198. You have been offered the opportunity to invest in a project which will pay $1,000 per year at the end of years one through 10 and $2,000 per year at the end of years 21 through 30. If the appropriate discount rate is 8%, what is the present value of this cash flow pattern?
199. You are saving money to buy a house. You will need $7,473.50 to make the down payment. If you can deposit $500 per month in a savings account which pays 1% per month, how long will it take you to save the $7,473.50?
200. You have a credit card with a balance of $18,000. The annual interest rate on the card is 18% compounded monthly, and the minimum payment is $400 per month. If you pay only the minimum payment each month and do not make any new charges on the card, how many years will it take for you to pay off the $18,000 balance?
201. You are considering purchasing common stock in AMZ Corporation. You anticipate that the company will pay dividends of $5.00 per share next year and $7.50 per share in the following year. You also believe that you can sell the common stock two years from now for $30.00 per share. If you require a 14% rate of return on this investment, what is the maximum price that you would be willing to pay for a share of AMZ common stock?
202. How does the risk-return tradeoff relate to the time value of money and the multinational firm?
203. You have decided to invest $500 in a mutual fund today and make $500 end-of-the-year investments in the fund each year until you retire for 40 years. Assuming an opportunity cost of 12%, what do you estimate that you will have in this account at retirement?
und annuity
204. You are planning to deposit $10,000 today into a bank account. Five years from today you expect to withdraw $7,500. If the account pays 5% interest per year, how much will remain in the account eight years from today?
205. You have borrowed $70,000 to buy a speed boat. You plan to make monthly payments over a 15-year period. The bank has offered you a 9% interest rate, compounded monthly. Create an amortization schedule for the first two months of the loan.
206. Suppose you are 40 years old and plan to retire in exactly 20 years. 21 years from now you will need to withdraw $5,000 per year from a retirement fund to supplement your social security payments. You expect to live to the age of 85. How much money should you place in the retirement fund each year for the next 20 years to reach your retirement goal if you can earn 12% interest per year from the fund?
207. You have just purchased a car from Friendly Sam. The selling price of the car is $6,500. If you pay $500 down, then your monthly payments are $317.22. The annual interest rate is 24%. How many payments must you make?
208. An investment will pay $500 in three years, $700 in five years, and $1,000 in nine years. If the opportunity rate is 6%, what is the present value of this investment?
RDS: complex stream
209. a.) If Sparco, Inc. deposits $150 at the end of each year for the next eight years in an account that pays 5% interest, how much money will Sparco have at the end of eight years?
b.) Suppose Sparco decides that they need to have $5,300 at the end of the eight years. How much will they have to deposit at the end of each year?
Y: Moderate
KEYWORDS: future value of annuity
210. What is the value (price) of a bond that pays $400 semiannually for 10 years and returns $10,000 at the end of 10 years? The market discount rate is 10% paid semiannually.
RDS: present value of annuity
211. Frank Zanca is considering three different investments that his broker has offered to him. The different cash flows are as follows:
End of Year / A / B / C1 / 300 / 400
2 / 300
3 / 300
4 / 300 / 300 / 600
5 / 300
6 / 300
7 / 300
8 / 300 / 600
Because Frank has enough savings for only one investment, his broker has proposed the third alternative to be, according to his expertise, the best in town. However, Frank questions his broker and wants to eliminate the present value of each investment. Assuming a 15% discount rate, what is Frank's best alternative?
DIF
212. What is the present value of the following perpetuities?
a. $600 discounted at 7%
b. $450 discounted at 12%
c. $1,000 discounted at 6%
d. $880 discounted at 9%
erpetuities
213. Delight Candy, Inc. is choosing between two bonds in which to invest their cash. One bond is being offered from Hershey’s and will mature in 10 years and pays 12% per year, compounded quarterly. The other alternative is a Mars bond that will mature in 20 years and that pays 12% per year, compounded quarterly. What would be the present value of each bond if the discount rate is 10%?
