FIN202 - MID – TEST – IB1708

1. Bond price: Regatta, Inc., has seven-year bonds outstanding that pay a 12 percent
coupon rate. Investors buying these bonds today can expect to earn a yield to
maturity of 8.875 percent. What is the current value of these bonds? Assume annual
coupon payments.

Annual coupon=$1000*12%=$120

Hence current value=Annual coupon*Present value of annuity factor(8.875%,7)+

$1000*Present value of discounting factor(8.875%,7)

 =$120*5.054131966+$1000*0.551445788

 =$1157.94

2. Bond price: You are interested in investing in a five-year bond that pays 7.8 percent
coupon with interest to be received semiannually. Your required rate of return is 8.4
percent. What is the most you would be willing to pay for this bond?

3. Zero coupon bonds: Diane Carter is interested in buying a five-year zero coupon
bond with a face value is $1,000. She understands that the market interest rate for
similar investments is 9 percent. Assume annual coupon payments. What is the
current value of this bond?

Face value is 1000

Yield is 9%

Maturity is 5 year

zero coupon bonds do not pay coupons,it is issued at discount and redeemed at par value.

Present value of bond is 649.93$

4. Zero coupon bonds: Ten-year zero-coupon bonds issued by the U.S. Treasury have a
face value of $1,000 and interest is compounded semiannually. If similar bonds in the
market yield 10.5 percent, what is the value of these bonds?

Value of bonds=Face value/(1+Yield/2)^(2*time period)

 =$1000/(1+0.105/2)^(2*10)

 =$1000/(1.0525)^20

=$1000*0.359383314

=$359.38

5. Zero coupon bonds: Northrop Real Estate Company is planning to fund a

development project by issuing 10-year zero coupon bonds with a face value of
$1,000. Assuming semiannual compounding, what will be the price of these bonds if
the appropriate discount rate is 14 percent?
Face value = 1000
N = 10 * 2 = 20 period
I = 14% / 2 = 7%
Price = face value / (1+ i) ^ n

= 1000 / (1* 0.7) ^ 20

= 258.42
6. Yield to maturity: Ruth Hornsby is looking to invest in a three-year bond that makes
semiannual coupon payments at a rate of 5.875 percent. If these bonds have a market
price of $981.13, what yield to maturity and effective annual yield can she expect to
earn?

Face Value = $1,000

Current Price = $981.13

Annual Coupon Rate = 5.875%

Semiannual Coupon Rate = 2.9375%
Semiannual Coupon = 2.9375% * $1,000
Semiannual Coupon = $29.375

Time to Maturity = 3 years

Semiannual Period = 6

Let Semiannual YTM be i%

$981.13 = $29.375 * PVIFA(i%, 6) + $1,000 * PVIF(i%, 6)

Using financial calculator:
N=6
PV = -981.13
PMT = 29.375
FV = 1000

I = 3.289%

Semiannual YTM = 3.289%

Annual YTM = 2 * 3.289%

Annual YTM = 6.58%

So, she can expect to earn a yield to maturity of 6.58%

7. Yield to maturity: Rudy Sandberg wants to invest in four-year bonds that are
currently priced at $868.43. These bonds have a coupon rate of 6 percent and make
semiannual coupon payments. What is the current market yield on this bond?
Time= 4 years*2= 8 semi-annual periods

Face value= $1,000

Present value= $868.43

Coupon rate= 6%

Annual Coupon payment= 0.06*1,000= $60

 Current yield= Annual coupon/ Current price of bond

                           = 60/ 868.43

                           = 0.0691*100

                           = 6.91%.

