1. If you have $150 today and would like to have $300 eight years from now, what

Question

1. If you have $150 today and would like to have $300 eight years from now, what annual compounded rateof return do you need to earn?

2. A zero coupon bond has a par value of $10,000 and has 8 years to maturity. If the price of the bond is$5000 today, what is its YTM?

3. A corporation is considering a research project that will have initial costs of $2 billion. When the projectis completed in 8 years, it will return a one-time cash flow of $4 billion. What is the IRR of this project?

4. Here’s some info on a company:

          Number of issuances  

Debt                         3000Preferred stock                       15,000   Equity                                  90,000    Bonds coupon rate: 0%       Current stock price: $45            Market risk premium: 8%Bond par value: $1000       Stock beta:    1.2              Pref. dividend: $8Bond time to maturity: 5 years       Preferred stock price: $60         Tax rate: 30%Bond price: 73% of par       Risk free rate:    6%  What is this company’s capital structure weights? What is the WACC?

5. A company with a beta of 1.2 and constant growth in dividends of 5% would like to issue one millionshares of stock at a price of $50. Their investment banking fees and prospectus creation and mailing costswill be $1,000,000. If they recently paid a dividend of $4, what is their cost of issuing new stock?

6. A project costs $200,000 today and returns cash flows of $30,000 each year (end of year) forever. If theWACC is 10%, what is the NPV?       6a. What if the cash inflows only lasted for 15 years? What is the NPV then?     6b. What if the cash flows were constantly growing at 5% forever? What is the NPV then?

7. A project costs $10,000 today and will return cash flows of $200 at the end of each month of the next 10years. If the WACC is 12% annually, what is the NPV?

8. If an investment requires an initial investment of $100,000 and then returns annual inflows of    Year 1= $45,000, Year 2 = $30,000, Year 3 = $40,000, and Year 4 = $30,000, what is the NPV if the    WACC is 10%?                     A. $10,279   B. $15,167   C. $15,325   D. $16,245   E. $18,451   F. $21,611

9. If an investment requires an initial investment of $100,000 and then returns annual inflows of    Year 1= $45,000, Year 2 = $30,000, Year 3 = $40,000, and Year 4 = $30,000, what is the IRR?            A. 8.2%   B. 9.4%   C. 10.8%   D. 14.4%   E. 17.7%   F 18.4%

Explanation / Answer

Answer for question 1

Value of investment Today = $150

Value after 8 year = $300

Interest rate on investment is calculated below:

Let’s assume compound interest rate = r

$300 = $150 × (1 + r) ^8

$300 / $150 = (1 + r) ^8

2 = (1 + r) ^8

(2)^ (1/8) = 1 + r

1 + r = 1.09051

r = 9.051%

Hence, Annual Compound interest rate is 9.051%.

Answer for question 2

Present value of Zero coupon bond = $5,000

Value of Zero coupon bond after 8 year = $10,000

YTM on investment in Zero coupon bond is calculated below:

Let’s assume YTM = r

$10,000 = $5,000 × (1 + r) ^8

$10,000 / $5,000 = (1 + r) ^8

2 = (1 + r) ^8

(2)^ (1/8) = 1 + r

1 + r = 1.09051

r = 9.051%

Hence, YTM on investment in Zero coupon bond is 9.051%.

Answer for question 3

Initial Investment = $2 billion

Value of investment after 8 year = $4 billion

Let’s assume IRR = r

$4 = $2 × (1 + r) ^8

$4 / $2 = (1 + r) ^8

2 = (1 + r) ^8

(2)^ (1/8) = 1 + r

1 + r = 1.09051

r = 9.051%

Hence, IRR of project is 9.051%.

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