S: investment alternatives
214. In order to send your oldest child to law school when the time comes, you want to accumulate $40,000 at the end of 18 years. Assuming that your savings account will pay 6% compounded annually, how much would you have to deposit if:
a. you want to deposit an amount annually at the end of each year?
b. you want to deposit one large lump sum today?
113. Briefly discuss why there is no reason to believe that the market will reward investors with additional returns for assuming unsystematic risk.
114. Provide an intuitive discussion of beta and its importance for measuring risk.
115. You are considering a security with the following possible rates of return:
Probability Return (%)
0.20 9.6
0.30 12.0
0.30 14.4
0.20 16.8
a. Calculate the expected rate of return.
b. Calculate the standard deviation of the returns.
116. The return for the market during the next period is expected to be 16%; the risk-free rate is 10%. Calculate the required rate of return for a stock with a beta of 1.5.
117. Asset A has a required return of 18% and a beta of 1.4. The expected market return is 14%. What is the risk-free rate? Plot the security market line.
118. The stock of the Preston Corporation is expected to pay a dividend of $6 during the coming year. Dividends are expected to grow far into the future at 8%. Investors have recently evaluated future market return variance to be 0.0016 and the covariance of returns for Preston and the market as 0.00352. Assuming a required market return of 14% and a risk-free rate of 6%, at what price should the stock of Preston sell?
119. Security A has an expected rate of return of 22% and a beta of 2.5. Security B has a beta of 1.20. If the Treasury bill rate is 10%, what is the expected rate of return for security B?
cted rate of return, CAPM
120. Using the following information for McDonovan, Inc.’s stock, calculate their expected return and standard deviation.
State Probability Return
Boom 20% 40%
Normal 60% 15%
Recession 20% (20%)
121. AA & Co. has a beta of .656. If the expected market return is 13.2% and the risk-free rate is 5.7%, what is the appropriate required return of AA & Co. using the CAPM model?
122. Given the anticipated rate of inflation (i) of 6.3% and the real rate of interest (R) of 4.7%, find the nominal rate of interest (r).
123. If provided the nominal rate of interest (r) of 14.2% and the anticipated rate of inflation (i) of 5.5%, what is the real rate of interest (R)?
124. Given the anticipated rate of inflation (i) of 6.13% and the real rate of interest (R) of 7.56%, what is the true inflation premium?
116. Compare and contrast current yield and yield to maturity.
117. BCD's $1,000 par value bonds currently sell for $798.50. The coupon rate is 10%, paid semiannually. If the bonds have five years before maturity, what is the yield to maturity or expected rate of return?
118. If you are willing to pay $1,392.05 for a 15-year, $1,000 par value bond that pays 10% interest semiannually, what is your expected rate of return?
119. Why are longer-term bonds more sensitive to changes in interest rates than shorter-term bonds?
120. DAH, Inc. has issued a 12% bond that is to mature in nine years. The bond had a $1,000 par value, and interest is due to be paid semiannually. If your required rate of return is 10%, what price would you be willing to pay for the bond?
121. Calculate the value of a bond that is expected to mature in 13 years with a $1,000 face value. The interest coupon rate is 8%, and the required rate of return is 10%. Interest is paid annually.
122. The market price of a 20-year, $1,000 bond that pays 9% interest semiannually is $774.31. What is the bond’s yield to maturity?
123. Garvin, Inc.’s bonds have a par value of $1,000. The bonds pay semiannual interest of $40 and mature in five years.
a. How much would you pay for Garvin bonds if your required rate of
return is 10%?
b. How much would you pay if your required rate of return is 8%?
