# Time Value of Money/ Bond & Stock Valuation/ Risk & Return /Capital Budgeting

It is January 2005, and you observe the following price quote:

BK Corp. 5 1/2s28Dec Close 92 3/4

1.Suppose interest rates were to fall by 1.5% over the next year. What would be the rate of return from buying the bond today, holding it for one year, and selling it at its new market price?

2. You are setting up a scholarship fund for your favorite university by making monthlydeposits into a savings account earning 5.75% compounded monthly. Your first deposit is today, and the last is in 5 years. You expect the perpetual endowment will finance student scholarships of \$7,500 per year, with the first scholarship awardedexactly one year after the final deposit is made. The principal in the account will never be drawn-down (it too earns 5.75% compounded monthly ). According to this scenario, approximately how much must you deposit each month?

The following information pertains to problems 3 & 4:

Eighteen months ago you borrowed \$39,500 to purchase a car. The annual interest rate is 12% and the loan is to be repaid with monthly payments over four years.

3. How much of the 4th payment will be applied towards interest charges?

4. How much of the final payment will be applied towards principal reduction?

5. A share of stock paid its annual dividend of \$1.10 exactly 4 years ago and you expect that next year’s dividend will equal \$1.50. Your analyst tells you the stock’s expected total return is 12.50%, and that the stock’s current price is \$16.25. According to the constant dividend growth model, what is the stock’s intrinsic value and, more importantly, should you buy the stock?

For problems 6 & 7:

The total rates of return on equity securities are obviously affected by the business cycle. Business economists for the Genco Co. predict the following outcomes for the economy, and the associated outcomes on their shares:

Growth Stagnant Recession
Probability .20 .50 .30
% Return 28% -3% 24%

6. What is the expected return AND standard deviation of returns for the Genco
shares?

You are looking at investing in shares of either Genco (from problem 5) or Dotcom. The expected returns for Dotcom under the different economic conditions are as follows:

Growth Stagnant Recession
Probability .20 .50 .30
% Return 0% 15% 10%

7. Suppose you invest 50% of your funds in Genco, and the remainder in Dotcom.
What is the expected return AND risk for the portfolio?

Consider the following information:

VK estimates that it can issue debt at a before-tax cost of 12%, and its tax rate is 35%. The company can also issue preferred stock at \$30 per share, which pays a constant dividend of \$5 annually. Floatation costs on the preferred are \$1 per share.

Net income is estimated to be \$200,000, and the firm plans to maintain its policy of paying out 30% as dividends. The company’s stock currently sells for \$36 per share. The next dividend is expected to be \$2.35, which is \$.15 higher than the most recent dividend. Furthermore, these dividends are expected to continue to grow at the same rate. Float costs on newly issued common stock are \$3 per share. The company’s balance sheet is financed with optimal proportions of debt and equity and is as follows:

PP&E \$250,000 Debt \$250,000
Cash \$100,000 Preferred Stock \$ ?
Inventories \$300,000 Common Equity \$300,000
Total Assets \$650,000 Total Liab. \$ ?

8. What is the cost of retained earnings?

9. What is the relevant cost of debt?

10. What is VK’s current WACC?

Consider the following cash flows for two mutually exclusive investments:

t = 0 t = 1 t = 2 t = 3
A (\$87) \$40 \$50 \$29
B (\$188) \$51 \$42 \$140

11. What are the internal rates of return for the projects and which project is best?

For problems 12 – 15:

You have been asked by the president of your company to evaluate the proposed acquisition of a new hydropropolaser for the R&D department. The price for this equipment is \$70,000, and it would cost another \$14,000 to modify it for special use by your firm. The hydropropolaser, which has a MACRS 3-year recovery period (wts. 33%, 45%, 15%, 7%) would be sold after 3 years for \$30,000. Use of this equipment would require an increase in net working capital of \$11,000. The hydropropolaser would have no effect on revenues, but it is expected to save the firm \$20,000 per year in before-tax operating costs, mainly labor. The firm’s marginal tax rate is 36%.

