Question 1
You have a project that is very similar to the types of projects in PhelpCo (an all equity firm). On average the project is expected to generate positive cash flows starting next year (at t = 1) of $150,000, growing at 10 percent per year for the foreseeable future.
Currently the scale of PhelpCo is such that their earnings per share is $5.00. PhelpCo pays out all of its earnings as an annual dividend. The current price of PhelpCo is $40.00 per share.
a. Given the above information about PhelpCo, what is the appropriate discount rate that should be applied to the cash flows of your project?
Question 2
You have a project that is very similar to the types of projects in PhelpCo (an all equity firm). On average the project is expected to generate positive cash flows starting next year (at t = 1) of $150,000, growing at 10 percent per year for the foreseeable future.
Currently the scale of PhelpCo is such that their earnings per share is $5.00. PhelpCo pays out all of its earnings as an annual dividend. The current price of PhelpCo is $40.00 per share.
b. Given this opportunity cost (discount rate), what is the PV of your project?
Question 3
You have a project that is very similar to the types of projects in PhelpCo (an all equity firm). On average the project is expected to generate positive cash flows starting next year (at t = 1) of $150,000, growing at 10 percent per year for the foreseeable future.
Currently the scale of PhelpCo is such that their earnings per share is $5.00. PhelpCo pays out all of its earnings as an annual dividend. The current price of PhelpCo is $40.00 per share.
c. An analyst that works for you estimated that the cost of the project (incurred at t = 0) is $3,800,000. The project should be accepted or not? "True" for accepting the project and "False" for not accepting the project.
True
False
Question 4
a. What would an investor be willing to pay for common stock in a firm that has no growth opportunities but pays dividends of $6.00 per year, starting today? The next dividend will be paid in exactly 1 year. The required rate of return is a stated annual rate of 12.5% compounded quarterly. If the investor buys now, they will receive today's dividend.
Question 5
b. What would an investor be willing to pay for common stock in a firm that is expected to pay an annual dividend that will grow at 10 percent over the next 2 years, then grow at 5 percent for 3 years and then stop growing (i.e., will grow at zero percent) from then on? The firm just paid its dividend of $2.00. Thus, if an investor buys this stock, they will not receive the dividend that was just paid. The next dividend will be paid in one year. The required rate of return is an effective annual rate of 10%.
Question 6
The ABC Company currently has $16,000,000 in physical assets that have always generated a steady stream of earnings for the company. The management of the firm has always paid all of its earnings to shareholders as a dividend. While there is risk in the return on assets, the average return over many years has been steady at 10 percent. The firm has 1,000,000 shares outstanding. The current ex-dividend price of a share of equity is $15.00.
a. What is the required rate of return for this firm implied by the current market price?
Question 7
The ABC Company currently has $16,000,000 in physical assets that have always generated a steady stream of earnings for the company. The management of the firm has always paid all of its earnings to shareholders as a dividend. While there is risk in the return on assets, the average return over many years has been steady at 10 percent. The firm has 1,000,000 shares outstanding. The current ex-dividend price of a share of equity is $15.00.
The management wants the company to grow. Rather than pay out all of the firm's earnings as a dividend this year (t = 0), the management wants to plow back 60 percent of the earnings into the business.
b.Assuming that the management will be able to maintain the return on assets it has achieved in the past as the firm grows, what will be the ex-dividend stock price under the new growth policy?
Question 8
The ABC Company currently has $16,000,000 in physical assets that have always generated a steady stream of earnings for the company. The management of the firm has always paid all of its earnings to shareholders as a dividend. While there is risk in the return on assets, the average return over many years has been steady at 10 percent. The firm has 1,000,000 shares outstanding. The current ex-dividend price of a share of equity is $15.00. The management wants the company to grow. Rather than pay out all of the firm's earnings as a dividend this year (t = 0), the management wants to plow back 60 percent of the earnings into the business.
Assuming that the management will be able to maintain the return on assets it has achieved in the past as the firm grows.
c. Given your answer in part b, should the management adopt this policy? Why or why not?
Question 9
a. Find the effective rate of a stated rate of 18.3 percent compounded monthly.
Question 10
b. Find the effective rate of a stated rate of 18.4 percent compounded continuously.
Question 11
c. Find the effective rate of a stated rate of 18.4 percent compounded every 6 months.
Question 12
d. Find the effective rate of a stated rate of 18.5 percent compounded annually.
Question 13
1. Exactly one year ago today (say 4/20/14), the prices on zero-coupon US treasury bonds were as follows:
|
Maturity In Years
|
Price
|
|
1
|
98
|
|
2
|
94
|
|
3
|
90
|
|
4
|
82
|
2.
3. The current (i.e., 4/20/15) prices are as follows:
|
Maturity In Years
|
Price
|
|
1
|
96
|
|
2
|
92
|
|
3
|
88
|
|
4
|
80
|
4.
5. a. What was the one-year forward rate last year?
Question 14
1. Exactly one year ago today (say 4/20/14), the prices on zero-coupon US treasury bonds were as follows:
|
Maturity In Years
|
Price
|
|
1
|
98
|
|
2
|
94
|
|
3
|
90
|
|
4
|
82
|
2. The current (i.e., 4/20/15) prices are as follows:
|
Maturity In Years
|
Price
|
|
1
|
96
|
|
2
|
92
|
|
3
|
88
|
|
4
|
80
|
3.
