Reference no: EM132496934

Question 1. After graduation, you plan to work for Johnson Corporation for 7 years and then start your own business. You expect to save and deposit $4,000 a year for the first 3 years (t = 1 through t = 3 and $14,000 annually for the following 4 years (t = 4 through t = 7). The first deposit will be made a year from today. In addition, your grandfather gave you a $20,000 graduation gift which you will deposit at the end of year one. If the account earns 11% compounded annually, how much will you have when you start your business 7 years from now?

Question 2. Your sister turned 25 today, and she is planning to save $3,500 per year for retirement, with the first deposit to be made one year from today. She will invest in a mutual fund that's expected to provide a return of 7% per year. She plans to retire 40 years from today, when she turns 65, and she expects to live for 25 years after retirement, to age 90. Under these assumptions, how much can she spend each year after she retires? Her first withdrawal will be made at the end of her first retirement year and she will earn 7% per year.

Question 3. Adam's Inc.'s outstanding common stock is currently selling in the market for $28. Dividends of $1.80 per share were paid last year, and the company expects annual growth of 6%.

(a) What is the value of the stock to you, given a 11% required rate of return?

(b) Determine the expected rate of return for the stock.

(c) Should you purchase this stock? Why?

Question 4. Sampson food company has a 14% annual coupon interest rate on a $1,000 par value bond with 15 years left to maturity. Bonds of same maturity now sell to yield 12% return.

(a) How much would you be willing to pay for one of these bonds today? Why?

(b) If the bond is selling for $ 1,150 what is the yield to maturity?

(c) Will you buy this bond? Explain in detail what key factors you will consider in making your decision.

You are considering two mutually exclusive projects: projects A and project B. The initial cash outlay (cost) associated with project A is $60,000, whereas the initial cash outlay associated with project B is $ 80,000. The required rate of return on both projects is 10 percent. The expected annual free cash inflows from each project are as follows:

Year               Project A                            Project B

0                 - 60,000                        -80,000

1                    13,000                       15,000

2                       13,000                    15,000

3                       13,000                   15,000

4                       13,000                   15,000

5                       13,000                     15,000

6                         13,000                       15,000

A. Calculate the payback period. Which project should be accepted under the payback rule?

B. Calculate the NPV and the IRR for each project and; (i) indicate which project should be accepted, if mutually exclusive; (ii) Explain in detail why you selected or rejected the project/s; (iii). What are the implications for the firm if you selected the wrong project?

You must show the formula/s you used to arrive at your answers.

C. When comparing two mutually exclusive projects, (i) do you think the short -term project will be ranked higher using the NPV criterion if this project cost of capital is higher than the other project? (ii) Would the other long-term project be ranked higher under the NPV criterion (better) if its cost of capital is much lower? (iii) Would changes in the cost of capital ever cause a change in the IRR ranking of two such projects. Why or why not?

Jam inc stock has a beta of 0.9. The risk free rate is 5% and the expected return on the market is 11%. What is the expected rate of return on this stock?

If you require 16% rate of return on a stock given a risk free rate of 4% and the expected return on the market of 12%, what would be the beta of the stock you should buy?