1. Look up annual dividend of Microsoft (MSFT) on finance.yahoo.com. Assuming Microsoft dividend grows by 3% every year for 10 years and the discount rate is 6%.
a. What is the intrinsic price of Microsoft today and is it more or less than the market price?
b. What will be the intrinsic price of Microsoft stock 10 years from now?
2. Henry, a direct descendant of Jefferson Morgan has inherited $450,000. A financial advisor tells her to invest this amount and target an average of at least 8% return over a 30 years. Henry decides to invest in a Northern Endowment Fund that has had a ten year average return of 8.5%. During the same time, S&P500 has had a 13% return (this is market return). The risk free return is 2% and the beta of the fund is 0.8.
a. What is the discount rate?
b. Would a beta of 1.1 increase her returns?
3. Rierson owns a garment factory in Spain and sells designer clothes to US and other European countries. He is trying attract some investments from US that he can use to expand further into the US market. US investors are looking for stable cash flow, which is going to be a challenge given that the fashion industry is changing constantly and he can get stuck with unsold inventory. To allay their fears, Rierson decides to investment some of the capital raised into Italian 10 year Government Bonds. He explains that the return from these bonds will be used to improve his operations. Ignoring currency exposure, consider the following:
a. He decides to invest into ten year 1,000 EURO Government bond with 8% coupon rate and semi-annual coupons. If the bond is currently trading for a price of 957.35 Euros, what isthe bond’s yield to maturity? Assume is buys 10,000 of these bonds.
b. Suppose he is told that the yield to maturity has increased to 15% (expressed as an APR with semiannual compounding). What price is the bond trading for now?
4. I am offering each of you a choice:
A nominal return of 7% on your investment if you invest in US
A nominal return of 6% on you investment if you invest in Ireland.
Which option will give you the highest real rate of return? (Calculate the average inflation for the last 5 years for each country and use that to calculate the real rate of return. Inflation rate can be found online).