Question 1) Hosto Consulting has preferred stock outstanding that pays a $8 annual dividend. It has a price of $75. What is the required rate of return (yield) on the preferred stock?
Question 2) Don Felgate retired as president of Wells Snack Vending Company but is currently on a consulting contract for $35,000 per year for the next 10 years.
a. If Mr. Felgate's opportunity cost (potential return) is 10%, what is the present value of his consulting contract?
b. Assume Mr. Felgate will not retire for two more years and will not start to receive his 10 payments until the end of the third year, what would be the value of his deferred annuity.
Question 3) Townsend Electronics currently pays a $2.10 annual cash dividend (D0). It plans to maintain the dividend at this level for the foreseeable future as no future growth is anticipated. If the required rate of return by common stockholders (Ke) is 12%, what is the price of the common stock?
Question 4) Wally Hattenhauer is considering a bond investment in McInturff Welding Company. The $1,000 bonds have a quoted annual interest rate of 8% and interest is paid semiannually. The yield to maturity on the bonds is 10% annual interest. There are 25 years to maturity. Compute the price of the bonds based on semiannual analysis.
Question 5) Buchan, Inc. is considering an investment of $20,000, which produces the following inflows.
Year Cash Flow
1 $11,000
2 9,000
3 5,800
Use the net present value profile to approximate the value for the internal rate of return. Please follow these steps.
a. Determine the net present value project based on a zero discount rate.
b. Determine the net present value of the project based on a 10% discount rate.
c. Determine the net present value of the project based on a 20% discount rate (it will be negative).
d. Draw a net present value profile for the investment. (Use a scale up to $6,000 on the vertical axis, with $2,000 increments. Use a scale up to 20% on the horizontal axis, with 5% increments.) Observe the discount rate at which the net present value is zero. This is an approximation of the internal rate of return on the project.
e. Actually compute the internal rate of return based on the interpolation procedure. Compare the answers in parts d and e.