1. a) Your company will generate $80,000 in annual revenues each year of the next 8 years from a new information database. If the appropriate interest rate is 8.2%, what is the present value of the revenue stream?
b) If you put up $28,000 today in exchange for a 7.65%, 14year annuity, what will the annual cash
flow be?
c) If you deposit $2,000 at the end of each of the next 20 years into an account paying 10.5%
interest, how much money will you have in the account in 20 years?
2. Borderline Co. issued bonds with a coupon rate of 8.2%. The bonds make semi-annual payments and have 10 years left to maturity. If the market rate of return is 7.4%, what is the current bond price? Face value = $1000.
b) Raines Umbrella Corp. have bonds with a coupon rate of 8%, face value of $1000, and 12 years left to maturity. The bonds make semi-annual payments. If the bonds currently sell for $970, what is the yield to maturity (YTM)? Hint: Use the approximation formula.
3. Mug, Inc. just paid a dividend of $1.40 per share. The dividends are expected to grow at a constant rate of 6% per year, indefinitely. If investors require a 12% return on Mug, Inc. stock, what is the current price of the stock?
b) Genetic Engineering, Ltd has been growing at a phenomenal rate of 30% per year because of
its rapid expansion and explosive sales. This phenomenal growth rate will last for 3 more
years and then drop to 10% indefinitely. The company just paid a $5 dividend and the
company’s required rate of return is 20%. What is the total value of the stock?
4. Robb Computer Corporation is considering investing in a new design project. The new design project will require a $5,000 investment. It will generate after-tax cash inflows of $2,800 per year for 3 years. The company’s required rate of return is 10%.
a) Calculate the Net Present Value.
b) Calculate the Internal Rate of Return. (To the nearest whole number)
c) Calculate the Profitability Index.
d) Calculate the Payback period. If the maximum payback period is 3 years, is the project acceptable?
e) Should the company invest in the new design project?