- A real estate investment has the following expected cash flows:
Year / Cash Flows
1 / $10,000
2 / 25,000
3 / 50,000
4 / 35,000
The discount rate is 8 percent. What is the investment’s present value?
2- At an inflation rate of 9 percent, the purchasing power of $1 would be cut in half in 8.04 years. How long to the nearest year would it take the purchasing power of $1 to be cut in half if the inflation rate were only 4 percent?
3--Today is your 21st birthday, and you are opening up an investment account. Your plan is to contribute $2,000 per year on your birthday and the first contribution will be made today. Your 45th, and final, contribution will be made on your 65th birthday. If you earn 10 percent a year on your investments, how much money will you have in the account on your 65th birthday, immediately after making your final contribution?
4-Palmer Products has outstanding bonds with an annual 8 percent coupon. The bonds have a par value of $1,000 and a price of $865. The bonds will mature in 11 years. What is the yield to maturity on the bonds?
5-Jill currently has $300,000 in a brokerage account. The account pays a 10 percent annual interest rate. Assuming that Jill makes no additional contributions to the account, how many years will it take for her to have $1,000,000 in the account?
6- 30-year, $175,000 mortgage has a nominal interest rate of 7.45 percent. Assume that all payments are made at the end of each month. What will be the remaining balance on the mortgage after 5 years (60 monthly payments)?
7-You deposited $1,000 in a savings account that pays 8 percent interest, compounded quarterly, planning to use it to finish your last year in college. Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account. How much money will you receive?
8-A bond with 12 years to maturity has a 7 percent semiannual coupon and a face value of $1,000. (That is, the bond pays a $35 coupon every six months.) The bond currently sells for $1,000. What should be the price of a bond with the same risk and maturity that pays a 7 percent annual coupon and has a face value of $1,000?
9-An analyst estimates that Cheyenne Co. will pay the following dividends: D1 = $3.0000, D2 = $3.7500, and D3 = $4.3125. The analyst also estimates that the required rate of return on Cheyenne’s stock is 12.2 percent. After the third dividend, the dividend is expected to grow by 8 percent per year forever. What is the price of the stock today?
10-Hadlock Healthcare expects to pay a $3.00 dividend at the end of the year (D1 = $3.00). The stock’s dividend is expected to grow at a rate of 10 percent a year until three years from now (t – 3). After this time, the stock’s dividend is expected to grow at a constant rate of 5 percent a year. The stock’s required rate of return is 11 percent. What is the price of the stock today?
11-Motor Homes Inc. (MHI) is presently in a stage of abnormally high growth because of a surge in the demand for motor homes. The company expects earnings and dividends to grow at a rate of 10 percent for the next 4 years, after which time there will be no growth (g = 0) in earnings and dividends. The company’s last dividend was $1.50. MHI’s beta is 1.6, the return on the market is currently 12.75 percent, and the risk-free rate is 4 percent. What should be the current common stock price?
12-You have just been offered a $1,000 par value bond for $847.88. The coupon rate is 8 percent, payable annually, and annual interest rates on new issues of the same degree of risk are 10 percent. You want to know how many more interest payments you will receive, but the party selling the bond cannot remember. Can you determine how many interest payments remain?
13-Waters Corporation has a stock price of $20 a share. The stock’s year-end dividend is expected to be $2 a share (D1 = $2.00). The stock’s required rate of return is 15 percent and the stock’s dividend is expected to grow at the same constant rate forever. What is the expected price of the stock seven years from now?
14-Assume that you plan to buy a share of XYZ stock today and to hold it for 2 years. Your expectations are that you will not receive a dividend at the end of Year 1, but you will receive a dividend of $9.25 at the end of Year 2. In addition, you expect to sell the stock for $150 at the end of Year 2. If your expected rate of return is 16 percent, how much should you be willing to pay for this stock today?