FINANCE Review

Freeport Inc. is a young start-up company. No dividends will be paid for the next 9 years because the firm needs to plow back the earnings into the company for continued growth. In year 10 the company will pay a dividend of $14 per share and will increase the dividend at 3.9 percent per year thereafter. If the required return on this stock is 12.5 percent, what is the current share price?

14 ------- =162.79 .125-.039. 56.40!!!!!!

Nassau Corp. has earnings of $2.35 per share. The benchmark PE for the company is 18. What stock price would you consider appropriate?

2.35 x 18= $42.3

Spanish Wells, Inc. will pay a $3.56 per share dividend next year. The company pledges to increase its dividend by 3.75 percent per year indefinitely. If you require a return of 11 percent on your investment, how much will you pay for the company's stock today?

3.56 ------ = $49.10 .11-.0375

Exuma, LLC has an issue of preferred stock outstanding that pays a $3.50 dividend every year in perpetuity. If this issue currently sells for $85 per share, what is the required rate of return?

85= 3.50 ------ = 4.1% r

Teleco Inc. issued 15 year bonds one year ago at a coupon rate of 4.1 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 4.5 percent, what is the current bond price?

FV $1000 N 14 x 2 I/Y 4.5/2 PMT 20.5 PV =958.78

You save for retirement over 30 years by investing $850/month in a stock account that yields 10%. You invest $350/month in a bond account that yields 6%. At retirement you combine both accounts into a new account that yields 5%. How much can you withdraw each month assuming a 25 year withdrawal period?

FV 2,272,994 + 351,580= PV PV= 2,272,994 I/Y= 5/12 FV= 0 N=25 x 12 PMT= 13,287

Assume the yield to maturity is 10 percent. What is the price of the bond if the coupon payments were made semiannually?

N 10 I/Y 10/2 PMT 50 FV 1000 PV=1000

Piedmont Park Corp. pays a constant $7.80 dividend on its stock. The company will maintain this dividend for the next 13 years and will then cease paying dividends forever. If the required return on this stock is 11.2 percent, what is the current share price?

N 13 I/Y 11.2 PMT 7.80 PV? $52.12

If you deposit $4,000 at the end of each of the next 20 years into an account paying 9.7% interest. How much will you have in 20 years?

N= 20 PMT = -4,000 I/Y= 9.7 FV? = 221,439

You are planning to make monthly deposits of $450 into a retirement account that pays 10% compounded monthly. If your first deposit will be one month from now, how large will your retirement account be in 30 years?

PMT= -450 I/Y= 10/12 N= 30 x 12 (360) FV= 1,017,219

Dinero bank offers you a 5 year, $50,000 loan, at 7.5% interest. What is the annual payment?

PV 50000 N 5 I/Y 7.5 PMT= 12,358

If you put up $38,000 today in exchange for a 5.8%, 15-year annuity, what will the annual cashflow be?

PV = -38,000 PMT= ? I/Y= 5.8 = 3,861

Assume a growing perpetuity just made a payment of $120 yesterday. If the cash flow is expected to grow at 5% and interest rates are still 10%, what is the price of the perpetuity today?

PV0= CF1 --------- 120 x .05 = $6 --> 126 r-g -------- = 2,520 .10-.05

DG Inc. pays a $2,000 annual dividend that yields 7% and the dividend grows by 2% per years. How much would you pay for the preferred stock?

PV0= CF1 2000 --------- ------- = 40,000 r-g .07-.02

DG Inc. wants to raise cash through issuing preferred stock. The dividend of the stock is set to yield 5% annually and the quarterly dividend payments are $25,000. How much cash will DG Inc. raise through selling preferred stock?

PV0= CF1 25000 x 4= 100,000 --------- ---------- =$2,000,000 r .05

An investment offers $5,500 per year forever, with the first payment occurring one year from now. If the required rate of return is 6% What is the value of the investment? What if the $5,500 payment started in 5 years..what is it worth today? *perpetuity forever*

PV0= CF1 5,500 -------- -------- = 91,666 r .06

You wan to buy a new car for $68,000. The loan is for 60 months with payment at the beginning of the period (annuity due). The APR is 6.4%. What will the monthly payments be?

PV= 68,000 I/R= 6.4/12 N= 60 PMT= 1327

Tigers, Inc. decides to issue $1,000 bonds with 5 years to maturity. The coupon rate is 10 percent, paid annually. The yield to maturity is also 10%. What is the price of a Tigers, Inc. bond?

PV? FV 1000 PMT 100 N 5 I/Y 10 $1000

An investment offers $5,500 per year for 15 years, with the first payment occurring one year from now. If the required rate of return is 6% What is the value of the investment?

PV? N= 15 I/Y= 6 PMT= 5,500 FV= 0 15 --> n, 6--> I/Y, 5500--> PMT then click PV

Now, assume the yield to maturity (i.e., the market interest rates) falls to 8 percent. What is the price of the bond now?

PV? i/y 8 N 5 PMT 100 FV 1000 PV= 1,079

Consider a firm with a contract to sell an asset for $157,000 four years from now. The asset costs $91,700 to produce today. Given a discount rate of 13% per year, will the firm make a profit on this asset? At what rate does the firm just break even?

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You want to be a millionaire when you retire in 40 years. How much do you have to save each month if you earn 10.5% per year? How much do you have to save if you wait 10 years before you start investing?

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You own a zero coupon bond with a par value of $10,000 and 17 years to maturity. If the YTM is 4.9 percent, what is the price of the bond? Assume semiannual compounding periods.

price of bond = par value/(1+r/2)^(2*n) 10,000/(1+4.9%/2)^(2*17) PV $439