Reference no: EM13973475

1. You have just received a windfall from an investment in a friend's business.  He will be paying you $10,000 at the end of this year, $20,000 at the end of the following year, and $30,000 at the end of the year after that (3 years from today).  The interest rate is 3.5%. 

a) What is the present value of your windfall?

b) What is the future value of your windfall in 3 years (on the date of the last payment)? 

2. You are saving for your retirement.  You have decided that one year from today you will deposit 2%of your annual salary in an account which will earn 8% per year.  Your salary last year was $50,000, and it will increase at 4% per year throughout your career.  How much money will you have for your retirement, which will begin in 40 years? HINT: It is easiest to get the PV and then grow that number to FV.

3. You have an outstanding student loan with required payments of $500 per month for the next four years.  The interest rate on the loan is 9% APR (monthly compounding).  Looking at your budget, you can afford to pay an extra $250 a month in addition to your required monthly payments of $500, or $750 in total each month.  How long will it take you to pay off the loan?  What is the effective rate on the account?

4. Ajax has been offered a $100,000 advance on a contract with Sys-ed.  In exchange, they must supply $45,000 in services each year for 3 years.  If the IRR of the deal is 16.65%, should they take the deal?  A similar contract proposed by Win-ed has an IRR of 14.3%.  Which deal should they take? Explain.  Assume the cost of capital is 12%.

5. You have the following cash flows.  The cost of capital is 14%. 

Project	Investment	CF 1	CF 2	CF 3	CF 4
A	-400,000	75,000	90,000	180,000	210,000

a. Calculate the payback period. If the firm has a maximum payback period of 3 years, do you accept the project?

b. Calculate the internal rate of return (IRR). Do you accept the project? Explain.

6. Briefly discuss one reason why the yield curve is important or one way the yield curve can be used. 

7. You are forecasting the balance sheet and income statement for Star for Y1.  Use the following assumptions:  Sales and accounts receivable grow by 25%; cost of goods sold, inventory and accounts payable grow 20%; and SG&A grows 10%.  Interest expense will fall to 9M.  The following accounts will not change (same dollar amount): depreciation expense, dividends, cash, accruals, notes payable, long-term debt, common stock.  The firm will need 100M more in gross PPE.  Calculate the additional funds needed. 

STAR: INCOME STATEMENT (M$)

Fiscal Year Ending	Y0	Y1
Sales	500
Cost of Goods Sold	240
SG&A	30
Depreciation	20
Earnings Before Interest & Tax (EBIT)	210
Interest Expense	10
Earnings Before Tax	200
Taxes (40%)	80
Net Income	120
Dividends	40

STAR: BALANCE SHEET (M$)

Fiscal Year Ending	Y0	Y1
Cash	10
Accounts Receivable	20
Inventories	30
Current Assets	60
Gross PPE	300
Accumulated Depn	40
Net Fixed Assets	260
TOTAL ASSETS	320
Accruals	15
Accounts Payable	5
Notes Payable	25
Current Liabilities	45
Long Term Debt	75
Common Stock	5
Retained Earnings	195
Total Liability & Equity	320

8. Suppose that Starbucks issued a bond at face value on June 15, 2010 that will mature on June 15, 2045.  The price of the bond on December 15, 2015 was $103.23.  The coupon rate is 4.3% with coupons paid semiannually.  The face value is $1000. 

a. What was the yield to maturity when the bond was issued?

b. What is the yield to maturity on December 15, 2015 (Assume you do not get the Dec. 15, 2015 coupon payment)? 

9. Ego Enterprises is considering a new 3-year expansion project that requires a new machine.  The machine costs $2.4 million and can be sold for $600,000 at the end of 3 years.  It will be fully depreciated to a zero book value on a straight line basis over its 3-year tax life.  The project will generate the following revenues during the 3 years: $2,000,000 for year one; $2,500,000 for year 2 and $3,000,000 in year 3.  Operating costs are equal to 20% of the same year sales.  Operating costs do not include depreciation or interest.  Ego will have $400,000 annually in interest expense as part of the financing.  To get the project started and for each year, net operating working capital (NOWC) is 5% of the next year's sales.  The tax rate is 40% and the cost of capital is 12%.  Find the net present value.  Should they take the project? Explain.

10. Colgate-Palmolive Co has just paid an annual dividend of $1.52.  Analysts are predicting a 7.5% growth rate in earnings (and dividends) over the next 4 years.  After that, assume that Colgate will grow at only 3% per year.  If the required return for Colgate is 9.8%,estimate the price for Colgate.  Look up Colgate's current stock price and compare it to what you calculated.

11. Coca-Cola Co. (ticker: KO) just closed at $41.50 per share.   Coke is expected to pay an annual dividend of $1.45 per share at the end of the year.   Analysts were predicting a growth rate in earnings (and dividends) of 3.5% per year.   If this growth rate continues in perpetuity, what is the required return (cost of capital) for an investment in Coca-Cola stock?

12. Suppose your employer offers you a choice between a $5000 bonus, and 100 shares of the company stock.  Whichever one you choose will be awarded today.  The stock is currently trading for $63 per share.

a. Suppose that if you receive the stock bonus, you are free to trade it.  Which form of the bonus should you choose?  What is its value?

b. Suppose that if you receive the stock bonus, you are required to hold it for at least one year.  What can you say about the value of the stock bonus now?  What will your decision depend on?