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Fin 301 Midterm Review Fall 2010

# Fin 301 Midterm Review Fall 2010 - 1 The interest rate on a...

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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. 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.) 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-

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