Question 1
Turkish Air is expected to pay a $2.00 dividend at the end of this year. If you expect Turkish Air's dividend to grow by 5% per year forever and Turkish Air's equity cost of capital is 13%, please evaluate the value of a share of Turkish Air's stock.
Question 2
The Gastoreid Company is planning on investing in a new project. This will involve the purchase of some new machinery costing $450,000. The Gastoreid Company expects cash inflows from this project as detailed below:
|
Year One
|
Year Two
|
Year Three
|
Year Four
|
|
$200,000
|
$225,000
|
$275,000
|
$200,000
|
The appropriate discount rate for this project is 16%. What is the payback period for this project? What is IRR for this project? What is NPV for this project?
Question 3
The following table shows the one-year return distribution of Standard, Inc. Calculate
a. The expected return.
b. The standard deviation of the return.
Question 4
Consider a bond with a face value of $1,000, a coupon rate of 5%, a yield to maturity of 8%, and five years to maturity. Please calculate this bond's duration and volatility.
Question 5
Your son is about to start kindergarten in a private school. Currently, the tuition is $12,000 per year, payable at the start of the school year. You expect annual tuition increases to average 6% per year over the next 13 years. Assuming that you son remains in this private school through high school and that your current interest rate is 7%, what is the present value of your son's private school education?
Question 6
Peter's Computer Company has an outstanding issue of bond with a par value of $1,000, paying 12 percent coupon rate semiannually. The bond has 5 years to maturity. What is the value of the bond assuming the YTM on similar bonds is 14 percent rate of interest?
Question #7
London Electric Company's bond currently sells for $800, has a 14% coupon interest rate and a $1,000 par value, pays interest annually and has 10 years to maturity. Please calculate the current yield and yield to maturity on this bond. Use IRR method-Excel to calculate YTM.
Question #8
If the 4-year spot rate is 11% and the 3-year spot rate is 8%, what is the one-year forward rate of interest three years from now?
Question #9
Suppose Johnson & Johnson and the Walgreen Company have expected returns and volatilities shown below, with a correlation of 22%.
Calculate (a) the expected return and (b) the volatility (standard deviation) of a portfolio that is equally invested in Johnson & Johnson's and Walgreen's stock.
Question #10
Philip Motor Company is currently paying a dividend of $1.40 per year. The dividends are expected to grow at a rate of 14% for the next three years and then a constant rate of 5% thereafter forever. What is the value of its current stock price? Assuming that the discount rate is 8%.
Question #11
Fancy Co. is expected to pay a dividend or $4.00 per share out of earnings of $7.50 per share. If the required rate of return on the stock is 15% and dividends are growing at a current rate of 10% per year, calculate the present value of the growth opportunity for the stock (PVGO).
Question 12
Portfolio Products is considering the purchase of one of three mutually exclusive projects for increasing production efficiency. The firm plans to use a 14% cost of capital to evaluate these equal risk projects. The initial investment and annual cash inflows over the life of each project are shown in the following table:
|
|
Project X
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Project Y
|
Project Z
|
|
initial investment
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78,000
|
52,000
|
66,000
|
|
Year
|
Project X
|
Project Y
|
Project Z
|
|
1
|
17,000
|
28,000
|
15,000
|
|
2
|
25,000
|
18,000
|
15,000
|
|
3
|
33,000
|
|
15,000
|
|
4
|
41,000
|
|
15,000
|
|
5
|
|
|
15,000
|
|
6
|
|
|
15,000
|
|
7
|
|
|
15,000
|
|
8
|
|
|
15,000
|
(A). Evaluating the NPV for each project over its life. Rank the projects in descending order on the basis of NPV.
(B). Use annualized net present value approach to compute and rank the projects in descending order.
Question #13
The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0. The cane manufacturing machine will result in sales of 2,000 canes in year 1. Sales are estimated to grow by 10% per year each year through year three. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each. Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 6% of its annual sales in accounts payable. The firm is in the 35% tax bracket, and has a cost of capital of 10%.
(A). Determine the total Free Cash Flows for each of the three years for the Sisyphean Corporation's new project.
(B). What is the NPV for this project?
(C). What is the IRR for this project?
Question 14
DFB, Inc., expects earnings this year of $5 per share, and it plans to pay a $3 dividend to shareholders. DFB will retain $2 per share of its earnings to reinvest in new projects with an expected return of 15% per year. Suppose DFB will maintain the same dividend payout rate, retention rate, and return on new investments in the future and will not change its number of outstanding shares.
a. What growth rate of earnings would you forecast for DFB?
b. If DFB's equity cost of capital is 12%, what price would you estimate for DFB stock?
c. Suppose DFB instead paid a dividend of $4 per share this year and retained only $1 per share in earnings. If DFB maintains this higher payout rate in the future, what stock price would you estimate now? Should DFB raise its dividend?