Corporate finance

Q1- If your friend is looking for safe investments, will you advise him or her to purchase bonds

or shares? Why

Q2- Baby’s Care Corporation has an infinite horizon with a constant dividend of $25. Your uncle

Sam and his wife are willing to invest their money in purchasing the shares of this corporation.

While your uncle wants an annual return of 10% on his investment, his wife is expecting an

annual return of 8% on her money. Which one of them will be eager to pay a higher price for this

company’s share?

Q3- What is the price of a constant growth dividend with an infinite horizon, if you know that the

most recent dividend was $20, growth rate is 5%, and the required rate on investment is 7%?

Q4- What is the main difference between common stocks and preferred stocks?

Q5- Moore Company is about to issue a bond with semiannual coupon payments, a coupon rate

of 8%, and a par value of $1,000. The yield to maturity for this bond is 10%.

A. What is the bond price if it matures in five or twenty years?

B. What do you notice about the bond price in relationship to the bond’s maturity?

Q6- Prestigious University is offering a new admission and tuition payment plan for all alumni.

On the birth of a child, parents can guarantee admission to Prestigious if they pay the first year’s

tuition. The university will pay an annual rate of return of 4.5% on the deposited tuition, and a

full refund will be available if the child chooses another university. The tuition is projected to be

$12,000 a year at prestigious eighteen years from today. What would parents pay today if they

just gave birth to a new baby and the child will attend college in eighteen years? How much is

the required payment to secure admission for their child if the interest rate falls to 2.5%?

Q7- Your dreams of becoming rich have just come true. You have won the State of Tranquility's

lottery. The state offers you two payment plans for the $5,000,000 advertised jackpot. You can

take annual payments of $250,000 for the next twenty years or $2,867,480 today. If your

investment rate over the next twenty years is 8%, which payoff will you choose?

Q8- Given the following after-tax cash flow on a new toy for Tyler’s Toys, find the project’s

discounted payback period, NPV, and profitability index. The appropriate discount rate for the

project is 12%. If the cutoff period is six years for major projects, determine whether

management will accept or reject the project under the three different decision models?

Initial cash outflow: $10,400,000

Years one through four cash inflow: $2,600,000 each year

Years six and seven cash inflow: $750,000 each year