TEST2REVIEWspr09

TEST2REVIEWspr09 - $125 $100 $145 $180 NPV $50.00 $75 $80...

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A. A bond pays a semi-annual coupon at an APR of 8%. The bond will mature in 6 years and has a face value of $1,000. The bond has a yield-to-maturity of 11% APR. What is the current price of the bond? B. A stock just paid a dividend this morning of $1.25. Dividends are expected to grow at 10% for the next two years. At that point, dividends are expected to grow at a rate of 5% forever. If investors require a return of 12% to own the stock, what is its intrinsic value? C. A bond was issued exactly one year ago with a face value of $1,000 and a coupon rate of 9% APR. The bond pays coupons on an annual basis and was issued with a thirty year maturity. An investor purchased the bond last year for $1,000 and decides to sell the bond today (ONE YEAR LATER). Currently, the bond trades at a YTM of 9.50%. What is the total one-year return for the investor if the bond is SOLD today? ABC Corporation is considering the following set of projects: PROJECT Project 1 Project 2 Project 3 Project 4 Initial Cost
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Unformatted text preview: $125 $100 $145 $180 NPV $50.00 $75 $80 $105 Payback 2.25 4.5 2 4.1 IRR 16.00% 23.25% 17.45% 15.75% D. Suppose that firm can invest in any good project without constraint. Which project provides the greatest increase in shareholder wealth? E. If project liquidity is the MAIN concern of the manager, which project should be selected? F. Suppose that the firm is budget constrained. How would you rank the projects for investment? G. Erwin Enterprises has 10 million shares outstanding with a current market price of $10 per share. There is one investment available to Erwin, and its cash flows are provided below. Erwin has a cost of capital of 10 percent. Given this information, determine the impact on Erwins stock price and firm value if capital markets fully reflect the value of undertaking the project. Initial cash outflow = $15,000,000 Year Cash Inflow 1 $2,000,000 2 $4,000,000 3 $5,000,000 4 $6,000,000 5 $7,000,000 6 $1,000,000 The new price of Erwin stock will be:...
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