1. John Adams borrowed $25,000 at a 10% annual interest rate for a vehicle purchase from First State Bank. This loan is to be repaid over a three-year time-frame. The loan will be amortized in three equal, end-of-year payments.
A. Calculate the annual, end-of-year loan payment that John will make each year.
B. Calculate the amount of “Interest Expense” that will be paid in the first year that this loan is outstanding.
2. Urban Utilities, Inc. has an outstanding common stock that is not growing. The firm has been paying an annual $4 dividend each year. No growth in this dividend payment is expected for the foreseeable future. Investors require an annual 8% rate of return on this stock, due to its risk level.
a. Given this information, calculate the market value per share of this firm’s outstanding common stock.
b. Now, assume that a large competitor enters the market, taking 20% of Urban Utilities’ market share. With this increase in risk, investors now require a 10% annual rate of return on Urban Utilities common stock. Given this information, calculate the market value per share of Urban Utilities’ common stock.
3. Milford Masonry, Inc. expects to pay a dividend per share of $2.50 next year on its common stock. The firm has enjoyed a 4% annual growth rate over the past decade.
a. If you can earn a 10% rate of return on other investments having similar risk, how much would you be willing to pay per share for Milford Masonry’s stock?
b. Now, assume that you can only earn 6% on similar-risk investments. How much would you now be willing to pay for Milford Masonry’s stock?