Assume that your father is now 50 years old, plans to retire in 10 years, and expects to live for 25 years after he retires - that is, until age 85. He wants his first retirement payment to have the same purchasing power at the time he retires as $50,000 has today. He wants all his subsequent retirement payments to be equal to his first retirement payment. (Do not let the retirement payments grow with inflation: Your father realizes that if inflation occurs the real value of his retirement income will decline year by year after he retires). His retirement income will begin the day he retires, 10 years from today, and he will then receive 24 additional annual payments. Inflation is expected to be 5% per year from today forward. He currently has $50,000 saved and expects to earn a return on his savings of 8% per year with annual compounding. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. Open spreadsheet How much must he save during each of the next 10 years (with equal deposits being made at the end of each year, beginning a year from today) to meet his retirement goal? (Note: Neither the amount he saves nor the amount he withdraws upon retirement is a growing annuity.) Do not round intermediate calculations. Round your answer to the nearest dollar.
| Father's current age | 50 | |
| Number of years until retirement | 10 | |
| Number of years living in retirement | 25 | |
| 1st retirement payment, same purchasing power today as | $60,000 | |
| Inflation rate | 6.00% | |
| Current savings at t = 0 | $75,000 | |
| Percentage return earned | 4.00% | |
| Step 1. Calculate retirement payments, beginning at t = 10 | Formulas | |
| Fixed retirement payments | #N/A | |
| Step 2. Calculate the value of current savings at t = 10 | ||
| Value of current savings, 10 years from today | #N/A | |
| Step 3. Calculate the value of the annuity due of retirement payments at t = 10 | ||
| Value of annuity due | #N/A | |
| Step 4. Calculate the net amount that must be accumulated at t = 10 to receive desired retirement payments | ||
| Net amount needed in 10 years | #N/A | |
| Step 5. Calculate the value of annual deposit needed to meet desired retirement goal | ||
| Value of annual deposit to meet retirement goal | #N/A |
In: Finance
You are considering a 20-year, $1,000 par value bond. Its coupon rate is 11%, and interest is paid semiannually. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.
Open spreadsheet
If you require an "effective" annual interest rate (not a nominal rate) of 7.63%, how much should you be willing to pay for the bond? Do not round intermediate steps. Round your answer to the nearest cent.
In: Finance
The Miller Corporation is considering a new product. An outlay of $255 million is required for equipment to produce the new product and additional net working capital of $31 million is required to support production. The equipment will be depreciated on a straight-line basis to a zero book value over 10 years. Although the depreciable life is 10 years, the project is expected to have a productive life of only 8 years, and it is expected to have a zero salvage value at that time (scrap value = removal cost). Revenues minus expenses are expected to be $61.761 million per year for the productive life of the project. The corporation's marginal tax rate is 23% and the cost of capital for this investment is 8.3%. Compute the NPV of Miller's potential new product. (In $millions with 3 decimals.)
In: Finance
Cusic Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $24,300, and the company expects to sell 1,600 per year. The company currently sells 1,950 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,620 units per year. The old board retails for $22,700. Variable costs are 55 percent of sales, depreciation on the equipment to produce the new board will be $1,275,000 per year, and fixed costs are $3,150,000 per year. If the tax rate is 25 percent, what is the annual OCF for the project?
In: Finance
(Bond valuation) A bond that matures in 17years has a $1 comma 000par value. The annual coupon interest rate is 8percent and the market's required yield to maturity on a comparable-risk bond is 16 percent. What would be the value of this bond if it paid interest annually? What would be the value of this bond if it paid interest semiannually?
a. The value of this bond if it paid interest annually would be
.
(Round to the nearest cent.)
In: Finance
Sarah is buying a home. Her loan will be $100,000. She will make annual payments for the next 30 years to retire this loan. The interest rate on the loan is 4 %.
