# Here S Your Cash Flows Exam 2 Review

1.) Your rich aunt wants to retire in 20 years but is unsure of how much to invest now so that she can have \$2,000,000 as a retirement fund. She is currently looking into markets that yield 8%. Calculate how much she should invest now.

429,096.415

2.) You have \$9,000. You want to save this money till it doubles and then buy a car. If the market yields 10%, how long will it take for you to double your money?

7.27 years

3.) Steve’s Investments will pay in Year 1, \$300, Year 2, \$150 and Year 3, \$225. You can earn a 10.5% elsewhere. What’s the most you should pay for this investment?

561.10

Here’s your cash flows

Year 1&2: \$200

Year 3 : \$250

Discount rate= 8%

Year 4&5: \$400

4.) Cyclone Inc. has been growing at the phenomenal rate of 17% per year due to the recent development of a new method for freezing ice cream. This growth rate is expected to last for three more years after which the patent will be up and other companies will have developed similar systems, and Cyclone Inc.’s growth rate will drop to 8% thereafter. The most recent annual dividend, which was paid yesterday, was \$2.05 per share. If the growth in dividends matches the company’s overall growth rate and if stockholders require a 10% return on Cyclone Inc.’s stock, what is the current share price?

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2.3982.803.283.546

P3 = D4/R-g 3.546/.10-.08 = \$177.29 Use Cash Flows and I/Y = 10 CF3 = 180.83

NPV= \$130.46

5.) A stock currently sells for \$14 a share. Its dividend is growing at a constant rate, and its dividend yield is 4%. The required rate of return is expected to be constant at 14%. What is the expected stock price four years from now?

R = Div Yield + Capital gains yield

D1/P0 + G

.14 = .04 + .10 so FV = PV(1+g)^t FV = 14(1+.1)^4 = 20.49 I/Y = 10 when using a calculator

6.) You are looking at these choices:

Option 1 = 4% compounded daily

Option 2 = 3.5% compounded monthly

Option 3 = 5% compounded semiannually

Option 4 = 4.5% with Continuous compounding

Which bank offers the highest effective annual rate and which option should you choose?

[1 + APR/m]^m -1 Just do on board I believe option 3 was the best option

.045 2nd e^x -1

7.) The market price of a bond is \$1150, it has 10 years to maturity, a \$1000 face value, and makes 10% coupon payments in semiannual installments. What is the yield to maturity?

Calculator remember for semiannual installments

8.) Cisco issues 20 year bonds four years ago at a coupon rate of 11.3%. The bond makes semi-annual payments. If the YTM is 7.4%, what is the current bond price?

Calculator, remember for semiannual installments

9.) M insurance Co. is selling a perpetuity contract that pays \$1000 monthly. The contract sells for \$46,000. What is the monthly return on this investment vehicle? What is the APR? What is the EAR?

Perpetuity = CF/R

46,000 = 1000/R 1000/46000 = 2.17% or .0217

APR = .0217 * 12 = .2609

[1+ .2609/12]^12 – 1 = EAR = .2945 or 29.45%

10.) A bond matures in 10 years sells for \$950. The bond has 6% annual coupon. What is the bond’s YTM? What would the price of the bond be six years from today?

PV = -925

FV = 1000

N = 10

PMT = 80

I/Y = ? 9.18NOT CORRECT #S

Then…FV = 1000

N = 7

PRM = 80

I/Y = 9.18

PV in three years? = 940.96

What would be the value at maturity? 1000!

Use this framework

11.) Suppose you know that a company’s stock currently sells for \$40 per share and the required return on the stock is 10 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it’s the company’s policy to always maintain a constant growth rate in its dividends, what is the current dividend per share?

R = Div Yield + Capital gains yield

D1/P0 + G

12.) The Brigapenski Co. has just paid a cash dividend of \$3 per share. Investors require a 14 percent return from investments such as this. If the dividend is expected to grow at a steady 7 percent per year, what is the current value of the stock? What will the stock be worth in five years?

P0 = D0 x (1+g)/(R-g) 3 x 1.0= 7 / .14-.07 = \$45.85 x 1.07^5 = \$64.31

13.) In the last problem, what would the stock sell for today if the dividend was expected to grow at 20 percent per year for the next three years and then settle down to 6 percent per year, indefinitely?

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3.64.325.1845.49

5.49/ (.14 - .06) = \$68.68

Use CF

CF3 = 73.86 I/Y = 14 NPV = 56.33

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