Part A -
Problem 1 - Calculating Future Values - Compute the future value of $3,200 compounded annually for
a. 10 years at 6 percent
b. 10 years at 8 percent
c. 20 years at 6 percent
Problem 2 - Calculating Present Values
For each of the following, compute the present value:
|
Present Value
|
Years
|
Interest Rate
|
Future Value
|
|
|
12
|
7%
|
$15,451
|
|
|
8
|
9
|
51,557
|
|
|
19
|
14
|
886,073
|
|
|
24
|
16
|
550,164
|
Problem 3 - Calculating Interest Rates
Solve for the unknown interest rate in each of the following:
|
Present Value
|
Years
|
Interest Rate
|
Future Value
|
|
$217
|
3
|
|
$307
|
|
432
|
10
|
|
896
|
|
41,000
|
13
|
|
162,181
|
|
54,382
|
26
|
|
483,500
|
Problem 4 - Calculating the Number of Periods
Solve for the unknown number of years in each of the following:
|
Present Value
|
Years
|
Interest Rate
|
Future Value
|
|
$625
|
|
9%
|
$1,284
|
|
810
|
|
11
|
4,341
|
|
18,400
|
|
7
|
402,662
|
|
21,500
|
|
10
|
173,439
|
Problem 5 - Present Value and Multiple Cash Flows
Conoly Co. has identified an investment project with the following cash flows. If the discount rate is 5 percent, what is the present value of these cash flows? What is the present value at 13 percent? At 18 percent?
|
Year
|
Cash Flow
|
|
1
|
$960
|
|
2
|
840
|
|
3
|
1,935
|
|
4
|
1,350
|
Problem 6 - Valuing Bonds
Microhard has issued a bond with the following characteristics:
Par: $1,000
Time to maturity: 25 years
Coupon rate: 7 percent
Semiannual payments
Calculate the price of this bond if the YTM is:
Problem 7 - Bond Yields
Watters Umbrella Corp. issued 15-year bonds two years ago at a coupon rate of 6.8 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM?
Problem 8 - Stock Values
The next dividend payment by ZyX, Inc., will be $1.99 per share. The dividends are anticipated to maintain a growth rate of 4.5 percent forever. If ZyX stock currently sells for $31 per share, what is the required return?
Problem 9 - Stock Values
Mickelson Corporation will pay a $2.65 per share dividend next year. The company pledges to increase its dividend by 4.75 percent per year indefinitely. If you require a return of 11 percent on your investment, how much will you pay for the company's stock today?
Part B -
Problem 1 - Calculating Payback Period and NPV
Tri Star, Inc., has the following mutually exclusive projects.
|
Year
|
Project A
|
Project B
|
|
0
|
-$14,500
|
-$9,800
|
|
1
|
8,500
|
4,700
|
|
2
|
6,800
|
4,200
|
|
3
|
2,800
|
4,100
|
Suppose the company uses the NPV rule to rank these two projects. Which project should be chosen if the appropriate discount rate is 15 percent?
Problem 2 - Calculating Payback
An investment project provides cash inflows of $825 per year for eight years. What is the project payback period if the initial cost is $3,200? What if the initial cost is $4,600? What if it is $7,900?
Problem 3 - Calculating IRR
Compute the internal rate of return for the cash flows of the following two projects.
|
Year
|
Cash Flows ($)
|
|
Project A
|
Project B
|
|
0
|
-$5,200
|
-$3,600
|
|
1
|
1,800
|
1,300
|
|
2
|
3,200
|
2,100
|
|
3
|
2,200
|
1,800
|
Problem 4 - Calculating Profitability Index
Bill plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $185,000. Bill expects aftertax cash inflows of $62,000 annually for seven years, after which he plans to scrap the equipment and retire to the beaches of Nevis. The first cash inflow occurs at the end of the first year. Assume the required return is 15 percent. What is the project's PI? Should it be accepted?
Problem 5 - Calculating Project NPV
Who Dat Restaurant is considering the purchase of a $27,000 soufflé maker. The soufflé maker has an economic life of six years and will be fully depreciated by the straight-line method. The machine will produce 2,300 soufflés per year, with each costing $2 to make and priced at $7. Assume that the discount rate is 14 percent and the tax rate is 34 percent. Should the company make the purchase?
Part C -
Problem 1 - Calculating Returns
Suppose a stock had an initial price of $73 per share, paid a dividend of $1.20 per share during the year, and had an ending share price of $82. Compute the percentage total return.
