1. The Lo Sun Corporation offers a 5.8 percent bond with a current market price of $823.50. The yield to maturity is 8.18 percent. The face value is $1,000. Interest is paid semiannually. How many years is it until this bond matures?
2. Purple Haze Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $500,000 is estimated to result in $205,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of $84,000. The press also requires an initial investment in spare parts inventory of $23,000, along with an additional $2,800 in inventory for each succeeding year of the project. The shop's tax rate is 35 percent and its discount rate is 9 percent. Calculate the NPV of the project. Should the company buy and install the machine press?
3. The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 17 percent a year for the next 4 years and then decreasing the growth rate to 6 percent per year. The company just paid its annual dividend in the amount of $2.40 per share. What is the current value of one share of this stock if the required rate of return is 7.90 percent?
4. Consider a project to supply 110 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $2,000,000 five years ago; if the land were sold today, it would net you $2,200,000 aftertax. The land can be sold for $2,400,000 after taxes in five years. You will need to install $5.50 million in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the project's five-year life. The equipment can be sold for $600,000 at the end of the project. You will also need $700,000 in initial net working capital for the project, and an additional investment of $60,000 in every year thereafter. Your production costs are 0.60 cents per stamp, and you have fixed costs of $970,000 per year. If your tax rate is 35 percent and your required return on this project is 11 percent, what bid price should you submit on the contract?
5. Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows:
Year Cash Flow
0 -$ 1,240,000
1 415,000
2 480,000
3 375,000
4 330,000
All cash flows will occur in Erewhon and are expressed in dollars. In an attempt to improve its economy, the Erewhonian government has declared that all cash flows created by a foreign company are "blocked" and must be reinvested with the government for one year. The reinvestment rate for these funds is 5 percent.
If Anderson uses a required return of 11 percent on this project, what are the NPV and IRR of the project?
6. Suppose we have the following Treasury bill returns and inflation rates over an eight year period:
Year Treasury Bills Inflation
1 9.01 10.86
2 9.87 14.41
3 7.62 8.80
4 6.71 6.39
5 7.20 8.56
6 9.50 10.99
7 12.33 15.15
8 14.09 14.89
a.
Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index) for this period. Calculate the standard deviation of Treasury bill returns and inflation over this period. Calculate the standard deviation of Treasury bill returns and inflation over this period.
7. Consider a four-year project with the following information: initial fixed asset investment = $430,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $24; variable costs = $16; fixed costs = $120,000; quantity sold = 72,000 units; tax rate = 34 percent.
How sensitive is OCF to changes in quantity sold?
8. You find a certain stock that had returns of 16 percent, -23 percent, 24 percent, and 9 percent for four of the last five years. The average return of the stock over this period was 10.20 percent. What was the stock's return for the missing year? What is the standard deviation of the stock's return?