Finance homework 5

Assignment 5

Remember, you must show your calculations to receive credit. To show how you calculated an answer

using the time value functions on your calculator, you may show this as the text does on page 258 on the

bottom left. For example when solving for the FV, you may show this as:

N = 4

I/Y = 10

PV = -1,000

PMT = 0

Solve for FV = $1,464.10

To solve these time value problems, you may use any of 3 methods. You may use the appendices at the

back of the textbook (these are also provided in the Course Information tab in Blackboard), you may use

the formulas in the text, or you may use the time value functions on your calculator. I strongly

recommend that you use one method and check your work using another method (keeping in mind that

the appendices have factors that are rounded off and your answers using the appendices will be slightly

different than using the formulas or the calculator time value functions).

Chapter 9 Problems

1. What is the present value of:

a. $80,000 in 10 years at 6 percent?

b. $106,000 in 5 years at 12 percent?

c. $250,000 in 15 years at 8 percent?

2. If you invest $25,000 today, how much will you have:

a. In 5 years at 8 percent?

b. In 10 years at 8 percent?

c. In 20 years at 8 percent?

d. In 25 years at 8 percent (compounded semiannually)?

3. How much would you have to invest today to receive:

a. $120,000 in 6 years at 10 percent?

b. $150,000 in 15 years at 10 percent?

c. $15,000 each year for 5 years at 4 percent?

d. $40,000 each year for 20 years at 4 percent?

4. Abby Cohen will receive $ 250,000 in 30 years. Her friends are very jealous of her. If the funds are

discounted back at a rate of 13 percent, what is the present value of her future “pot of gold”?

5. Anthony Slayer will receive $275,000 per year for the next 10 years as a payment for a weapon he

invented. If a 7 percent rate is applied, should he be willing to sell out his future rights now for

$1,750,000?

6. Your grandfather has offered you a choice of one of the three following alternatives: $6,000 now;

$1,000 a year for eight years; or $12,000 at the end of eight years. Assuming you could earn 7

percent annually, which alternative should you choose? If you could earn 10 percent annually,

would you still choose the same alternative?

7. The Alabama Stars Company has $1,000 par value bonds outstanding at 7 percent interest. The bonds

will mature in 20 years. Compute the current price of the bonds if the present yield to maturity is:

a. 6 percent.

b. 8 percent.

c. 12 percent.

NOTE: Before you calculate the answer, you should be able to tell if the answer will be above or below

PAR based on the Chapter Notes for Chapter 10.

8. Apex Biochemical Co. has a $1,000 par value bond outstanding that pays 9 percent annual interest.

The current yield to maturity on such bonds in the market is 5 percent. Compute the price of the

bonds for these maturity dates:

a. 30 years.

b. 15 years.

c. 1 year.

9. Archie Bunker calls his broker to inquire about purchasing a bond of Golden Years Recreation

Corporation. His broker quotes a price of $1,370 which includes a $25 stated broker’s fee. He is

concerned that the bond might be overpriced based on these facts. The $ 1,000 par value bond pays

10 percent interest, and it has 20 years remaining until maturity. The current yield to maturity on

similar bonds is 7 percent.

Do you think the bond is overpriced? Do the necessary calculations.

10. The preferred stock of Alma Savings and Loan pays an annual dividend of $5.60. It has a required

rate of return of 7 percent. Compute the price of the preferred stock.

11. Academy, Inc. issued preferred stock many years ago. It carries a fixed dividend of $8 per share.

With the passage of time, yields have gone down from the original 11 percent to 7 percent (yield is

the same as required rate of return).

a. What was the original issue price?

b. What is the current value of this preferred stock?

12. Always Easy Bancorp has had the following pattern of earnings per share over the last five years:

Year Earnings per Share 2011............................ $4.00

2012............................ 4.20

2013............................ 4.41

2014............................ 4.63

2015............................ 4.86

The earnings per share have grown at a constant rate (on a rounded basis) and will continue to do

so in the future. Dividends represent 20 percent of earnings. Project earnings and dividends for the

next year (2016).

a. If the required rate of return (Ke) is 10 percent, what is the anticipated stock price (P0) at the

beginning of 2016 using formula 10-8 on page 313?

b. If the P/E is 16, what is the anticipated stock price?

c. Which valuation makes more sense to you? Why?