Kevin Hall just received a cash gift from his grandfather. He plans to invest in a five-year bond issued by Wildhorse Corp. that pays an annual coupon rate of 4.5 percent. If the current market rate is 8.50 percent, what is the maximum amount Kevin should be willing to pay for this bond?

Cullumber Corp is issuing a 10-year bond with a coupon rate of 11 percent. The interest rate for similar bonds is currently 5 percent. Assuming annual payments, what is the value of the bond?

You own three​ stocks:

1 comma 000

shares of Apple​ Computer,

10 comma 000

shares of Cisco​ Systems, and

5 comma 000

shares of Goldman Sachs. The current share prices and expected returns of​ Apple, Cisco, and Goldman Sachs​ are, respectively,

$ 136

​,

$ 22

​,

$ 122

and

12 %

​,

10 %

​,

10.5 %

.

a. What are the portfolio weights of the three stocks in your​ portfolio?

b. What is the expected return of your​ portfolio?

c. Suppose the price of Apple stock goes up by

$ 5

​,

Cisco rises by

$ 3

​,

and Goldman Sachs falls by

$ 9

.

What are the new portfolio​ weights?

d. Assuming the​ stocks' expected returns remain the​ same, what is the expected return of the portfolio at the new​ prices?

DEF Corporation is considering purchasing a new production machine at a cost of $10,000,000. The machine is 7-year MACRS property. The corporate tax rate is a flat 21%, and the applicable discount rate is 6%.

a. Compute the after-tax cost of the machine to DEF.

b. Compute the after-tax cost of the machine to DEF, assuming that the machine qualifies for immediate expensing.

c. Comment.

MACRS percentages for depreciation each year are as follows:

   Year      %

     1     14.29
     2     24.49
     3     17.49
     4     12.49
     5      8.93
     6      8.92
     7      8.93
     8      4.46

Case Study on Managing an Investment Portfolio

As a recently hired CFA financial analyst for Horizon Investments you have been asked to make portfolio recommendation and setup an investment policy statement for three clients of the firm.

1) John Lambert has recently received his MBA and currently works for Oracle. He is 26 and recently married. He and hid wife have saved nearly $100,000 for a down payment on a home. He contributes 10% of his salary to a 401K and Oracle provides a 10% match.   The investments are made in mutual funds run by Fidelity Investment. The 401K offered by Oracle has access to all of the funds offered by Fidelity. John Lambert needs to have a detailed investment plan set up for his 401K including the name of the funds and percentage of portfolio to be invested in the funds.

2) Elizabeth Yeo, aged 60, is managing director of USX and plans to retire in one year. Yeo will receive a lump sum severance payment of $500,000 from the company and plans to close out her company 401K which is entirely invested in USX stock where she has currently about 35,00 shares. Yeo is widowed and has a son who is married and who has a high-level position at an investment bank. Yeo maintains a money market fund currently value at $1.1 million and earns about 1.2% annually. She has a home, zero mortgage, currently valued at about $1 million and plans to continue living there. She also plans to begin to collect social security at the age of 62. Her living expenses, including maintaining the home, are about $80,000 a year. Her living expenses are expected to grow at an annual rate of 3 percent throughout her retirement period, which is expected to be 25 years given her family’s mortality history. You are requested to prepare an investment policy statement for Yeo and make some investment recommendations.    

3) Christopher Maclin, aged 40 is a supervisor at Barnett Co. and earns an annual salary of $100,000. Louise Maclin, aged 38, stays home to care for their newborn twins. She recently inherited $1.3 million (after taxes) in cash from her father’s estate. In addition, the Maclins have $20,000 in cash and $150,000 in Barnett common stock. They are unhappy about portfolio volatility and do not want to suffer a loss of more than 12% in one year. They recently purchased a new home. They need sufficient funds to fund their children’s college education and Christopher plans to retirement at age 65. Christopher is not very knowledgeable about finance but read that small cap and emerging market stocks provide the highest return over the long run. He plans to invest 50% of the inherited money in a small cap fund and the other in an emerging market fund. His wife is concerned about the decision. She requested Horizon review her husband’s decision and, if needed, provide an alternative investment strategy.

Problem 7-19 Interest Rate Risk [LO2]

Both Bond Sam and Bond Dave have 10 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has six years to maturity, whereas Bond Dave has 19 years to maturity.

If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Sam and Bond Dave? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

  Percentage change in price of Bond Sam

%  

  Percentage change in price of Bond Dave

%  

If rates were to suddenly fall by 2 percent instead, what would be the percentage change in the price of Bond Sam and Bond Dave? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

  Percentage change in price of Bond Sam

%  

  Percentage change in price of Bond Dave

%

What would be the marginal and average tax rates for a corporation with an income level of $85,000? (Do not round intermediate calculations. Enter the marginal tax rate as a whole percent. Enter the average tax rate as a percent rounded to 2 decimal places.)

