1. Jones Camping Equipment is considering acquiring Outdoor Apparel, Inc. Management believes Outdoor Apparel, Inc. can generate cash flows of $453,000, $556,000, and $685,000 over the next three years, respectively. After that time, they feel the business will be worthless. Jones Camping Equipment has determined that a 13.66 percent rate of return is applicable to this potential acquisition. What should Jones be willing to pay today to acquire Outdoor Apparel, Inc.?
2. You are 30 years old and want to retire at 55. However, you do not want to start withdrawing your retirement accounts and social security until 62.You must, therefore, fund 7 years' worth of living expenses and you estimate you'll need $5,850/month during that period. If you earn 3.20% on any money invested in non-retirement accounts during the 55-62 time period and can earn 6.15% annually on your investments prior to age 55.
a. How much must you invest at the end of each month starting next month to fund your early retirement?
b. You get paid every two weeks, how much must you deposit each paycheck to fund your early retirement?
3. You have been hired as a financial advisor to John Lester. He has received two offers the Red Sox and wants to select the best offer. Offer A is a $150m offer for $30m a year for 5 years. Offer B is a $165m offer of $15m a year for four years and $105m in year 5. Assuming a 12.00% discount rate what offer should he choose?
4. Explain, in detail, the relationship between interest rates (i.e. yield to maturity) and bond prices. Is now a good time to invest in bonds?
5. Currently the average house in your town cost $275,000 and is increasing in value by 6.0% per year. In six years you plan to purchase an average house and will need to have a 20% down payment. You currently have $3,900 in your investment account, which earns 10.0% a year.
a. How much must you save per month to have your down payment when you buy the house?
b. The terms of the loan are "30 years, monthly payments, 6.5% annual interest rate." What are your monthly payments?
6. Assume you purchased a 7.5% John Deere, Inc. bond one year ago for $790.59 when the market rate of interest was 9.75% and the bond had 25 years to maturity. If the current market rate of interest is 12.5%, what would be the percentage change in bond value from the time you purchased this bond until today?
7. You just received an insurance settlement offer related to an accident you had six years ago. The offer gives you a choice of one of the following three offers:
Option A $1,678 a month for 72 months
Option B $1,175 a month for 10 years
Option C $98,000 as a lump sum payment today
You can earn 8.00% on your investments. You do not care if you personally receive the funds or if they are paid to your heirs should you die within the settlement period. Which option should you choose, why?
8. You just purchased a bond that matures in 5 years. The bond has a face value of $1,000 and has an 8% annual coupon. The bond has a current yield (CY) of 8.21%. What is the bond's yield to maturity? What is the capital gain yield?
9. Bauer Inc., just paid a dividend of $1.85 per share and has a beta of 1.2. The expected return on the market is 6.7% and the risk free rate is 2.35%.
a. Assuming a constant dividend growth rate of 3.5%, what is the value per share of Bauer, Inc.?
b. Bauer, Inc. just announced the development of a new manufacturing process that will significantly decrease cost and increase production. Management anticipates that this new process will double or even triple its profit margin. Therefore, Bauer decided to increase its dividend by 21% each year for the next 6 years. After that time it will decrease its dividend to a constant 3.5% rate. What is the value per share of Bauer?
c. After further analysis, you realize that instead of immediately dropping to 3% Bauer will slowly decrease its dividend to 3% over 16 years. What is the value per share?
10. The common stock of Jensen Shipping has an expected return of 16.3 percent. The return on the market is 10.8 percent and the risk-free rate of return is 3.8 percent. What is the beta of this stock?
E(r) = 0.163 = 0.038 + ? (0.108 - 0.038);? = 1.79
11. You are examining two bonds. Bond A is a 9.875 % coupon semi-annual bond that matures in 20 years. Bond B is a 20 year zero-coupon bond. The yield to maturity for each bond is 7.50% and the par value for each is $1,000.
a. For each bond indicate if it is a premium bond, discount bond, or par bond.
b. What is the current price of each bond?
c. Plot the price path for each bond from now until maturity.
12. Consider the following stocks:
Stock Beta Last Dividend Growth Rate Current Price
Blackstone Group (BX) 2.03 $1.18 3.60% $32.95
United Parcel Service (UPS) 0.92 $2.48 5.25% $107.35
Procter and Gamble Co. (PG) 0.41 $2.45 1.30% $88.60
Nike (NKE) 0.78 $0.93 5.65% $97.47
Oracle Corporation (ORCL) 1.41 $0.48 8.75% $41.59
If the expected return on the market is 7.00% and the risk free rate is 2.3%, what is each stock's required rate of return? What is the value per share? Is each stock overvalued, undervalued, or fairly valued?