1. An office in Ford Collins uses 1,000 photocopies per working day, and there are 200 working days a year. The brand A copying machine costs $3,000 and will produce a total of 1 million copies before it wears out. The band B machine costs $5,000 and will produce 2 million copies in its life. Maintenance and material costs are $.03 a copy with either machine, or neither machine will have any salvage value. The required return is 10% a year.
(1) Which machine should the company acquire? (Assume year-end cash flows for simplicity)
(2) Which of the two machines should the company choose if it uses 5,000 copies a day?
2. The board of directors at Boulder Corporation is considering two alternate ways of dealing with a deteriorated, demoralizing, and difficult-to-maintain office building. The existing building could be refurbished at a cost of $4 million, or a new building could be built at a cost of $6 million. The old building, even if refurbished, would not be as efficient as the new one, and energy costs would therefore be $200,000 a year higher. Either the new or the refurbished building would be used for 20 years. The salvage value for the new building would be then be $1 million, while the salvage value for the old building would be $500,000. If the new building is acquired, the old building can be sold now for $250,000 in its present deteriorated condition. The required return for Boulder is 12%.
(1) Which alternative should be chosen? (Assume year-end cash flows for simplicity)
(2) Assume that the old building would only last 15 years if refurbished. The salvage value in 15 years would be $500,000. In this case, which building should be chosen?
3. The Alto Horns Corp. is planning on introducing a new line of saxophones. They expect sales to be $200,000 with total fixed and variable costs representing 70% of sales. The discount rate on the unlevered equity is 17%, but the firm plans to raise $77,820 of the initial $150,000 investment as 9% perpetual debt. The corporate tax rate is 34% and the target debt to value ratio is .3. Calculate the all equity NPV and the levered NPV using the flow-to-equity method.
4. Bonds of Zello Corporation with a par value of $1,000 sell for $960, mature in five years, and have a 7% annual coupon rate paid semiannually. Calculate the current yield and yield to maturity.
5. Consider a bond paying a coupon rate of 10% per year semiannually when the market interest rate is only 4% per half year. The bond has three years until maturity.
Find the bond's price today and 6 months from now after the next coupon is paid.
What is the 6-month holding-period return on this bond?
6. The following is a list of prices for zero-coupon bonds of various maturities. Calculate the spot rates and the implied sequence of forward rates.
|
Maturity (years)
|
Price of bond ($)
|
|
1
|
943.40
|
|
2
|
898.47
|
|
3
|
847.62
|
|
4
|
792.16
|
7. An 8.5% coupon $1,000 par value pays an annual coupon and will mature in 3 years. Given the information in Q. 6, what should be the bond price and yield to maturity on the bond?
8. Find the duration of a 6% coupon bond making annual coupon payments if it has 3 years until maturity and has a yield to maturity of 6%. What is the duration if the yield to maturity is 10%?
9. A 30-year maturity bond making annual coupon payments with a coupon rate of 12% has duration of 11.54 years and convexity of 192.4. The bond currently sells at a yield to maturity of 8%. Find the price of the bond if its yield to maturity falls to 7% or rises to 9%. What percentage price changes would be predicted by the duration rule and the duration-with-convexity rule?