Question 1. A 10-year bond pays 12% interest on a $1,000 face value annually. If it currently sells for $1,100, what is its approximate yield to maturity?
Question 2. You buy a new piece of equipment for $7,360, and you receive a cash inflow of $1,000 per year for 10 years. What is the internal rate of return?
Question 3. Assume a project has earnings before amortization and taxes of $15,000,
amortization of $25,000, and that the firm has a 30 percent tax bracket. What are the after-tax cash flows for the project?
Question 4. How long does it take $1,000 to quadruple in value if you have an 11% annual return? Assume annual compounding, and express your answer in years (to two decimals).
Question 5. Assume the following spot and forward rates for the euro ($/euro).
Spot rate = $1.6277
30-day forward rate = 1.6330
90-day forward rate = 1.6353
120-day forward rate = 1.6387
a) What is the dollar value of one euro in the spot market?
b) Suppose you issued a 120-day forward contract to exchange 200,000 euros into Canadian dollars. How many dollars are involved?
c) How many euros can you get for one dollar in the spot market?
d)What is the 120-day forward premium?
Question 6. The MacHardee Plumbing Company has common stock outstanding. The stock paid a dividend of $2.00 per share last year, but the company expects that earnings and dividends will grow by 25% for the next two years before dropping to a constant 9% growth rate afterward. The required rate of return on similar common stocks is 13%. What is the per-share value of the company’s common stock?
Question 7. Defense Electronics Corporation is considering building an overseas manufacturing facility to produce radar detection systems. As a consultant to DEC, you have the contract to determine the appropriate discount rate for evaluating this project.
Current information regarding DEC includes:
Debt: 25,000 bonds outstanding, each with a coupon rate of 6.5% paid semi-annually, par value of $1,000, maturity of 20 years, and current value of 96% of par.
Common Stock: 400,000 shares outstanding with a current value of $89/share. An annual dividend of $4.74 has just been paid, and dividends are expected to grow by 9% annually into the foreseeable future.
Preferred Stock: 35,000 shares of 6.5% stock with a par value of $100/share, and a current value of $99/share.
Tax rate: DEC’s combined tax rate is 34%.
Other liabilities: DEC has the usual accounts payable and accruals on its balance sheet, but does not regularly utilize any interest-bearing debt other than the bonds described above.
Risk Adjustment: Since the new manufacturing facility is to be built overseas, management is suggesting an adjustment factor of +2% to account for the increased riskiness.
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