8. Realized yield: Josh Cavern bought 10-year, 12 percent coupon bonds issued by the
U.S. Treasury three years ago at $913.44. If he sells these bonds, which have a face
value of $1,000, at the current price of $804.59, what is the realized return on these
bonds? Assume similar coupon-paying bonds make annual coupon payments.
Coupon =12%*1000 =120
Price =913.44
Sales price of Bond =804.59
Number of Year =3
Realized Yield using financial calculator 
 N=3;PMT=120;PV=-913.44;FV=804.59 CPT I/Y =9.52%
Realized Return =9.52%
9. Realized yield: Four years ago, Lisa Stills bought six-year, 5.5 percent coupon bonds
issued by the Fairways Corp. for $947.68. If she sells these bonds at the current price
of $894.52, what will be her realized yield on the bonds? Assume similar coupon-
paying bonds make annual coupon payments.

Annual coupon = 1000 * 5.5% = 55

Annual coupon payment ( the bond was held for 4 years) = 55 * 4 = $220

Lisa purchased the bond for 947.68 and sold for 894.52
 Capital gain = -53.16
Capital return on Lisa’s bond = 220 + (-53.16) = 166.84
The rate of return = 166.84 / 947.68 = 17.61%
Annual rate of return = 17.61% / 4 = 4.4%

10. The CAPM predicts that the return of Moon Bucks Tea Corp. is 23.6 percent. If the
risk-free rate of return is 8 percent and the expected return on the market is 20
percent, then what is Moon Bucks’ beta?
The CAPM (expected) return = Risk free + Beta * ( Market rate – Risk
free rate)
23.6% = 8% + Beta (20% - 8%)
23.6% = Beta * (12%)
=> Beta = 1.30
11. CSB, Inc., has a beta of 1.35. If the expected market return is 14.5 percent and the
risk-free rate is 5.5 percent, what is the appropriate required return of CSB (using the
CAPM)?

Risk premium of stock = Beta * Market risk premium

= 1.35 * 9
= 12.15%
Required rate of return = Risk free rate + risk premium
= 5.5 + 12.15
= 17.65%
12. Ted McKay has just bought the common stock of Ryland Corp. The company
expects to grow at the following rates for the next three years: 30 percent, 25 percent,
 and 15 percent. Last year the company paid a dividend of $2.50. Assume a required
rate of return of 10 percent. Compute the expected dividends for the next three years
and also the present value of these dividends.

Dividend paid = 2.5

Rate of return = 10%
Growth rate = 35%, 25%, 15%
Dividend for year 1 = Dividend paid * (1 + growth rate1)
= 2.5 * ( 1 + 30%)
= 3.25
Dividend for year 2 = Dividend paid * (1 + growth rate2)
= 3.25 * ( 1 + 25%)
= 4.06
Dividend for year 3 = Dividend paid * (1 + growth rate3)
= 4.06 * ( 1 + 15%)
= 4.67

Present value of dividend payment:

Year Cash flows Discount rate Discounted cash
flows
1 3.25 0.909% 2.96
2 4.06 0.826% 3.36
3 4.67 0.751% 3.51
Present value 9.83

13. Merriweather Manufacturing Company has been growing at a rate of 6 percent for
the past two years, and the CEO expects the company to continue to grow at this rate
for the next several years. The company paid a dividend of $1.20 last year. If your
 required rate of return is 14 percent, what is the maximum price that you would be
willing to pay for this company’s stock?

growth rate g = 6%

last paid dividend D0 = $1.20

r = 14%

Maximum price to be paid = D0*(1+g)/(r-g)

= 1.2*(1+6%)/(14%-6%)

=1.2*1.06/8%

=$15.90

14. Clarion Corp. has been selling electrical supplies for the past 20 years. The
company’s product line has changed very little in the past five years, and the
company does not expect to add any new items for the foreseeable future. Last year,
the company paid a dividend of $4.45 to its common stockholders. The company is
not expected to increase its dividends for the next several years. If your required rate
of return for such firms is 13 percent, what is the current value of this company’s
stock?

