Problems: Easy Problems 1-6 • 5-1 Bond Valuation with Annual payments Jackson Corporation’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%. The bonds have a yield to maturity of 9%. What is the current market price of these bonds? 80*7.1607+1000*.3555 = $928 • 5-2 Yield to Maturity for Annual payments Wilson Wonders’s bonds have 12 years remaining to maturity.
8% b. 8% 2. a. A $1,000 bond has a 7.5 percent coupon and matures after 10 years. If current interest rates are 10 percent, what should be the price of the bond? Price = $1,000 x 0.3855 + $1,000 x 7.5% x 6.1446 Price = $385.50 + $460.85 Price = $846.35 b.
A bond has a par value of $100,000 and pays interest revenues of $5,000 per year. This bond has a five-year life and a current market price of $98,000. Calculate the yield-to-maturity of this bond. (Points : 10) .3. An investor purchased call options for $2 per option.
What would be the second year future value? (LG4-3) FV = 750 × (1 + 0.10) (1 + 0.12) 750 × 1.10 × 1.12 Answer: 924.00 4-11 Present Value What is the present value of a $1,500 payment made in six years when the discount rate is 8 percent? (LG4-4) PV = 1500/(1+0.08)6 1500/1.586874323 Answer: 945.25 4-13 Present Value with Different Discount Rates Compute the present value of $1,000 paid in three years using the following discount rates: 6 percent in the first year, 7 percent in the second year, and 8 percent in the third year. (LG4-4) PV = 1000 / ((1 + 0.06) (1 +0.07) (1 + 0.08)) 1000/ (1.06 × 1.07 × 1.08) 1000/1.224936 Answer: 816.37 4-16 Rule of 72 Approximately how many years are needed to double a $500 investment when interest rates are 10 percent per year? (LG4-6) N=72 / 10 Answer: 7.2 4-31 Solving for Time How many years (and months) will it take $2 million to grow to $5 million with an annual interest rate of 7 percent?
If Krell is expected to pay a dividend of $0.88 this year, and its stock price is expected to grow to $23.54 at the end of the year, what is Krell’s dividend yield and equity cost of capital? Answer: Dividend Yield = Dividend / Share price = 0.88/22 = 4% Capital Gain Rate = (End of year stock price – Share price today) / Share price today = (23.54 – 22) / 22 = 7% Total expected return (Equity cost of capital) = 4% + 7% = 11% 9-5 No Growth Company NoGrowth Corporation currently pays a dividend of $2 per year, and it will continue to pay this dividend forever. What is the price per share if its equity cost of capital is 15% per year? Answer: Assume: dividends are paid at the end of the year Stock pays a total of $2.00 in dividends per year. Valuing this dividend as a perpetuity: P = $2.00 / 0.15 = $13.33 9-6 Value of Operations of Constant Growth Summit Systems will pay a dividend of $1.50 this year.
WE PROVIDE CASE STUDY ANSWERS, ASSIGNMENT SOLUTIONS, PROJECT REPORTS AND THESIS aravind.banakar@gmail.com ARAVIND - 09901366442 – 09902787224 CORPORATE FINANCE CASE STUDY : 1 Reliance company has a $ 1,000 face value convertible bond issue that is currently selling in the market for $ 950. Each bond is exchangeable at any time for 25 shares of the company’s stock. The convertible bond has a 7 percent coupon. Payable semi-annually. Similar non-convertible bonds are priced to yield 10 percent.
First cash flow: FV = 3581.70 (already done) Second cash flow: PV = -4000, N = 6, I/YR = 6, solve for FV = 5674.08 Third cash flow: PV = -8000, N=2, I/YR = 6; solve for FV = 8988.80 ANSWER: 3581.70+5674.08+8988.80 = $18,244.58 Question 1c Using the information from Question 1b, what will be the total accumulated value at the end of 10 years, if the interest rate is expected to be 6% for only the first three years, followed by 8% for the next five years, and 10% thereafter? First cash flow: PV = -2000, N=3, I/YR =6, solve for FV = 2382.03 PV = -2382.03, N = 5, I/YR = 8, solve for FV = 3499.98 PV = -3499.98, N = 2, I/YR = 10, solve for FV = 4,234.97 Second cash flow: PV = -4000, N = 4, I/YR = 8, solve for FV = 5441.96 PV = -5441.96, N = 2, I/YR = 10, solve for FV = 6584.77 Third cash flow: PV = -8000, N = 2, I/YR = 10, solve for FV = 9680.00 ANSWER: 4234.97 + 6584.77 + 9680.00 = $20,499.74 Question 1d Using the information from 1b, what equal amounts should be withdrawn in years 5 an 6, if the total accumulated value at the end of ten years is
TIME VALUE OF MONEY Assignment 1. What is the present value of: a. $8,000 in 10 years at 6% b. $16,000 in 5 years at 12% c. $25,000 in 15 years at 8% d. $1,000 in 40 periods at 20% 2. If you invest $12,000 today, how much will you have: a.
What is the stock’s required rate of return? Answer $5/$50 = 10% (7–5) Nonconstant Growth Valuation A company currently pays a dividend of $2 per share (D0 = $2). It is estimated that the company’s dividend will grow at a rate of 20% per year for the next 2 years, then at a constant rate of 7% thereafter. The company’s stock has a beta of 1.2, the riskfree rate is 7.5%, and the market risk premium is 4%. What is your estimate of the stock’s current price?
Dividing the present value of future cash flows by the cost of the investment indicates that every dollar invested buys securities worth $1.18. Value is created. Table 1 The appropriate intrinsic value of PacifiCorp Assume: 1. 10-year investment horizon, when you liquidate at “book” or accumulated investment value 2. initial investment is $9.4 billion 3. no dividends are paid, all cash flows are reinvested 4. return on equity = 7.45% 5. cost of equity = 5.72% Year 0 1 2 3 4 5 6 7 8 9 10 Investment or Book Equity Value 9.4 10.1 10.9 11.7 12.5 13.5 14.5 15.5 16.7 17.9 19.3 Market Value (or Intrinsic Value) = Present value @ 5.72% of 19.3 = $11.07 Market/Book = $11.07/9.4 = $1.18 Value created: $1.00 invested becomes $1.18 in market value. Discounted Cash Flow Appendix 1 shows the discounted cash flow for following 15 years.