17) Assume tht you wish to purchase a 30-year bond that has a maturity value of
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17) Assume tht you wish to purchase a 30-year bond that has a maturity value of $1,000 and a coupon interest rate of 95%, paid semiannually require a 6.75% rate of return on this investment, what is the maximum price that you should be willing to pay for this bond? A) $1,00o B) $675 C) $1,450 E) $1,352 18) Green Company's common stock is currently selling at $24.00 per share. a dividends of $1.92 per share and projects that dividends will growth at a rate of 4%. At this rate, what is This year the company plans to pay the stock's expected rate of return A) 8.80% B) 4.08% c) 8.00% D) 12.00% 19) You are evaluating the purchase of Cool Toys, Inc. common st just paid a dividend of $1.80. You expect the dividend to grow at a rate of 12%, indefinitely. You estimate that a required rate of return of 175% will be adequate compensation for this investment. Assuming that your analysis is correct, what is the most that you would be willing to pay for the common stock if you were to purchase it today? A) $51.55 B) $36.65 C) $91.23 D) $74.82 You have been asked to analyze a capital investment proposal. The project's cost is $2,775,000. Cash inflows are projected to be $925,000 in Year 1; $1,000,000 in Year 2;$1,000,000 in Year 3; $1,000,000 in Year 4; and $1,225,000 in Year 5. What is the project's IRR? C) 8.04% A) 23.78% B) 19.16% D) 16.75% 21) A machine has a cost of $5,375,000. It will produce cash inflows of $1,825,000 (Year 1); $1,775,000 (Year 2):$1,630,000 (Year 3): $1,585,000 (Year 4); and $1,650,000 (Year 5). At a discount rate of 16.25%, what is the NPV? A) $81,724 B) $416,912 C)$190,939 D) $257,106 22) A project costs $10,000 and is expected to return after-tax cash flows of $3,000 each year for the next 10 years. This project's payback period is: A) three and one-third years. C) three years. B) four years. D) 10 years.Explanation / Answer
Answer 17.
Face value = $1,000
Annual Coupon rate = 9.5%
Semi-annual Coupon Rate = 4.75%
Semi-annual Coupon = 4.75%*$1,000 = $47.50
Annual Interest rate = 6.75%
Semi-annual Interest rate = 3.375%
Semi-annual period to maturity = 60
Price of Bond = $47.50 * PVA of $1 (3.375%, 60) + $1,000 * PV of $1 (3.375%, 60)
Price of Bond = $47.50 * (1 - (1/1.03375)^60) / 0.03375 + $1,000 / 1.03375^60
Price of Bond = $1,352
So, maximum price for this bond is $1,352
Answer 18.
Current Price, P0 = $24.00
Year-end Dividend, D1 = $1.92
Growth rate, g = 4%
Rate of Return = D1 / P0 + g
Rate of Return = $1.92 / $24.00 + 0.04
Rate of Return = 0.12 = 12.00%
Answer 19.
Current Dividend, D0 = $1.80
Growth rate, g = 12%
rate of return, r = 17.5%
Year-end Dividend, D1 = $1.80 * 1.12
Year-end Dividend, D1 = $2.016
Current Price = D1 / (r - g)
Current Price = $2.016 / (0.175 - 0.12)
Current Price = $36.65
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