Nine years ago the Templeton Company issued 25-year bonds with an 12% annual coupon rate at their $1,000 par value. The bonds had an 8% call premium, with 5 years of call protection. Today Templeton called the bonds.

1. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Round your answer to two decimal places.
   
   %
   
2. Why the investor should or should not be happy that Templeton called them.
   1. Since the bonds have been called, interest rates must have risen sufficiently such that the YTC is greater than the YTM. If investors wish to reinvest their interest receipts, they can now do so at higher interest rates.
   2. Since the bonds have been called, interest rates must have risen sufficiently such that the YTC is greater than the YTM. If investors wish to reinvest their interest receipts, they must do so at lower interest rates.
   3. Since the bonds have been called, investors will receive a call premium and can declare a capital gain on their tax returns.
   4. Since the bonds have been called, investors will no longer need to consider reinvestment rate risk.
   5. Since the bonds have been called, interest rates must have fallen sufficiently such that the YTC is less than the YTM. If investors wish to reinvest their interest receipts, they must do so at lower interest rates.

You have just won a $5,000,000 lottery! You can collect $3,000,000 now or wait 5 years to collect the full amount. Assume an APR of 5%. Which is the best alternative?

How much money do you need to invest now, to have $50,000 in 10 years?  Assume an APR of 4.5%.

Problem 1

Assume the T-bill maturity and futures delivery are on the same day. Ignore transactions costs.

Treasury Bill

Maturity          DTM               Bid                  Asked                                    

Mar                 90                    1.18                 1.17                                        

Index Futures

S&P 500 Index (CME)

                        Open               High                Low                 Settle

Mar                 1,905.00          1,911.00          1,901.00            1,907.70

S&P 500 closed at $1,910.00 on the same day.

1. Find the discount factor using the T-bill data. Please use the “Bid” yield for the calculation.

2. Suppose that if you buy one unit of S&P 500 index today, you will be entitled to a $10.00 dividend on the delivery day. Consider the following zero-net-investment strategy: buy S&P 500 index spot, borrow at the risk-free rate, and short the S&P 500 futures. Make sure your positions add up to zero at t=0. Show the cash flows from all your positions in the following table, per unit.

3. Considering that each S&P 500 futures contract is for 250 units of the index, what is your total arbitrage profit per 1000 contracts?

Young screenwriter Carl Draper has just finished his first script. It has action, drama, and humor, and he thinks it will be a blockbuster. He takes the script to every motion picture studio in town and tries to sell it but to no avail. Finally, ACME studios offers to buy the script for either (a) $10,000 or (b) 1 percent of the movie’s profits. There are two decisions the studio will have to make. The first is to decide if the script is good or bad; the second is to decide if the movie is good or bad. First, there is a 90 percent chance that the script is bad. If it is bad, the studio does nothing more and throws the script out. If the script is good, it will shoot the movie. After the movie is shot, the studio will review it, and there is a 60 percent chance that the movie is bad. If the movie is bad, the movie will not be promoted and will not turn a profit. If the movie is good, the studio will promote heavily; the average profit for this type of movie is $14.2 million. Carl rejects the $10,000 and says he wants the 1 percent of profits.

What is value of accepting 1 percent of the profits? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32..)

On September 3, 2008 you invested $1,000 at the annual risk-free rate of 7% until APR. 18, 2009. Calculate the amount you will receive on APR 18, 2009 if the annual 5% rate is compounded;

annually

quarterly

monthly

daily

continuously.

An investment of $1,000,000 yields $1,100,000 in exactly one year. Calculate the annual rate of return on this investment with:

annual compounding

semiannual compounding

Monthly compounding

Continuous compounding.

Consider a 30-year, $155,000 mortgage with a rate of 6.05 percent. Ten years into the mortgage, rates have fallen to 5 percent. What would be the monthly saving to a homeowner from refinancing the outstanding mortgage balance at the lower rate?  (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Calligraphy Pens is deciding when to replace its old machine. The machine's current salvage value is $2,900,000. Its current book value is $1,725,000. If not sold, the old machine will require maintenance costs of $695,000 at the end of the year for the next five years. Depreciation on the old machine is $345,000 per year. At the end of five years, it will have a salvage value of $140,000 and a book value of $0. A replacement machine costs $4,500,000 now and requires maintenance costs of $365,000 at the end of each year during its economic life of five years. At the end of the five years, the new machine will have a salvage value of $730,000. It will be fully depreciated by the straight-line method. In five years, a replacement machine will cost $3,500,000. The company will need to purchase this machine regardless of what choice it makes today. The corporate tax rate is 22 percent and the appropriate discount rate is 8 percent. The company is assumed to earn sufficient revenues to generate tax shields from depreciation.

Calculate the NPV for the new and old machines. (Do not round intermediate calculations and enter your answers in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.)

BUSI 320 Comprehensive Problem 3 FALL 2019

Use what you have learned about the time value of money to analyze each of the following decisions:

Decision #1: Which set of Cash Flows is worth more now? Assume that your grandmother wants to give you generous gift. She wants you to choose which one of the following sets of cash flows you would like to receive:

Option A: Receive a one-time gift of $ 10,000 today.

Option B: Receive a $1500 gift each year for the next 10 years. The first $1400 would be received 1 year from today.

Option C: Receive a one-time gift of $18,000 10 years from today.

Compute the Present Value of each of these options if you expect the interest rate to be 3% annually for the next 10 years. Which of these options does financial theory suggest you should choose?

Option A would be worth $___ today.

Option B would be worth $___ today.

