508 Words3 Pages

1. A company would like to purchase a small technology firm for $5,000,000. The net cash flows from the small technology firm would be $2,000,000 per year in Years 1 & 2, then $1,000,000 per year in Years 3 through 5. After 5 years the patent of the small technology firm is estimated to be obsolete and the small-technology would not generate any net cash flows after Year 5. Should the company purchase the small technology firm? Use an interest rate of 12%. What is the “breakeven price” of the small technology firm? (Points : 10)\
2. 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. This investor purchased 1,000 of these call options on a stock that has a standard deviation of 20% and an exercise price of $140/share. The investor has a liquidity problem at this point and needs to sell the call options at current value. The current stock price is $120/share and the option will expire in a ½ year. What is the total profit or loss to the investor? Use a risk-free rate of 4% and assume this is a European option where the stock does not pay any dividends. (Points : 20)
4. On March 1, a company declared quarterly dividends of $2 per share to all common stock shareholders as of March 15. The ex-dividend date is March 19 and there are 1 million shares outstanding. The payment date is set at March 31. Show all the necessary journal entries for this set of dividend transactions. (Points : 20)
5. The weight of common stock in a company is 50%, the weight of preferred stock is 10% and the weight of long-term debt is 40%. The cost of common stock is 12%, the cost of preferred stock is 10% and the cost of long-term debt is 8%. Total

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