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Final Review - UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL...

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U NIVERSITY OF N ORTH C AROLINA A T C HAPEL H ILL K ENAN -F LAGLER B USINESS S CHOOL B USI 408: C ORPORATE F INANCE R EVIEW Q UESTIONS P ROF . A RZU O ZOGUZ F ALL 2008 A. Time Value of Money 1. With graduation only a few days away, you are ready to purchase a new car. You want to trade in your old Toyota for a Mercedes SLK, which costs $35,000. One dealer will give you the market value $3,000 for your old car, and offers a 48-month loan at a 3% APR. You find another dealer that will give you $8,000 for your old car, if you take their 19% APR, 48-month loan. Which dealer would you choose? 2. If the discount rate is 12.5 percent per annum, would you rather receive $5000 today, or $1000 per year forever? B. Bond Valuation The electric utility Black-out, Corp. has just issued a new five-year bond with a $1000 face value and with 7 percent annual coupon, paid semiannually. a. What is the price of the bond, if the yield to maturity is 12 percent? b. Calculate the annual return that an investor would realize, if she buys the Black-out bonds today, has a three-year holding period, reinvests all the coupon payments at a 3% semi-annual return, and if she sells the bonds with two years remaining until maturity. Assume that at the end of three years, the 7% coupon bonds with two years remaining sell at 7 percent yield. C. Stock Valuation The annual earnings of Asheville Skis Inc. will be $4 per share in perpetuity if the firm makes no new investments. Under such a situation, the firm would pay out all of its earnings as dividends. Assume that the first dividend will be received exactly one year from now.
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