1) You purchased one share of Googling Enterprises common stock for $40 today. If the stock pays a dividend of $6.50 in one year, and sells for $50 at that time, what will the dividend yield, growth rate, and total rate of return be for the year?
2) Porky Pine Co. is issuing a $1,000 par value bond that pays 6% interest annually. Investors are expected to pay $950 for the 10-year bond. Porky will pay $20 per bond in flotation costs. What is the after-tax cost of new debt if the firm is in the 35% tax bracket?
a) 3.23%
b) 4.55%
c) 7.00%
d) 9.45%
3) Consider two mutually exclusive projects X and Y with identical initial outlays of $500,000 and useful lives of 5 years. Project X is expected to produce an after-tax cash flow of $150,000 each year. Project Y is expected to generate a single after-tax net cash flow of $1,015,000 in year 5. The discount rate is 15 percent.
a) Calculate the net present value for each project.
b) Calculate the IRR for each project.
c) What decision should you make regarding these projects?
4) A bond with a $1,000 face value and a 9 percent annual coupon pays interest annually. The bond matures in 12 years.
a) Determine the value of the bond to a friend of yours with a required rate of return of 11%.
b) A zero coupon bond with similar risk is selling for $300. The bond has a face value of $1,000 and matures in 12 years. Your friend asks you which bond she should invest in, the zero coupon bond or the bond in part (a). Which bond do you recommend, and why? Assume the market price of the bond in part (a) is $720.