124. Given the following information, determine the market value of EAO Company bonds.
Par value $1,000
Coupon rate 10%
Years to maturity 6
Market rate 8%
Interest paid semiannually
111. Compare and contrast preferred stock and common stock valuation.
112. Discuss two reasons why preferred stock would be viewed as less risky than common stock to investors.
113. Determine the rate of return on a preferred stock that costs $50 and pays a $6 per share dividend.
114. Is the following common stock priced correctly? If no, what is the correct price?
Price = $26.25
Required rate of return = 13%
Dividend year 0 = $2.00
Dividend year 1 = $2.10
115. Texon’s preferred stock sells for $85 and pays $11 each year in dividends. What is the expected rate of return?
116. Draper Company’s common stock paid a dividend last year of $3.70. You believe that the long-term growth in the dividends of the firm will be 8% per year. If your required return for Draper is 14%, how much are you willing to pay for the stock?
117. Determine the rate of return on a $25 common stock that pays a dividend of $2.50 in year 1 and grows at a rate of 5%.
118. You are considering the purchase of AMDEX Company stock. You anticipate that the company will pay dividends of $2.00 per share next year and $2.25 per share the following year. You believe that you can sell the stock for $17.50 per share two years from now. If your required rate of return is 12%, what is the maximum price that you would pay for a share of AMDEX Company stock?
119. You can purchase one share of Sumter Company common stock for $80 today. You expect the price of the common stock to increase to $85 per share in one year. The company pays an annual dividend of $3.00 per share. What is your expected rate of return for Sumter stock?
120. Dink and Company’s preferred stock pays an annual dividend of $2.80. The shares have no maturity date. You as an investor require a 7% return. What is the value of Dink’s preferred stock to you?
121. Tannerly Worldwide’s common stock is currently selling for $48 a share. If the expected dividend at the end of the year is $2.40 and last year’s dividend was $2.00, what is the rate of return implicit in the current stock price?
122. Miller/Hershey’s preferred stock is selling at $54 on the market and pays an annual dividend of $4.20 per share.
a. What is the expected rate of return on the stock?
b. If an investor’s required rate of return is 9%, what is the value
of the stock for that investor?
c. Considering the investor’s required rate of return, does this stock
seem to be a desirable investment?
123. The common stock of Cranberry, Inc. is selling for $26.75 on the open market. A dividend of $3.68 is expected to be distributed, and the growth rate of this company is estimated to be 5.5%. If Richard Dean, an average investor, is considering purchasing this stock at the market price, what is his expected rate of return?
129. A firm is considering two projects, A and B. Both have the same initial cash outlay and the same payback period. Project A is expected to generate after-tax cash flows for 10 years, while Project B is expected to generate after-tax cash flows for 15 years. Given that payback is the same for both projects, will the firm be indifferent between these two projects? Explain why or why not.
130. Tinker Tools, Inc. is considering a project with the following cash flows. Calculate the MIRR of the project assuming a reinvestment rate of 8%.
Year Cash Flows
0 ($70,000)
1 ($55,000)
2 $40,000
3 $60,000
4 $100,000
131. Define the reinvestment rate assumption. What is the underlying assumption for NPV and IRR? Which assumption is most acceptable? How does the MIRR adjust the reinvestment rate assumption of IRR?
132. Carter Paving plans to purchase a new grader. The one under consideration costs $250,000 and has a depreciable life of five years. After-tax cash flows are expected to be $67,124 in each of the five years and nothing thereafter. Calculate the IRR for the grader.
133. What is the NPV of a $45,000 project that is expected to have an after-tax cash flow of $14,000 for the first two years, $10,000 for the next two years, and $8,000 for the fifth year? Use a 10% discount rate. Would you accept the project?
134. Referring to the above problem, if the discount rate was 8%, what would the NPV be? Would you accept or reject the investment?
135. Determine the IRR on the following projects:
a. Initial outlay of $35,000 with an after-tax cash flow at the end of
the year of $5,836 for seven years
b. Initial outlay of $350,000 with an after-tax cash flow at the end
of the year of $70,000 for seven years
c. Initial outlay of $3,500 with an after-tax cash flow at the end of