Option C would be worth $___ today.

Financial theory supports choosing Option ____ .

Compute the Present Value of each of these options if you expect the interest rate to be 6% annually for the next 10 years. Which of these options does financial theory suggest you should choose?

Option A would be worth $__________ today.

Option B would be worth $__________ today.

Option C would be worth $__________ today.

Financial theory supports choosing Option _______

Compute the Present Value of each of these options if you expect to be able to earn 9% annually for the next 10 years. Which of these options does financial theory suggest you should choose?

Option A would be worth $__________ today.

Option B would be worth $__________ today.

Option C would be worth $__________ today.

Financial theory supports choosing Option _______

Decision #2 begins at the top of page 2! Decision #2: Planning for Retirement Erich and Mallory are 22, newly married, and ready to embark on the journey of life. They both plan to retire 45 years from today. Because their budget seems tight right now, they had been thinking that they would wait at least 10 years and then start investing $3000 per year to prepare for retirement. Mallory just told Erich, though, that she had heard that they would actually have more money the day they retire if they put $3000 per year away for the next 10 years - and then simply let that money sit for the next 35 years without any additional payments – then they would have MORE when they retired than if they waited 10 years to start investing for retirement and then made yearly payments for 35 years (as they originally planned to do). Please help Erich and Mallory make an informed decision: Assume that all payments are made at the END a year (or month), and that the rate of return on all yearly investments will be 7.2% annually. (Please do NOT ROUND when entering “Rates” for any of the questions below)

a) How much money will Erich and Mallory have in 45 years if they do nothing for the next 10 years, then put $3000 per year away for the remaining 35 years?

b) How much money will Erich and Mallory have in 10 years if they put $3000 per year away for the next 10 years?

b2) How much will the amount you just computed grow to if it remains invested for the remaining 35 years, but without any additional yearly deposits being made?

c) How much money will Erich and Mallory have in 45 years if they put $3000 per year away for each of the next 45 years? How much money will Erich and Mallory have in 45 years if they put away $250 d) per MONTH at the end of each month for the next 45 years? (Remember to adjust 7.2% annual rate to a Rate per month!)

e) If Erich and Mallory wait 25 years (after the kids are raised!) before they put anything away for retirement, how much will they have to put away at the end of each year for 20 years in order to have $1,000,000 saved up on the first day of their retirement 45 years from today?

Sheffield Manufactures Ltd, operate in the printing and packaging industry. They feel that some of their older printing and labelling machines need to be replaced. They seek help in order to calculate their cost of capital. Their present capital structure is as follows: • 800 000 R2 ordinary shares now trading at R2.50 per share. • 250 000 preference shares trading at R2 per share (issued at R3 per share), at 10% fixed rate of interest. • A bank loan of R1 500 000 at 13% p.a. (payable in 5 years’ time) Additional data a. The company’s beta is 1.3. the return on the market is 14% and the risk free rate is 7% b. Its current tax rate is 28% c. Its current dividend is 40c per share and it expects its dividends to grow by 8% p.a. Required 1.1 Assuming that the company uses the Dividend Growth Model to calculate its cost of equity. Calculate its weighed average cost of capital. (17) 1.1.1 If a further R500 000 is needed to finance the expansion, which option should they use from ordinary shares, preference shares or loan financing and why? (3)

You have been given the following return information for a mutual fund, the market index, and the risk-free rate. You also know that the return correlation between the fund and the market is 0.97.

Calculate Jensen’s alpha for the fund, as well as its information ratio. (Do not round intermediate calculations. Enter the alpha as a percent rounded to 2 decimal places. Round the ratio to 4 decimal places.)

You have been given the following return information for a mutual fund, the market index, and the risk-free rate. You also know that the return correlation between the fund and the market is 0.97.

What are the Sharpe and Treynor ratios for the fund? (Do not round intermediate calculations. Round your answers to 4 decimal places.)

You are given the following information for Smashville, Inc.  

During the year, Smashville, Inc., had 25,000 shares of stock outstanding and depreciation expense of $15,000. Calculate the book value per share, earnings per share, and cash flow per share. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Mr. James, an ardent photographer has decided to take his for steps on realizing his entrepreneurial dream. He has been mulling over various options and has narrowed them down to 2 options. Mr. James asks for your assistance in resolving the dilemma that he faces. Option 1 Rent an office at La Lucia Mall and purchase photo developing equipment and other devices necessary for this venture. This will involve the actual printing/development of photos, “burning” of CDs/DVD’s, etc. Option 2 Purchase a state of the art Nikon Camera Kit and take photos/record videos of special events (weddings, birthdays, anniversaries, etc.). This will entail spending on an advertising campaign in order to aggressively seek market share. Project cost and other data Option 1 Option 2 Cost of investments (Total) 400 000 90 000 Expected useful life 5 years 5 years Salvage value 50 000 10 000 Cost of capital (After tax) 9% Project Revenues Year 1 150 000 20 000 Year 2 130 000 30 000 Year 3 80 000 50 000 Year 4 60 000 30 000 Year 5 40 000 15 000 Required: 2.1 If James requires a payback period of no more than 3 1/2 years which project should he choose? Show calculations. (8) 2.2 Suggest flaws in the valutitaion method (payback period).(2) 2.3 Use the NPV method to test which project is more viable. (10)

List five goals of a firm and Select which goals you will set for your organization as a manager and give the reason why you have selected those goals. (260 words

Use this textbook as a guide -Principles of Managerial Finance (14th ed.) by Gitman, Lawrence & Zutter, Chand