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# 1.

Find the future value of an investment of \$2,500 made today for the following rates and periods:
a. 6.25 percent compounded semiannually for 12 years
b. 7.63 percent compounded quarterly for 6 years
c. 8.9 percent compounded monthly for 10 years
d. 10 percent compounded daily for 3 years

2. You have \$10,000 in cash invest to earn 8.2 percent; or you can wait, enjoy some of it, and invest
\$9,000 in your brother’s business in one year. Your brother is promising you a return of at least 10
percent on your investment. Whichever alternative you choose, you will need to cash in at the end of 10
years. Assume your brother is trustworthy and that both investments carry the same risk. Which one
will you choose?

3. Suppose your company needs to raise \$45 million and you want to issue 30-year bonds for this
purpose. Assume the required return on your bond issue will be 8 percent, and you’re evaluating two
issue alternatives: A semiannual coupon bond with a 6 percent coupon rate and a zero coupon bond.
Your company’s tax rate is 35 percent.
How many of the coupon bonds would you need to issue to raise the \$45 million? How many of the
zeroes would you need to issue?

4. Lohn Corporation is expected to pay the following dividends over the next four years: \$10, \$7, \$6,
and \$2.75. Afterwards, the company pledges to maintain a constant 5 percent growth rate in dividends
forever. If the required return on the stock is 13 percent, what is the current share price?

5. Differential Growth Hughes Co. is growing quickly. Dividends are expected to grow at a rate of 20
percent for the next three years, with the growth rate falling off to a constant 5 percent thereafter. If the
required return is 12 percent and the company just paid a \$2.80 dividend, what is the current share
price?

6. Differential Growth Janicek Corp. is experiencing rapid growth. Dividends are expected to grow at
30 percent per year during the next three years, 18 percent over the following year, and then 8 percent
per year indefinitely. The required return on this stock is 11 percent, and the stock currently sells for
\$65 per share. What is the projected dividend for the coming year?

7. The Treasury bill rate is 4%, and the expected return on the market portfolio is 12%. Using the
capital asset pricing model:
a. What is the risk premium on the market?
b. What is the required return on an investment with a beta of 1.5?
c. If an investment with a beta of .8 offers an expected return of 9.8%, does it have a positive NPV?
d. If the market expects a return of 11.2% from stock X, what is its beta?

8. You are given the following information for Golden Fleece Financial:
Long-term debt outstanding: \$300,000
Current yield to maturity (r debt): 8%
Number of shares of common stock: 10,000
Price per share: \$50
Book value per share: \$25
Expected rate of return on stock (r equity): 15%
Calculate Golden Fleece’s company cost of capital. Ignore taxes.
9. Year Returns Probability
1 -10% 0.2
2 -5% 0.3
3 5% 0.25
4 15% 0.25
Compute the following:
a. Variance of the return
b. Standard deviation of the returns

10.
The following are the financial statements for Nederland Consumer Products Company for the fiscal
year ended September 30, 2011.

## Nederland Consumer Products Company

Income Statement for the Fiscal Year
Ended September 30, 2011

## Net sales \$51,407

Cost of products sold 25,076
Gross margin \$26,331
Depreciation 758
Operating income (loss) \$ 9,827
Interest expense 477
Earnings (loss) before income taxes 9,350
Income taxes 2,869
Net earnings (loss) \$ 6,481

## Nederland Consumer Products

Balance Sheet as of 9/30/2011
Assets Liabilities and Stockholders’ Equity
Cash and marketable securities \$ 5,469 Accounts payable \$ 3,617
Investment securities 423 Accrued and other liabilities 7,689
Accounts receivable 4,062 Taxes payable 2,554
Total inventories 4,400 Debt due within one year 8,287
Deferred income taxes 958
Prepaid expenses & other receivables 1,803
Total current assets \$17,115 Total current liabilities \$22,147
Property, plant, and equip., at cost 25,304 Long-term debt 12,554
Less: Accumulated depreciation 11,196 Deferred income taxes 2,261
Net plant and equipment \$14,108 Other non-current liabilities 2,808
Net goodwill & other intangible assets 23,900 Total liabilities \$39,770
Other non-current assets 1,925 Convertible Class A preferred stock 1,526
Common stock 2,141
Retained earnings 13,611
Total stockholders’ equity (deficit) \$17,278
Total liabilities and stockholders’
Total assets \$57,048 equity \$57,048

Calculate all the ratios for which industry figures are available below for Nederland and compare the
firm’s ratios with the industry ratios.

## Ratio Industry Average Nederland

Current ratio 2.05
Quick ratio 0.78
Gross margin 23.9%
Profit margin 12.3%
Debt ratio 0.23
Long-term debt to equity 0.98
Interest coverage 5.62
ROA 5.3%
ROE 18.8%