Question

a.Zap Enterprises, Inc. has issued thirty-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is (6%) and the current yield to maturity is 9%, what is the firm’s current price per bond? Answer is ________________________

b.You want to invest in a stock that pays $7.00 annual cash dividends for the next 6 years. At the end of the sixth year, you will sell the stock for $30.00. If you want to earn (6%) on this investment, what is a fair price for this stock if you buy it today?

Answer is _______________

C.RGG inc has only 2 scenarios: Boom and recession with the same probability to happen. In the boom the return will be (6%+ 60%) while in the recession will be only 20%. What is the expected return for RGG inc ?

Answer: ______________

d. What is the NET present Value of the following project witht the discount rate of (6%) ? Initial cost 9000 cashflow year 1: 3300. cashflow year 2: 3500. cashflow year 3: 7500.

Answer: Net PV = _________________

E.Gameiro Ltd. purchases a duplicating machine for $15,000. This machine qualifies as a five-year recovery asset under normal depreciation. The company has a tax rate of (6%). If the company sells the machine at the end of four years for $4,000, what is the cash flow from disposal after tax? Answer: cash flow from disposal is _________________

F. Elway Electronics has debt with a market value of $330,000, preferred stock with a market value of $145,000, and common stock with a market value of $550,000. If debt has a cost of (6%), preferred stock has a cost of 12%, common stock has a cost of 14%, and the firm has a tax rate of 33%, what is the WACC? Wacc is _____________

Answer 1

Calculation of Present Value of Bond Interest
	6%(Coupon Rate)	9%(Yeild)	Discount Factor @ 4.5%	Present Value of Interest
1	30	45	0.956937799	28.70813397
2	30	45	0.915729951	27.47189854
3	30	45	0.876296604	26.28889812
4	30	45	0.838561344	25.15684031
5	30	45	0.802451047	24.0735314
6	30	45	0.767895738	23.03687215
7	30	45	0.734828458	22.04485373
8	30	45	0.703185127	21.09555381
9	30	45	0.672904428	20.18713283
10	30	45	0.643927682	19.31783046
11	30	45	0.616198739	18.48596216
12	30	45	0.589663865	17.68991595
13	30	45	0.564271641	16.92814923
14	30	45	0.539972862	16.19918587
15	30	45	0.516720442	15.50161327
16	30	45	0.494469323	14.83407968
17	30	45	0.473176385	14.19529156
18	30	45	0.452800369	13.58401107
19	30	45	0.433301788	12.99905365
20	30	45	0.41464286	12.43928579
21	30	45	0.396787426	11.90362277
22	30	45	0.379700886	11.39102657
23	30	45	0.36335013	10.9005039
24	30	45	0.347703474	10.43110421
25	30	45	0.332730597	9.9819179
26	30	45	0.318402485	9.552074546
27	30	45	0.304691373	9.140741192
28	30	45	0.291570692	8.747120758
29	30	45	0.279015016	8.370450486
30	30	45	0.267000016	8.010000465
31	30	45	0.255502407	7.665072216
32	30	45	0.244499911	7.334997335
33	30	45	0.233971207	7.019136206
34	30	45	0.223895892	6.716876752
35	30	45	0.214254442	6.427633256
36	30	45	0.205028174	6.150845221
37	30	45	0.19619921	5.885976288
38	30	45	0.18775044	5.632513194
39	30	45	0.179665493	5.389964779
40	30	45	0.171928701	5.157861033
41	30	45	0.164525073	4.935752184
42	30	45	0.157440261	4.723207832
43	30	45	0.150660537	4.519816107
44	30	45	0.144172763	4.325182878
45	30	45	0.137964366	4.138930983
46	30	45	0.132023317	3.960699506
47	30	45	0.126338102	3.790143068
48	30	45	0.120897706	3.626931165
49	30	45	0.115691584	3.470747526
50	30	45	0.11070965	3.321289499
51	30	45	0.105942249	3.178267463
52	30	45	0.101380142	3.041404271
53	30	45	0.09701449	2.910434709
54	30	45	0.092836833	2.785104985
55	30	45	0.088839074	2.665172234
56	30	45	0.085013468	2.550404052
57	30	45	0.081352601	2.44057804
58	30	45	0.077849379	2.335481378
59	30	45	0.074497014	2.23491041
60	30	45	0.071289008	2.138670248
Present Value of Maturity		1000	0.071289008	71.28900828
Total Present Value Of Bond				690.4296694

