1. TT in 2010 had $11,500 of sales, $7,125 of operating, and $1,100 of depreciation. TT has $3,500 of bonds that carry a 5.75% interest rate with an income tax rate of 40%. Everything should remain the same in 2011 except for depreciation, which is expected to increase by $950.
a. Set up the table that shows how everything is derived all the way down to net income for 2010 and 2011. Also provide a column that shows the changes.
b. By how much will net after tax income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes.
2. You decide that you want to travel to the moon in 4 years. You figure you should start saving $35 million per year, starting today. You will make four deposits that pays 7.8% interest into your Bank of America account. Under these assumptions, how much will you have 4 years from today?
3. You came in possession of a diamond mine. The mine will pay you $15,050 per year for 35 years, with the first payment being made today. If you think a fair return on the well is 7.75%, how much should you ask for it if you decide to sell it?
4. Assume that you inherited an annuity that will pay you $12,225 each year for 10.5 years. You start earning money right away, but you need money today to start a new business. Your grandmother offers to give you $150,500 for the annuity. What rate of return would your grandmother earn on this sale?
5. Your portfolio is diversified. It has an expected return of 11% and a beta of 1.10. You want to add 300 shares of Tundra Corporation at $40 a share to your portfolio. Tundra has an expected return of 13% and a beta of 1.50. The total value of the investor's current portfolio is $45,000.
a. Calculate the expected return on the portfolio after the purchase of the Tundra Stock?
b. Calculate the expected beta on the portfolio after you add the new stock?
c. Is your portfolio less risky or more risky than average? Explain.
d. Will your portfolio likely outperform or underperform the market in a period when stocks are rapidly falling in value?
e. Is beta always an accurate predictor of a portfolio's performance? Explain?
6. JG's bonds mature in 5 years, have a par value of $1,000 and make an annual coupon payment of $65. The market interest rate for the bonds is 8.49%. What is the bond's price?
7. The Elvis Presley Company issued 10-year/noncallable bonds that have a par value of $1000 and a 8.25% annual coupon in 2011. The market interest rate on these bonds is 6.5%, today in 2012. What is the current price of the bonds based on them now having 12.5 years to mature?