Current value=Annual dividend/required return

 =4.45/0.13

which is equal to

=$34.23

15. Barrymore Infotech is a fast -growing communications company. The company did
not pay a dividend last year and is not expected to do so for the next two years. Last
year the company’s growth accelerated, and management expects to grow the
business at a rate of 35 percent for the next five years before growth slows to a more
stable growth rate of 7 percent for the next several years. In the third year, the
company has forecasted a dividend payment of $1.10. Calculate the value of the
company’s stock at the end of its rapid growth period (i.e., at the end of five years).
The required rate of return for such stocks is 17 percent. What is the current value of
this stock?
 D0 = D1 =D2 = 0
D3 = $1.10
D4 = D3(1 + g4) = $1.10(1 + 0.35) = $1.485
D5 = D4(1 + g5) = $1.485(1 + 0.35) = $2.005
D6 = D5(1 + g6) = $2.005(1 + 0.07) = $2.145
Price of stock at t = 5
P5: Present value of the dividends = PV(D1) + PV(D2) + PV(D3) + PV(D4) + PV(D5)
= 0 + 0 + 1.10/(1.17)^3 + 1.485/(1.17)^4 + 2.005 / (1.17)^ 5
= 0 + 0 + 0.69 + 0.79 + 0.91
=2.39
Present value of stock = PV(Dividends) + PV(P5)
= $2.39 + [$21.45/(1.17)5]
= $2.39 + $9.78
= $ 12.17

16. You are interested in buying the preferred stock of a bank that pays a dividend of
$1.80 every quarter. If you discount such cash flows at 8 percent, what is the value of
this stock?
Quaterly dividend on preferred stock = 1.8
Required rate of return = 8%
Value of prefered stock = preference dividend / required return
= 1.8 / 0.02
= 90$

17. Zero growth: The current stock price of Largent, Inc., is $44.72. If the required rate
of return is 19 percent, what is the dividend paid by this firm, if this dividend is not
expected to grow in the future?
P0 = Div1 / (r-g)
44.72 = D1 / 0.19 – g
D1 = 44.72 * 0.19 = 8.49

18. Constant growth: Moriband Corp. just paid a dividend of $2.15 yesterday. The
company is expected to grow at a steady rate of 5 percent for the foreseeable future.
If investors in stocks of companies like Moriband require a rate of return of 15
percent, what should be the market price of Moriband’s stock?
 Price = D1/ (k-g)

D1 = D0*(1+growth)

= 2.15* 105%

=2.2575

Price = 2.2575/ (15%- 5%)

=2.2575/ 10%

= $22.575

= $22.58

19. Constant growth: Nyeil, Inc., is a consumer products firm that is growing at a
constant rate of 6.5 percent. The firm’s last dividend was $3.36. If the required rate
of return is 18 percent, what is the market value of this stock if the dividends grow at
the same rate as the firm?

Market value of stock= Expected dividend next year/( required return-growth rate)

Expected dividend next year= 3.36*(1+6.5%)= 3.5784

Market value of stock= 3.5784/ (0.18-0.065)  =31.11652= 31.12

20. Constant growth: Reco Corp. is expected to pay a dividend of $2.25 next year. The
forecast for the stock price a year from now is $37.50. If the required rate of return is
14 percent, what is the current stock price? Assume constant growth.

  Current stock price = (P1+D1)/(1+R)

                                                 = (37.50+2.25)/(1+0.14)

                                                 = 39.75/1.14

                                                 = 34.87
21. Constant growth: Proxicam, Inc., is expected to grow at a constant rate of 7 percent.
If the company’s next dividend, which will be paid in a year, is $1.15 and its current
stock price is $22.35, what is the required rate of return on this stock?

D1 = expected dividend = 1.15

P0 = Current price = 22.35
G = growth rate = 7%
Required rate of return = D1 / P0 * 100 + g
= 1.15 / 22.35 * 100 + 7%
= 12.15%

22. Preferred stock valuation: X-Centric Energy Company has issued perpetual preferred
stock with a stated (par) value of $100 and a dividend of 4.5 percent. If the required
rate of return is 8.25 percent, what is the stock’s current market price?

