Fin3023 – Summer 2015 Homework #1 Instructions: this homework is due on Monday July 6 at the start of class. You can work in groups if you prefer but every member needs to turn in their own work. If you cannot turn in a hard copy, you can submit a scan of your homework through Blackboard (be sure to make a good scan or photo!). For mathematical problems box your final answer. 1. If there is no inflation, is a dollar today worth more/less/or equal than a dollar one year from now? Briefly explain your answer. 2. Suppose the Texas lottery advertises that it pays its winner $10 million. However, this prize money is paid at the rate of $500,000 each year (with the first payment being immediate) for a total of 20 payments. What is the present value of this prize at 10% annual interest rate? 3. In the year 2000, the New York Mets (a professional baseball team) owed Bobby Bonilla (a baseball player) $5.9 million. Instead of paying the amount on the spot, the Mets and Bonilla agreed to defer his compensation in the following way: starting in 2011, Bonilla would receive $1.2 million every year until 2035 (that is 25 annual payments). a. If we assume a discount rate of 9%, find the NPV of this deal for Bobby Bonilla. b. At which discount rate would Bonilla be indifferent between receiving the $5.9 million in 2000 or deferring his compensation. Can you remember what we call this discount rate? 1 4. On June 25 of this year, the price for a Greek government bond with an 8.65% coupon rate, semiannual payments, 3 year maturity, and face value of e100, was e71.35. What is the yield to maturity of this bond? 5. A young couple has made a security deposit of $1,000 on a 6-month apartment lease. The monthly rent on the apartment is also $1,000 and must be paid in advance (i.e. at the start of each month). The deposit is refundable at the end of six months if they stay until the end of the lease. The next day they find a different apartment that they like just as well, but its monthly rent is only $900. And they would again have to put a security deposit of $900 refundable at the end of 6 months. They plan to be in the apartment only 6 months. Should they switch to the new apartment? Assume a monthly interest rate of 10%. 6. A perpetuity will pay $1,000 per year, starting five years after the perpetuity is purchased. What is the present value of this perpetuity on the date that it is purchased, given that the annual interest rate is 4%? 7. Company ABC is expected to pay a $1.00 dividend one year from today. If you expect ABC’s dividend to grow by 7% per year forever and ABC’s equity cost of capital is be 10%, what should be the price of one share of ABC stock? 2