4. b. What was the one-year forward rate for two years in the future last year?
5.
Question 15
1. Exactly one year ago today (say 4/20/14), the prices on zero-coupon US treasury bonds were as follows:
|
Maturity In Years
|
Price
|
|
1
|
98
|
|
2
|
94
|
|
3
|
90
|
|
4
|
82
|
2. The current (i.e., 4/20/15) prices are as follows:
|
Maturity In Years
|
Price
|
|
1
|
96
|
|
2
|
92
|
|
3
|
88
|
|
4
|
80
|
3.
4. c. Using the current yield curve, what is the relationship between the forward rate and what actually happened?
Question 16
1. Exactly one year ago today (say 4/20/14), the prices on zero-coupon US treasury bonds were as follows:
|
Maturity In Years
|
Price
|
|
1
|
98
|
|
2
|
94
|
|
3
|
90
|
|
4
|
82
|
2. The current (i.e., 4/20/15) prices are as follows:
|
Maturity In Years
|
Price
|
|
1
|
96
|
|
2
|
92
|
|
3
|
88
|
|
4
|
80
|
3.
4. d. If the forward rate is a prediction of the rates next year, what will a two-year zero sell for next year?
5.
Question 17
1. Consider the following data on various bonds trading at t = 0.
|
Bond
|
Coupon Rate
|
Payment Frequency
|
Face Value
|
Time ot Maturity
|
Price at t=0
(per $1000 face value)
|
|
A
|
7%
|
4 times a year
|
$1000
|
8 years
|
?
|
|
B
|
12%
|
once a year
|
$1000
|
2 years
|
1100
|
|
C
|
0
|
2 times a year
|
$1000
|
5 years
|
700
|
2.
3. The prices are all ex-coupon. That is, they are the price you would pay immediately after the coupon has been paid. Thus, when you pay that price, you will receive the next coupon one period later.
4. a. What is the yield to maturity on Bond C?
Question 18
1. Consider the following data on various bonds trading at t = 0.
|
Bond
|
Coupon Rate
|
Payment Frequency
|
Face Value
|
Time ot Maturity
|
Price at t=0
(per $1000 face value)
|
|
A
|
7%
|
4 times a year
|
$1000
|
8 years
|
?
|
|
B
|
12%
|
once a year
|
$1000
|
2 years
|
1100
|
|
C
|
0
|
2 times a year
|
$1000
|
5 years
|
700
|
2. The prices are all ex-coupon. That is, they are the price you would pay immediately after the coupon has been paid. Thus, when you pay that price, you will receive the next coupon one period later.
3. b. If the yield curve were flat at 5 percent effective annual yield, what should the price of Bond A equal? (Note: given all of the data above, it may not be flat.)
Question 19
1. Consider the following data on various bonds trading at t = 0.
|
Bond
|
Coupon Rate
|
Payment Frequency
|
Face Value
|
Time ot Maturity
|
Price at t=0
(per $1000 face value)
|
|
A
|
7%
|
4 times a year
|
$1000
|
8 years
|
?
|
|
B
|
12%
|
once a year
|
$1000
|
2 years
|
1100
|
|
C
|
0
|
2 times a year
|
$1000
|
5 years
|
700
|
2. The prices are all ex-coupon. That is, they are the price you would pay immediately after the coupon has been paid. Thus, when you pay that price, you will receive the next coupon one period later.
3. c. If in one year (i.e., at t = 1), the yield curve is flat at 6% (i.e., the yield to maturity on zero-coupon bonds of all maturities is 6%), what will be the holding period yield for Bond B if you bought Bond B at t = 0?
Question 20
You have taken out a 30-year fixed-rate mortgage for $500,000.00 that requires you to make a fixed monthly payment every month for the next 360 months, with the first payment being made exactly one month from now. The stated interest rate is 4 percent, compounded monthly.
a. What are the monthly payments?
Question 21
You have taken out a 30-year fixed-rate mortgage for $500,000.00 that requires you to make a fixed monthly payment every month for the next 360 months, with the first payment being made exactly one month from now. The stated interest rate is 4 percent, compounded monthly.
b. For the first payment, what is the amount of that payment that repays principle?
Question 22
You have taken out a 30-year fixed-rate mortgage for $500,000.00 that requires you to make a fixed monthly payment every month for the next 360 months, with the first payment being made exactly one month from now. The stated interest rate is 4 percent, compounded monthly.
c. Right after you make the first monthly payment (i.e., essentially one month from now), using your answers to be above, what will be the remaining principle on the loan?
Question 23
You have taken out a 30-year fixed-rate mortgage for $500,000.00 that requires you to make a fixed monthly payment every month for the next 360 months, with the first payment being made exactly one month from now. The stated interest rate is 4 percent, compounded monthly.
d. Right after you make your first payment, what is the present value of the remaining monthly payments compares to your answer to c above? Greater than, Equal to or Less than?
|
A.
|
Greater than
|
|
B.
|
Equal to
|
|
C.
|
Less than
|
Question 24
You have taken out a 30-year fixed-rate mortgage for $500,000.00 that requires you to make a fixed monthly payment every month for the next 360 months, with the first payment being made exactly one month from now. The stated interest rate is 4 percent, compounded monthly.
e. Using the result you can infer from comparing c and d above, answer the following question. After your have made 180 monthly payments, what is the remaining principle?