Dividend = par value * dividend rate

= 100 * 4.5% = 4.50

Value of preferred stock = dividend / required rate of return

= 4.50 / 8.25%
= $54.55

23. Preferred stock valuation: The First Bank of Ellicott City has issued perpetual
preferred stock with a $100 par value. The bank pays a quarterly dividend of $1.65
on this stock. What is the current price of this preferred stock given a required rate of
return of 11.6 percent?

Required rate of return when pays quarterly = 11.6 / 4 = 2.9%

Value of preferred stock = dividend / required rate of return
= 1.65 / 2.9%
= $56.9
24. Preferred stock: The preferred stock of Axim Corp. is currently selling at $47.13. If
your required rate of return is 12.2 percent, what is the dividend paid by this stock?

Dividend = Value of preferred stock * required rate of return

= 47.13 * 12.2%
 = 5.75

25. Preferred stock: Each quarter, Sirkota, Inc., pays a dividend on its perpetual preferred
stock. Today, the stock is selling at $63.37. If the required rate of return for such
stocks is 15.5 percent, what is the quarterly dividend paid by this firm?

Required rate of return quarterly = 15.5% / 4 = 3.875%

Dividend = Value of preferred stock * required rate of return
= 65.37 * 3.875%
= 2.53

26. Non-constant growth: Diaz Corp. is expected to grow rapidly at a rate of 35 percent
for the next seven years. The first dividend, to be paid three years from now, will be
worth $5. After seven years, the company (and the dividends it pays) will settle to a
constant growth rate of 8.5 percent. What is the value of this stock with a required
rate of return of 14 percent?

Dividend of the first 3 years = CV / ( 1+ required rate of return) ^ period

= 5 / ( 1 + 14%) ^ 3
= 3.37
Dividend in the next 4 years = FV / ( 1 + required rate of return )^period
=( 5 * (1 + 35%) ^1) / (1 + 14%) ^ 4 + ….+ ( 5 * (1 +
35%) ^4) / (1 + 14%) ^ 7
= 3.99 + 4.73 + 5.6 + 6.64
= 20.96
Dividend after 7 years period = FV / (required rate of return – growth rate) / (1+
required rate of return) ^ 7
= (( 5 * ( 1 + 35%) ^ 4 * ( 1 + 8.5%)) / (14% - 8.5%)) /
( 1 + 14%) ^ 7
= 130.93
Value of non-constant grow stock = 3.37 + 20.96 + 130.93 = 155.26

27. Non-constant growth: Tin-Tin Waste Management, Inc., is growing rapidly.

Dividends are expected to grow at rates of 30 percent, 35 percent, 25 percent, and 18
percent over the next four years. Thereafter, management expects dividends to grow
 at a constant rate of 7 percent. The stock is currently selling at $47.85 and the
required rate of return is 16 percent. Compute the dividend for the current year (D0).

CV= D0*(1+Growth1)/(1+Return)^1+

D0*(1+Growth1)*(1+Growth2)/(1+Return)^2+

D0*(1+Growth1)*(1+Growth2)*(1+Growth3)/(1+Return)^3+

D0*(1+Growth1)*(1+Growth2)*(1+Growth3)*(1+Growth4)/(1+Return)^4+

[D0*(1+Growth1)*(1+Growth2)*(1+Growth3)*(1+Growth4)*(1+constant growth)/(Return-
Growth)]/(1+Return)^4

47.85=D0*1.3/1.16+    D0*1.3*1.35/1.16^2+         D0*1.3*1.35*1.25/1.16^3+        

D0*1.3*1.35*1.25*1.18/1.16^4 + [D0*1.3*1.35*1.25*1.18*1.07/(0.155-0.07)]/1.16^4

47.85=D0* 1.12 + D0 * 1.30 + D0 * 1.40 +D0 * 1.43 + D0 * 16.99

D0=47.85/22.24

 D0=2.15

28. Dynamo Corp. is expecting annual payments of $34,225 for the next seven years
from a customer. What is the present value of this annuity if the discount rate is 8.5
percent?

