Question 5 The Great White Whale Co. wants to issue zero coupon bonds with $1000

Question

Question 5

The Great White Whale Co. wants to issue zero coupon bonds with $1000 face value and 100 years to maturity. If your required return is 5.1 percent per year, how much would you be willing to pay for one of these bonds today?

Enter answer accurate to two decimal places.

Question 6

The common stock of Kangaroo Tours is selling for $64.65 a share and has a 14.5 percent rate of return. One-third of the return on this stock is derived from dividends and the other two-thirds is derived from capital gains. What is the amount of the next dividend?

Question 7

A project has the following cash flows for years 0 through 2, respectively: -14,233, 8,482, 8,991. What is the internal rate of return on this project?

Explanation / Answer

QUESTION - 5

If current price be P, then

P x (1.051)100 = $1000

P x 144.6344 = $1000

P = $1000 / 144.6344 = $6.91

QUESTION - 6

Total return = $64.65 x 1.145 = $74.02

Return from dividend = $74.02 / 3 = $24.67

Next dividend = $24.67 x 1.145 = $28.25

QUESTION - 7

IRR is that rate of discount which makes NPV = 0. If IRR be R, then

14,233 = [8,482 / (1 + R)] + [8,991 / (1 + R)2]

Let (1 + R) = Z. Then

14,233 = [8,482 / Z] + [8,991 / Z2]

14,233 x Z2 - 8,482 x Z - 8,991 = 0

This is a quadratic equation in Z, solving which (using online quadratic solver):

Z = 1.1468 or Z = - 0.5508

1 + R = 1.1468 or 1 + R = - 0.5508

R = 0.1468 (14.68%) or R < 0 (inadmissible).

IRR = 14.68%

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