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Finance Questions

# Finance Questions - 15 20 Dollars Discount rate Expected...

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15% 20% Discount rate (%) Net Present Value 0 2,000 4,000 6,000 8,000 IRR = 13.25% e IRR = 16.30 % H Project H Project E Dollars Expected Cash flow (\$80) \$80 1 yr. 5 yr. 10 yr. Time Chapter 10 22. You are called in as a financial analyst to appraise the bonds of Olsen’s clothing Stores. The \$1,000 par value bonds have quoted annual interest rate of 13 percent, which is paid semiannually. The yield to maturity on the bonds is 10 percent annual interest. There are 25 years to maturity. a. Compute the price of the bonds based on semiannual analysis. b. With 20 years to maturity, if the yield to maturity goes down substantially to 8 percent, what will be the new price of the bonds? Solution: a. Present Value of Interest Payments PV A = A x PV IFA (n = 50, i = 5%) PV A = \$65 x 18.25= \$1186.25 Present Value of Principal Payment at Maturity PV = FV x PV IF (n = 50, i = 5%) PV = \$1,000 x .087 = \$87 \$ 1186.25 87 \$1,273.25 b. PV A = A x PV IFA (n = 40, i = 4%) PV A = \$65 x 19.79 = \$1286.35 PV = FV x PV IF (n = 40, i = 4%) Appendix B PV = \$1,000 x .208 = \$208 \$ 1286.35 208 \$1,494.35

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35. Beasley Ball Bearings paid a \$4 dividend last year. The dividends is expected to grow at a constant rate of 6 percent over the next four years. The required rate of return is 13 percent (this will also serve as the discount rate in this problem). Round all values to three places to the right of the decimal point where appropriate. a. Compute the anticipated value of the dividends for the next four years. That is D 1 ,D 2 ,D 3 , and D 4 : For example D 1 is \$4.24(\$4x1.06) b. Discount each of these dividends back to the present at a discount rate of 13 percent and then sum them. c. Compute the price of the stock at the end of the fourth year (P 4 ). P 4 = D 5 Ke-g (D 5 ie equal to D 4 times 1.06) Solution: a. D 1= \$4(1.06)=\$4.24 D 2= \$4.24(1.06)=\$4.494 D 3= \$4.494(1.06)=\$4.764 D 4=\$4.764(1.06)=\$5.049 B. Dividends PV(13%) PV of Dividends D 1 \$4.24 .885 \$ 3.752 D 2 4.494 .783 3.518 D 3 4.764 .693 3.301 D 4 5.049 .613 3.095 \$13.666
C. (D 5 is equal to D 4 times 1.06) D 5 =5.049(1.06)=5.351 =5.351/.13-.06=5.351/\$76.44 Chapter 11 24. Brook’s Window Shields, Inc is trying to calculate its cost of capital for use in a capital budgeting decision. Mr. Glass, the vice-president of finance, has given

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Finance Questions - 15 20 Dollars Discount rate Expected...

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