Present value of annuity ( PVA ) = P * ( ( 1 - ( 1 / 1 + I )^n) / i)

= 34,225 * ( ( 1 – ( 1 / 1 + 8.5% ) ^ 7 ) / 8.5%)
=34,225 * 5.1185
= 175,181.14

29. Future value with multiple cash flows: Konerko, Inc., expects to earn cash flows of
$13,227, $15,611, $18,970, and $19,114 over the next four years. If the company
uses an 8 percent discount rate, what is the future value of these cash flows at the end
of year 4?

FV = CV * r ^ n
Year Current value Discount rate FV
1 13,227 (1+8%) ^ 3 16,662.21
2 15,661 (1+8%) ^ 2 18,208.67
 3 18,970 (1+8%) ^ 1 20,487.60
4 19,114 (1+8%) 19,114
74,472.48

30. Future value with multiple cash flows: Ben Woolmer has an investment that will pay
him the following cash flows over the next five years: $2,350, $2,725, $3,128,
$3,366, and $3,695. If his investments typically earn 7.65 percent, what is the future
value of the investment’s cash flows at the end of five years?
Year Current value Discount rate Future value
1 $2,350 (1+ 7.65%) ^ 4 3155.91

2 $2,725 (1+ 7.65%) ^ 3 3399.45

3 $3,128 (1+ 7.65%) ^ 2 3624.45

4 $3,366 (1+ 7.65%) ^ 1 3623.50

5 $3,695 (1+ 7.65%) 3695

17,498.75

31. Future value with multiple cash flows: You are a freshman in college and are
planning a trip to Europe when you graduate from college at the end of four years.
You plan to save the following amounts starting today: $625, $700, $700, and $750.
If the account pays 5.75 percent annually, how much will you have at the end of four
years?
Year Current value Discount rate Future value
1 625 (1+ 5.75%) ^ 4 781.6305

2 700 (1+ 5.75%) ^ 3 827.826

3 700 (1+ 5.75%) ^ 2 782.814

4 750 (1+ 5.75%) ^ 1 793.125

3185.396

32. Present value with multiple cash flows: Saul Cervantes has just purchased some
equipment for his landscaping business. For this equipment, he must pay the
following amounts at the end of each of the next five years: $10,450, $8,500, $9,675,
$12,500, and $11,635. If the appropriate discount rate is of 10.875 percent, what is
the cost of the equipment Saul purchased today?
 Year Future value Discount rate Current value
1 $10,450 (1.10875) 9245.03

2 $8,500 (1.10875) ^ 2 6,914.35

3 $9,675 (1.10875) ^ 3 7,098.23

4 $12,500 (1.10875) ^ 4 8,271.33

5 $11,635 (1.10875) ^ 5 6,943.82

38,65.76

33. Future value of an ordinary annuity: Cecelia Thomas is a sales executive at a

Baltimore firm. She is 25 years old and plans to invest $3,000 every year in an IRA
account, beginning at the end of this year until she turns 65 years old. If the IRA
investment will earn 9.75 percent annually, how much will she have in 40 years when
she turns 65 years old?

FVOA = P * ((1+ i) ^ n -1)/i

= 3,000 * ((1+ 9.75%) ^ 40 – 1 ) / 9.75%
= 1,240,676.405

34. Future value of an annuity. Refer to Problem 6.10. If Cecelia Thomas starts saving at
the beginning of each year, how much will she have at age 65?

FVA = FVOA * ( 1 + I )
= 1,240,676.405 * 1.0975
= 1,361,642.355

35. You are given the following information about Clarkesville Plumbing Company.
Revenues last year totaled $896, depreciation expenses $75, costs of goods sold
$365, and interest expenses $54. At the end of the year, current assets were $121 and
current liabilities were $107. The company has an average tax rate of 34 percent.
Calculate its net income by setting up an income statement.

INCOME STATEMENT
Revenue $896
COGS $365
EBITDA $531
Depreciation expense $75
EBIT $456
Interest expense $54
Earning before tax $402
Tax expense (34%) $136.68
Net income $265.32