, in the video we first imagined owning a stock for only one period. In this simple, yet powerful scenario, today's stock price is the PV of next year's dividend and next year's stock price.) The stock of Alydar Oil, an all-equity firm, is currently trading at $45 per share, after just having paid a $2 per share dividend. The market expects a dividend of $3 per share to be paid one year from today. If the equity cost of capital (same as discount rate for equity) is 20% for this firm, the expected exdividend price (the stock price after the dividend is paid next year) in one year (t = 1) should be closest to: 51 45 54 48
Question 4 (5 points) (One period stock pricing.) Qin's Marine Company (QMC) currently has a stock price per share of $42. If QMC's cost of equity capital (the discount rate for equity) is 16% and capital gains rate (gain/loss in prices relative to today's price) for the next year is expected to be 11%, the dividend in the upcoming year (t = 1) should be is closest to? 3 1 4 2
Question 5 (10 points) Locked-In Real Estate (LIRE) is preparing for their Initial Public Equity Offering (IPO). With its holdings consisting of rent controlled apartments, and no plans for expanding, LIRE plans to payout all of its earnings as dividends. These dividends amount to $6 per share, forever. If the expected rate of return is 12%, what is the stock price of LIRE? (Enter just the number without the $ sign or a comma; round off decimals.) Answer for Question 5
Question 6 (10 points) Investments made from retained earnings that lead to increases in future earnings will always increase stock price. True. False.
Question 7 (15 points) You are deciding whether to add Pony Electronics to your portfolio, but you are concerned about your projection for their growth rate. Pony's cost of equity capital (the discount rate for equity) is known to be 10% and they just paid a dividend of $1 per share. Most analysts are projecting constant growth of 8.25%, but you think that it might actually be 8.75%. By how much, in percentage terms, does this difference of opinion affect your estimate of Pony's price per share relative to the estimate implied by the analysts' forecast of growth rate? (No more than two decimals in the percentage difference, but do not enter the % sign.) Answer for Question 7
Question 8 (15 points) GraceBook is a young firm that is in the process of creating a new web-based social media platform that is focused on the corporate market. While they are unable to pay any dividends today, once corporate contracts are awarded, they expect to be able to start paying a dividend of $2.00 per share beginning two years from now (t = 2). From that point forward, as they build their reputation and capacity, they expect to be able to increase their dividend each year at a constant rate. If GraceBook's current stock price is $31 and their cost of equity capital (the discount rate for equity) is 9%, what is the growth rate implied by this price per share? (No more than two decimals in the percentage growth rate, but do not enter the % sign.) Answer for Question 8
Question 9 (15 points) Viento Windmills is a utility that charges customers for their wind generated electricity. With their current technology, they earn a total of $50 million each year to pay out to their 2 million shareholders. While their geographic footprint is fixed and we can't expect the climate to get progressively windier over time, they do have an opportunity to invest in technology that will more efficiently extract the wind energy and thus produce more megawatts to sell to customers. A one-time investment at the end of this year (t = 1) of $25 million for a state of the art lubricant system for the windmills will increase their cash flows by $10 million per year starting the following year (t = 2) and in perpetuity. If Viento plans to make the investment and cost of equity capital (the discount rate for equity) is 9%, calculate the increase or decrease in the share price of Viento as a result of this decision. (Draw time line to understand what is going on.) (Enter just the number without the $ sign or a comma; round off decimals.) Answer for Question 9
Question 10 (15 points) Pisco, Inc., a technology company's share price is $50 per share; earnings and dividends are $4 a share, and the growth rate is zero. The new management of the company thinks that it can grow even in a tough, competitive market. They have just announced a new
growth strategy whereby the company’s earnings would begin growing by 3% per year and remain stable at this new rate. This new growth strategy will require the company to reinvest 40% if their earnings starting at the end of this year (t = 1). What will happen to the price per share of this company? (Think carefully, draw a time line.) Increase by $2. Decrease by $1 Will not change. Increase by $1 Decrease by $2.