Assume a Bank has the following loan portfolio:

Credit Rating   Bank Debt    Corporate Debt
AAA 10,000,000   5,000,000
A 10,000,000   10,000,000
BBB 10,000,000   5,000,000

Risk weightings for these assets are:

Credit Rating   Bank Debt   Corporate Debt
AAA 20%   20%
A 50%   50%
BBB 50%   100%

What is the Bank's total risk weighted assets?

A. $23,000,000
B. $23,000
C. $400,000
D. $50,000,000

Calculations of the NPV, IRR and the payback for the project and an analysis of the results. I need the excel formula calculation and analysis of the questions

You have identified a potential opportunity for WBC, which involves undertaking a project that will have a ten-year life. The project requires an initial purchase of equipment and furniture totalling $4,500,000, plus ancillary programming capability and machinery costing $1,500,000. The equipment and furniture will depreciate and have a salvage value of $500,000 at the end of the project’s life, and the programing machinery will have nil salvage value at the end of the project’s life. Depreciation is calculated on a straight-line basis over five years. Information related to the project is as follows: • Sales will be $3,050,000, $4,000,000 and $5,000,000 respectively in each of the first three years of operation, expected to grow at 10 per cent per annum for a further four years thereafter, and then settle to a growth of 5 per cent per annum indefinitely thereafter. In the event of not undertaking this project, all of this income would be lost. • Variable costs associated with the project will be 65 per cent of sales. • Fixed costs associated with the project will be $400,000 in the first year and expected to grow at 5 per cent per annum thereafter. • Even though this project will not add additional expenses to head office, WBC has a policy of allocating a ‘head office’ charge of $200,000 a year to each major project. • Research for this project and its capability was conducted during the previous year at a cost of $300,000. It yielded valuable information. • The corporate tax rate is 30 per cent.
GSB003 Managing Financial Resources: Course Outline
3
• Financiers of this type and risk in this industry are presently requiring a rate of 12 per cent after corporate tax.

In order to undertake this project, WBC is considering various financing options. One option is to borrowing $5,000,000 at 7 per cent per annum. This loan will be paid off in 10 equal annual instalments.

Required Evaluate this project, and provide a report to WBC management discussing whether or not you recommend it should undertake the project, providing a full explanation of your recommendation. As support for your recommendation ensure your answer includes the following: • Calculations of the NPV, IRR and the payback for the project and an analysis of the results. • Justification for the correct discount rate to be used in evaluating the project. • Your assessment of the advantages and disadvantages of each methodology (NPV, IRR and payback), and which you therefore recommend is applied to evaluate this project. • Details of any other (financial and non-financial) matters you would consider before making a recommendation in respect of this project.

Complete the steps below using cell references to given data or previous calculations. In some cases, a simple cell reference is all you need. To copy/paste a formula across a row or down a column, an absolute cell reference or a mixed cell reference may be preferred. If a specific Excel function is to be used, the directions will specify the use of that function. Do not type in numerical data into a cell or function. Instead, make a reference to the cell in which the data is found. Make your computations only in the blue cells highlighted below. In all cases, unless otherwise directed, use the earliest appearance of the data in your formulas, usually the Given Data section.

The table below summarizes prices (per $100 face value) of various default-free zero-coupon bonds (expressed as a percentage of face value):

a. Compute the yield to maturity for each bond.

b. Plot the zero-coupon yield curve (for the first five years).

c.Is the yield curve upward sloping, downward sloping, or flat?

Maturity (years)                Price                                 Face Value =$100.00

a. Compute the yield to maturity for each bond.

b. Plot the zero-coupon yield curve (for the first five years).

c.Is the yield curve upward sloping, downward sloping, or flat?

The yield curve is _________

A bond matures in 20 years and pays an 8 percent annual coupon. The bond has a face value of $1000 and currently sells for $900. What is the bond's current yield and yield to maturity?

You have just received a windfall from an investment you made in a​ friend's business. He will be paying you $ 25,034 at the end of this​ year, $ 50,068 at the end of the following​ year, and $ 75,102 at the end of the year after that​ (three years from​ today). The interest rate is 10.2 % per year.

a. What is the present value of your​ windfall?

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

You are planning to buy a stock that has just paid a dividend (D0) of $2.50. In addition, you anticipate the following dividend growth rates:
• Year 1 = 100%
• Year 2 = 0%
• Year 3 = -30% (note this is NEGATIVE 30%)
• Year 4 = 20%
• Years 5 through infinity = 4%
Assume a discount rate of 10%. Based on this, what is the value of the stock today? (Hint: use the three-step process of non-constant growth DDM).

Costco is deciding between two potential investments. Each as an initial cost of 10,000 today,ans will produce the cash flow and only cash flows- listed below. 9 assume the cash flows occur at the end of the year). assuming a 10% return is required on investments, compute the net present value of the two options and indicate which investment if any should be made.

cash flow produce by each investment

year Drops Hots

1 $5,000 $8000

2 $6,000 $7,000

3 $7,000 $6,000

4 $8,000 $5,000