Fin 301 Midterm Review Fall 2010 Sol

Fin 301 Midterm Review Fall 2010 Sol - Midterm Review with...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Midterm Review with Solutions 1. The interest rate on a $10,000 loan is 8% APR compounded quarterly. Suppose the loan is to be repaid in three equal installments due 2, 4 and 8 years after the date of the loan. Calculate the size of each payment.   8 43 8 16 32 0.08 Elegant but long: r 1 1 0.1717 4 1 10,000 1 2.73 0.62 4,733.57 0.1717 1.1717 1.1717 Inelegant but fast (brute force): 0.08 / 4 0.02 10,000 2.11 4, 1.02 1.02 1.02 two year CC EQR C C C          733.57 2. Growth v.s. no growth: a. Krueger Industrial Smoothing pays $2 in dividends every year, and dividends are expected to continue in perpetuity (i.e. dividends are constant). What will be the stock price of Krueger in 17 years if the required rate of return is 10%? b. Suppose that Newman’s Postal Co has also paid $2 in dividends (D 0 = $2), but its dividends are expected to increase by 5% each year in perpetuity. What is Newman’s price going to be in 17 years based on this new assumption? How about 25 years? (The required rate of return is the same as for Krueger.) a. P 17 = $2/0.1 = $20 if g = 0 b. D 18 = D 0 (1 + g) 18 = $2 (1 + 0.05) 18 = $4.81 P 17 = D 18 /(r – g) = $4.81/(0.1 – 0.05) = $96.26 if g = 5% P 25 = P 17 (1 + g) 25 - 17 = $96.26 (1 + 0.05) 8 = 142.2, or D 26 = D 0 (1 + g) 26 = $2 (1 + 0.05) 26 = $7.11 P 25 = D 26 /(r – g) = $7.11/(0.1 – 0.05) = $142.2 3. J. Peterman Inc. issued a ten-year bond three years ago with a face value of $1,000. The bond makes semi- annual coupon payments, and its coupon rate is 8%. One year ago the yield to maturity on eight-year bonds with the same credit rating was 8%. The current yield to maturity on seven-year bonds with the same risk as
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 11/01/2011 for the course BUSINESS FIN301 taught by Professor Andrew during the Fall '10 term at University of Alberta.

Page1 / 5

Fin 301 Midterm Review Fall 2010 Sol - Midterm Review with...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online