Interest of Coupon Rate	Yield Interest (4.5%)	Amortisation	Book Value of Bond(Face Value-Discount)
			690.4296694
30	31.06933512	1.069335124	691.4990046
30	31.1174552	1.117455205	692.6164598
30	31.16774069	1.167740689	693.7842004
30	31.22028902	1.22028902	695.0044895
30	31.27520203	1.275202026	696.2796915
30	31.33258612	1.332586117	697.6122776
30	31.39255249	1.392552492	699.0048301
30	31.45521735	1.455217355	700.4600475
30	31.52070214	1.520702135	701.9807496
30	31.58913373	1.589133732	703.5698833
30	31.66064475	1.660644749	705.2305281
30	31.73537376	1.735373763	706.9659018
30	31.81346558	1.813465583	708.7793674
30	31.89507153	1.895071534	710.674439
30	31.98034975	1.980349753	712.6547887
30	32.06946549	2.069465492	714.7242542
30	32.16259144	2.162591439	716.8868456
30	32.25990805	2.259908054	719.1467537
30	32.36160392	2.361603916	721.5083576
30	32.46787609	2.467876092	723.9762337
30	32.57893052	2.578930516	726.5551642
30	32.69498239	2.69498239	729.2501466
30	32.8162566	2.816256597	732.0664032
30	32.94298814	2.942988144	735.0093913
30	33.07542261	3.07542261	738.084814
30	33.21381663	3.213816628	741.2986306
30	33.35843838	3.358438376	744.657069
30	33.5095681	3.509568103	748.1666371
30	33.66749867	3.667498668	751.8341357
30	33.83253611	3.832536108	755.6666718
30	34.00500023	4.005000233	759.6716721
30	34.18522524	4.185225243	763.8568973
30	34.37356038	4.373560379	768.2304577
30	34.5703706	4.570370596	772.8008283
30	34.77603727	4.776037273	777.5768656
30	34.99095895	4.99095895	782.5678245
30	35.2155521	5.215552103	787.7833766
30	35.45025195	5.450251948	793.2336286
30	35.69551329	5.695513285	798.9291418
30	35.95181138	5.951811383	804.8809532
30	36.2196429	6.219642895	811.1005961
30	36.49952683	6.499526826	817.6001229
30	36.79200553	6.792005533	824.3921285
30	37.09764578	7.097645782	831.4897743
30	37.41703984	7.417039842	838.9068141
30	37.75080663	7.750806635	846.6576207
30	38.09959293	8.099592933	854.7572137
30	38.46407462	8.464074615	863.2212883
30	38.84495797	8.844957973	872.0662463
30	39.24298108	9.242981082	881.3092273
30	39.65891523	9.65891523	890.9681426
30	40.09356642	10.09356642	901.061709
30	40.5477769	10.5477769	911.6094859
30	41.02242687	11.02242687	922.6319128
30	41.51843607	11.51843607	934.1503488
30	42.0367657	12.0367657	946.1871145
30	42.57842015	12.57842015	958.7655347
30	43.14444906	13.14444906	971.9099837
30	43.73594927	13.73594927	985.645933
30	44.35406699	14.35406699	1000

a.Zap Enterprises, Inc. has issued thirty-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is (6%) and the current yield to maturity is 9%, what is the firm’s current price per bond? Answer is $690.42 (Calculation given above)

Year	Cash Flows	Discount Factor @6%	Present Value
1	7	0.943396226	6.603773585
2	7	0.88999644	6.22997508
3	7	0.839619283	5.877334981
4	7	0.792093663	5.544655643
5	7	0.747258173	5.23080721
6	7	0.70496054	4.934723783
Sell	30	0.70496054	21.14881621
Price of Stock			55.5700865

b.You want to invest in a stock that pays $7.00 annual cash dividends for the next 6 years. At the end of the sixth year, you will sell the stock for $30.00. If you want to earn (6%) on this investment, what is a fair price for this stock if you buy it today?

Answer is $55.57

	Boom	Recession
Probability	0.5	0.5
Rate of Return	66%	20%
Resultant Return	33.0000%	10.0000%
Expected Return	43.0000%

C.RGG inc has only 2 scenarios: Boom and recession with the same probability to happen. In the boom the return will be (6%+ 60%) while in the recession will be only 20%. What is the expected return for RGG inc ?

Answer: 43%

Year	Cash Flows	Discount Factor @6%	Present Value
0	-9000	1	-9000
1	3300	0.943396226	3113.207547
2	3500	0.88999644	3114.98754
3	7500	0.839619283	6297.144623
NPV			3525.33971

d. What is the NET present Value of the following project witht the discount rate of (6%) ? Initial cost 9000 cashflow year 1: 3300. cashflow year 2: 3500. cashflow year 3: 7500.

Answer: Net PV = $3525.33

Year	Depreciation under 5 Year recovery Asset	Tax Saving From Depreciation
1	3000	180
2	4800	288
3	2880	172.8
4	1728	103.68
Cash Flow From Tax Saving		744.48
Cash flow from Salvage		4000
Total Cash Flow		4744.48

E.Gameiro Ltd. purchases a duplicating machine for $15,000. This machine qualifies as a five-year recovery asset under normal depreciation. The company has a tax rate of (6%). If the company sells the machine at the end of four years for $4,000, what is the cash flow from disposal after tax? Answer: cash flow from disposal is $4744.48

Wacc= (Market Value of Equity/Total Market Value of Debt and Equity*Cost of Equity)+(Market Value of Preffered Equity/Total Market Value of Debt and Equity*Cost of Preferred Equity)+[Market Value of Debt/Total Market Value of Debt and Equity*(Cost of Debt)*(1-Tax Rate)]

Wacc= (550000/1025000*0.14)+(145000/1025000*0.12)+[330000/1025000*(0.06)(1-0.33)

Wacc= (550000/1025000*0.14)+(145000/1025000*0.12)+[330000/1025000*(0.06)(1-0.33)

Wacc=(0.07512)+(0.016975)+0.01294

Wacc=.105035

Wacc=10.50%

F. Elway Electronics has debt with a market value of $330,000, preferred stock with a market value of $145,000, and common stock with a market value of $550,000. If debt has a cost of (6%), preferred stock has a cost of 12%, common stock has a cost of 14%, and the firm has a tax rate of 33%, what is the WACC? Wacc is 10.50%