# Answers Homework 2 - Return - 10% compounded semiannually...

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Problem 5-30 Facts Earnings Earnings Earning - \$110M per year \$110M from Inv. Investments - \$12M today, \$7M 1 year from today Inv. -\$12M Inv. -\$7M \$10M Investment Earnings - \$10M 2 years from today Today Year 1 Year 2 Shares outstanding - 20M Rate - 15% EPS (Dividend) / R (Discount Rate) EPS = \$110,000,000 / 20,000,000 = \$5.50 Price of Stock = \$5.5 / .15 Price of Stock = \$36.67 Investment Earnings Value NPVGO = -12,000,000 - 7,000,000 / 1.15 + (10,000,000 / .15) / (1.15) Value at Date 1 = 10,000,000/.15 = \$66,666,666.67 NPVGO = -12,000,000 - 6,086,956.52 + 57,971,014.49 Value at Date 0 = \$66,666,666.67 / 1.15 = \$57,971,014.49 NPVGO = \$39,884,057.97 NPVGO per share = Value / shares outstanding NPVGO per share = \$39,884,057.97 / 20,000,000 NPVGO per share = \$1.99 Problem 5-34 Bond M face value - \$20,000 time - 20 years first six years - no payments Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 next eight years - \$1,200 every 6 months last six years - \$1,500 every 6 months
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Unformatted text preview: Return - 10% compounded semiannually 10%/2 = .05 or 5% Using Excel Years 6 - 14 = 8 years x 2 = 16 payments PV of years 6-14 \$13,005.32 Years 14 - 20 = 6 years x 2 = 12 payments PV = \$1,200 x (10.8378) + \$1,500 x (8.8633) + \$2,840.91 PV of years 14-20 \$13,294.88 PV = \$29,141.22 PV of Bond \$2,840.91 PV = \$29,141.11 Bond N face value - \$20,000 time - 20 years Return - 10% compounded semiannually PV = \$2,840.91 10%/2 = .05 or 5% No coupon payments Time - 20 years x 2 = 40 A) What is the price of a share of stock if the firm dows not undertake the new investment? B) What is the value of the investment? NPVGO = Co + C 1 / (1 + R) + (C 2 / R) / (1+R) C) What is the per-share stock price if the firm undertakes the investment? PV = \$1,200 x A 16 .05 + \$1,500 x A 12 .05 + \$20,000 / (1.05) 40 PV = F / (1 + R) T PV = \$20,000 / (1 + .05) 40 No Payments \$1,200 every 6 months \$1,500 every 6 months...
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## This note was uploaded on 02/14/2011 for the course FINANCE 610 taught by Professor Siad during the Fall '09 term at UMBC.

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