Problem 2 - Holding Period Return
A stock has had returns of -18.35 percent, 14.72 percent, 28.47 percent, 6.48 percent, and 16.81 percent over the past five years, respectively. What was the holding period return for the stock?
Problem 3 - Calculating Returns
You bought a share of 4.2 percent preferred stock for $94.83 last year. The market price for your stock is now $96.20. What is your total return for last year?
Problem 4 - Calculating Returns
You bought a stock three months ago for $41.75 per share. The stock paid no dividends. The current share price is $44.07. What is the APR of your investment? The EAR?
Problem 5 - Portfolio Expected Return
You own a portfolio that has $3,900 invested in Stock A and $5,700 invested in Stock B. If the expected returns on these stocks are 9.5 percent and 15.2 percent, respectively, what is the expected return on the portfolio?
Problem 6 - Using CAPM
A stock has a beta of .85, the expected return on the market is 11.5 percent, and the risk-free rate is 3.4 percent. What must the expected return on this stock be?
Problem 7 - Calculating Cost of Equity
The Dybvig Corporation's common stock has a beta of 1.21. If the risk-free rate is 3.5 percent and the expected return on the market is 11 percent, what is Dybvig's cost of equity capital?
Problem 8 - Calculating WACC
Mullineaux Corporation has a target capital structure of 70 percent common stock and 30 percent debt. Its cost of equity is 13 percent, and the cost of debt is 6 percent. The relevant tax rate is 35 percent. What is Mullineaux's WACC?
Part D -
Problem 1 - Dividends and Taxes
Midnight Hour, Inc., has declared a $6.30 per-share dividend. Suppose capital gains are not taxed, but dividends are taxed at 25 percent. New IRS regulations require that taxes be withheld at the time the dividend is paid. Midnight Hour sells for $83 per share, and the stock is about to go ex dividend. What do you think the ex-dividend price will be?
Problem 2 - Stock Splits and Stock Dividends Roll Corporation (RC) currently has 270,000 shares of stock outstanding that sell for $73 per share. Assuming no market imperfections or tax effects exist, what will the share price be after:
a. RC has a five-for-three stock split?
b. RC has a 15 percent stock dividend?
c. RC has a 42.5 percent stock dividend?
d. RC has a four-for-seven reverse stock split?
Determine the new number of shares outstanding in parts (a) through (d).
Problem 3 - Stock Dividends
The market value balance sheet for Outbox Manufacturing is shown here. Outbox has declared a 25 percent stock dividend. The stock goes ex dividend tomorrow (the chronology for a stock dividend is similar to that for a cash dividend). There are 25,000 shares of stock outstanding. What will the ex-dividend price be?
|
Market Value Balance Sheet
|
|
Cash
|
$145,000
|
Debt
|
$127,000
|
|
Fixed assets
|
598,000
|
Equity
|
616,000
|
|
Total
|
$743,000
|
Total
|
$743,000
|
Problem 4 - Dividend Smoothing
The Sharpe Co. just paid a dividend of $2.05 per share of stock. Its target payout ratio is 40 percent. The company expects to have earnings per share of $6.20 one year from now.
a. If the adjustment rate is .3 as defined in the Lintner model, what is the dividend one year from now?
Part E -
Problem 1 - Cash Equation
McConnell Corp. has a book value of equity of $13,205. Long-term debt is $8,200. Net working capital, other than cash, is $3,205. Fixed assets are $17,380. How much cash does the company have? If current liabilities are $1,630, what are current assets?
Problem 2 - Rights Offerings
Again, Inc., is proposing a rights offering. Presently, there are 490,000 shares outstanding at $75 each. There will be 80,000 new shares offered at $71 each.
a. What is the new market value of the company?
b. How many rights are associated with one of the new shares?
c. What is the ex-rights price?
d. What is the value of a right?
Problem 3 - Using Spot and Forward Exchange Rates
Suppose the spot exchange rate for the Canadian dollar is Can$1.04 and the six-month forward rate is Can$1.06.
a. Which is worth more, a U.S. dollar or a Canadian dollar?
Problem 4 - Cross-Rates and Arbitrage Suppose the Japanese yen exchange rate is ¥89 = $1, and the British pound exchange rate is £1 = $1.62.
a. What is the cross-rate in terms of yen per pound?