DC8 Class and LAB8 Class Weeks 3 and 4

ASSIGNEMET 3 CLASS-DC8

Start by reading and following these instructions:

1. Quickly skim the questions or assignment below and the assignment rubric to help you focus.

2. Read the required chapter(s) of the textbook and any additional recommended resources. Some answers may require you to do additional research on the Internet or in other reference sources. Choose your sources carefully.

3. Consider the discussion and the any insights you gained from it.

4. Create your Assignment submission and be sure to cite your sources, use APA style as required, check your spelling.

Assignment:

Answer these essay questions:

1. Calculating Future Values - You have $20,000 you want to invest for the next 40 years. You are offered an investment plan that will pay you 7 percent per year for the first 20 years and 11 percent per year for the last 20 years. How much will you have at the end of the 40 years? Does it matter if the investment plan pays you 11 percent per year for the first 20 years and 7 percent per year for the next 20 years? Why or why not?

2. Finding the time necessary until you pay off a loan is simple if you make equal payments each month. However, when paying off credit cards many individuals only make the minimum monthly payment, which is generally 2% to 3% of the balance or $10 whichever is greater. Locate the credit card calculator at www.fincalc.com and work out this exercise:

You currently owe $10,000 on a credit card with a 17% interest rate and a minimum payment of $10 or 2% of your balance.

- How soon will you pay off this debt if you make the minimum payment each month?

- How much total interest will you pay using that method?

- Calculate how soon you would pay off this debt if you paid $100 per monthly payment.

3. Find the retirement calculator at www.moneychimp.com to answer the following questions. Suppose you have $1,500,000 when you retire and want to withdraw an equal amount each year for the next 30 years.

- How much can you withdraw each year if you earn 7%

- What if you can earn 9%?

- What if the market failed and your earnings dropped to -.5%. How long would it take to drain your account if you did nothing about this loss pattern?

This is a classic retirement problem. A friend is celebrating her birthday and wants to start saving for her anticipated retirement. She has the following years to retirement and retirement spending goals:

- Years until retirement: 30

- Amount to withdraw each year: $90,000

- Years to withdraw in retirement: 20

- Interest rate: 8%

Because your friend is planning ahead, the first withdrawal will not take place until one year after she retires. She wants to make equal annual deposits into her account for her retirement fund.

a. If she starts making these deposits in one year and makes her last deposit on the day she retires, what amount must she deposit annually to be able to make the desired withdrawals at retirement?

b. Suppose your friend just inherited a large sum of money. Rather than making equal annual payments, she decided to make one lump-sum deposit today to cover her retirement needs. What amount does she have to deposit today?

c. Suppose your friend's employer will contribute to the account each year as part of the company's profit-sharing plan. In addition, your friend expects a distribution from a family trust several years from now. What amount must she deposit annually now to be able to make the desired withdrawals at retirement?

- Employer's annual contribution: $1,500

- Years until trust fund distribution: 20

- Amount of trust fund distribution: $25,000

4. Time value of money. In our opening case study, why would the Toyota Motor Credit Corporation (TMCC) be willing to accept such a small amount today ($1,163) in exchange for a promise to repay about 9 times that amount ($10,000) in the future (30 years)?

- Would you—why or why not? Outline the considerations you used in making your answer.

- Would your answer depend on who is making the promise to repay? Explain your conclusions.

ASSIGNEMET 4 CLASS-DC8

Start by reading and following these instructions:

1. Quickly skim the questions or assignment below and the assignment rubric to help you focus.

2. Read the required chapter(s) of the textbook and any additional recommended resources. Some answers may require you to do additional research on the Internet or in other reference sources. Choose your sources carefully.

3. Consider the discussion and the any insights you gained from it.

4. Create your Assignment submission and be sure to cite your sources, use APA style as required, check your spelling.

Assignment:

Answer these essay questions:

1. Mark Sexton and Todd Story, the owners of S&S Air introduced in Module 3, have decided to expand their operations. They instructed their newly hired financial analyst, Chris Guthrie, to enlist an underwriter to help sell $20 million in new 10-year bonds to finance construction. Chris has entered into discussions with Renata Harper, an underwriter from the firm of Crowe & Mallard, about which bond features S&S Air should consider and what coupon rate the issue will likely have.

Although Chris is aware of the bond features, he is uncertain as to the costs and benefits of some features, so he isn't clear on how each feature would affect the coupon rate of the bond issue. You are Renata's assistant, and she has asked you to prepare a memo to Chris describing the effect of each of the following bond features on the coupon rate of the bond. She would also like you to list any advantages or disadvantages of each feature.

a. The security of the bond, that is, whether the bond has collateral.

b. The seniority of the bond.

c. The presence of a sinking fund.

d. A call provision with specified call dates and call prices.

e. A deferred call accompanying the above call provision.

f. A make-whole call provision.

g. Any positive covenants. Also, discuss several possible positive covenants S&S Air might consider.

h. Any negative covenants. Also, discuss several possible negative covenants S&S Air might consider.

i. A conversion feature (note that S&S Air is not a publicly traded company).

j. A floating rate coupon.

2. Holding Period Yield. The YTM on a bond is the interest rate you earn on your investment if interest rates don't change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY).

a. Suppose that today you buy an annual coupon bond with a coupon rate of 7 percent for $875. The bond has 10 years to maturity. What rate of return do you expect to earn on your investment?

b. Two years from now, the YTM on your bond has declined by 1 percent, and you decide to sell. What price will your bond sell for? What is the HPY on your investment? Compare this yield to the YTM when you first bought the bond. Why are they different?

3. According to the Value Line Investment Survey, the growth rate in dividends for Duke Energy for the previous 10 years has been 1.5%. If investors feel this growth rate will continue, what is the required return for Duke Energy stock?

4. Stock Valuation. Most corporations pay quarterly dividends on their common stock rather than annual dividends. Barring any unusual circumstances during the year, the board raises, lowers, or maintains the current dividend once a year and then pays this dividend out in equal quarterly installments to its shareholders.

a. Suppose a company currently pays an annual dividend of $3.20 on its common stock in a single annual installment, and management plans on raising this dividend by 6 percent per year indefinitely. If the required return on this stock is 12 percent, what is the current share price?

b. Now suppose the company in (a) actually pays its annual dividend in equal quarterly installments; thus, the company has just paid a dividend of $.80 per share, as it has for the previous three quarters. What is your value for the current share price now? (Hint: Find the equivalent annual end-of-year dividend for each year.) Comment on whether you think this model of stock valuation is appropriate.