12. What is the initial net investment for the machine (CF0)?

13. What are the net operating cash flows from this project for years 1 -3?

14. What are the additional cash flows from this project in year 3?

15. If the firm’s WACC is 14%, should they purchase the hydrpropolaser?

Consider the following information for problems 16 & 17.:

Strike Calls Puts
Jul Aug Oct Jul Aug Oct
155 10.5 11.75 14 .1875 1.25 2.75
160 6 8.125 11.125 .75 2.75 4.5
165 2.6875 6.45 8.125 2.375 4.75 6.75
170 .8125 3.25 5.50 5.75 7.5 9

It is currently July 6. The stock pays no dividends and is priced at \$162.00. The expirations are July 17, August 21 and October 16.

16. Suppose you purchased the Oct. 170 calls. What would your return be if the stock price ended at \$185 on Oct. 16 AND how does this rate of return compare to just buying and selling the stock?

17. Suppose you entered into a straddle with the Aug. 165 calls and puts. What would your rate of return be if the price ended up being \$200?

18. A currency trader observes that in the spot exchange market, 1 U.S. Dollar can be exchanged for 2.5 Euros or for 106.27 Japanese Yen. If a bank offers to
exchange .025 Euro/Yen, what (if any) arbitrage profits could be earned?
(Use \$1,000,000)

19. 6-month T-bills have a nominal rate of 3.7%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 5.1%. In the spot exchange market, 1 Yen equals \$.0074. If interest rate parity holds, what is the 6 month forward exchange rate?

20. Your aunt holds the shares of a single company that have been passed down through generations, and have always performed quite well. She also believes (and you agree) that the company will continue to perform well over the foreseeable future. You then proceed to explain why holding just this one company in her portfolio- even though it is not risky, and is providing a nice rate of return – is not a very wise decision. What is your explanation?

Calculate the price
Make an order in advance and get the best price
Pages (550 words)
\$0.00
*Price with a welcome 15% discount applied.
Pro tip: If you want to save more money and pay the lowest price, you need to set a more extended deadline.
We know how difficult it is to be a student these days. That's why our prices are one of the most affordable on the market, and there are no hidden fees.

Instead, we offer bonuses, discounts, and free services to make your experience outstanding.
How it works
Receive a 100% original paper that will pass Turnitin from a top essay writing service
step 1
Upload your instructions
Fill out the order form and provide paper details. You can even attach screenshots or add additional instructions later. If something is not clear or missing, the writer will contact you for clarification.
Pro service tips
How to get the most out of your experience with AssignmentHelpWeb
One writer throughout the entire course
If you like the writer, you can hire them again. Just copy & paste their ID on the order form ("Preferred Writer's ID" field). This way, your vocabulary will be uniform, and the writer will be aware of your needs.
The same paper from different writers
You can order essay or any other work from two different writers to choose the best one or give another version to a friend. This can be done through the add-on "Same paper from another writer."
Copy of sources used by the writer
Our college essay writers work with ScienceDirect and other databases. They can send you articles or materials used in PDF or through screenshots. Just tick the "Copy of sources" field on the order form.
Testimonials
See why 20k+ students have chosen us as their sole writing assistance provider
Check out the latest reviews and opinions submitted by real customers worldwide and make an informed decision.
Architecture, Building and Planning
The assignment was well written and the paper was delivered on time. I really enjoyed your services.
Customer 452441, September 23rd, 2022
English 101
Very good job. I actually got an A
Customer 452443, September 25th, 2022
Business Studies
Excellent service - thank you!
Customer 452469, February 20th, 2023
Public Administration
Excellent timely work
Customer 452451, April 19th, 2023
Nursing
The paper was EXCELLENT. Thank you
Customer 452449, September 23rd, 2022
Business Studies
Thank you!
Customer 452451, November 27th, 2022
Anthropology
Excellent services will definitely come back
Customer 452441, September 23rd, 2022
Business Studies
Job well done. Finish paper faster than expected. Thank you!
Customer 452451, October 3rd, 2022
Theology
Job well done and completed in a timely fashioned!
Customer 452451, November 18th, 2022
Anthropology
excellent loved the services
Customer 452443, September 23rd, 2022
Psychology
Thanks a lot the paper was excellent
Customer 452453, October 26th, 2022
11,595
Customer reviews in total
96%
Current satisfaction rate
3 pages
Average paper length
37%
Customers referred by a friend
OUR GIFT TO YOU
15% OFF your first order
Use a coupon FIRST15 and enjoy expert help with any task at the most affordable price.
Claim my 15% OFF Order in Chat