A. How much will her annual payments be?
B. How much interest will she pay over the life of the loan?
C. How much of her first payment will be applied to principal?
D. How much will she still owe on the loan after 10 years?
In: Finance
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The Cornchopper Company is considering the purchase of a new harvester. |
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The new harvester is not expected to affect revenue, but operating expenses will be reduced by $14,600 per year for 10 years. |
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The old harvester is now 5 years old, with 10 years of its scheduled life remaining. It was originally purchased for $91,000 and has been depreciated by the straight-line method. |
| The old harvester can be sold for $22,600 today. |
| The new harvester will be depreciated by the straight-line method over its 10-year life. |
| The corporate tax rate is 21 percent. |
| The firm’s required rate of return is 14 percent. |
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The initial investment, the proceeds from selling the old harvester, and any resulting tax effects occur immediately. |
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All other cash flows occur at year-end. |
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The market value of each harvester at the end of its economic life is zero. |
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Determine the break-even purchase price in terms of present value of the harvester. This break-even purchase price is the price at which the project’s NPV is zero. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
NOTE*** answer is not 91309.2 or 109154.41 or 110898.7 or 119875.42 or 117742.56
In: Finance
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Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $3.8 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $4.6 million. In five years, the aftertax value of the land will be $5 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $31.44 million to build. The following market data on DEI’s securities is current: |
| Debt: |
111,000 7 percent coupon bonds outstanding, 26 years to maturity, selling for 107 percent of par; the bonds have a par value of $2,000 and make semiannual payments. |
| Common stock: |
8,100,000 shares outstanding, selling for $70.30 per share; the beta is 1.3. |
| Preferred stock: |
443,000 shares of 5.9 percent preferred stock outstanding, selling for $80.30 per share and having a par value of $100. |
| Market: |
6 percent expected market risk premium; 4.8 percent risk-free rate. |
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DEI uses G.M. Wharton as its lead underwriter. Wharton charges DEI spreads of 6 percent on new common stock issues, 5 percent on new preferred stock issues, and 4 percent on new debt issues. Wharton has included all direct and indirect issuance costs (along with its profit) in setting these spreads. Wharton has recommended to DEI that it raise the funds needed to build the plant by issuing new shares of common stock. DEI’s tax rate is 22 percent. The project requires $1,125,000 in initial net working capital investment to get operational. Assume Wharton raises all equity for new projects externally. |
| a. |
Calculate the project’s initial Year 0 cash flow, taking into account all side effects. Assume that the net working capital will not require flotation costs. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g., 1,234,567.) |
| b. | The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of 1 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI’s project. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| c. | The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (that is, the end of Year 5), the plant and equipment can be scrapped for $3.8 million. What is the aftertax salvage value of this plant and equipment? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g., 1,234,567.) |
| d. | The company will incur $6,100,000 in annual fixed costs. The plan is to manufacture 15,300 RDSs per year and sell them at $10,450 per machine; the variable production costs are $9,050 per RDS. What is the annual operating cash flow (OCF) from this project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g., 1,234,567.) |
| e. | DEI’s comptroller is primarily interested in the impact of DEI’s investments on the bottom line of reported accounting statements. What will you tell her is the accounting break-even quantity of RDSs sold for this project? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) |
| f. | Finally, DEI’s president wants you to throw all your calculations, assumptions, and everything else into the report for the chief financial officer; all he wants to know is what the RDS project’s internal rate of return (IRR) and net present value (NPV) are. (Do not round intermediate calculations. Enter your NPV answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89. Enter your IRR answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
In: Finance
1. The face value for Karen’s Limited bonds is $100,000 and has a 2 percent annual coupon. The percent annual coupon bonds matures in 2022, and it is now 2012. Interest on these bonds is paid annually on December 31 of each year, and new annual coupon bonds with similar risk andmaturity are currently yielding 12 percent. How much should Karen sell her bonds today?
2. What is the semi-annual coupon bond’s nominal yield to maturity (YTM), if the years to maturity is 15 years, and sells for 119% with coupons rate of 10%? Assume the par value of the bond is $1,000.
3. MJI Corporation bonds mature in 6 years and have a yield to maturity of 8.5 percent. The par value of the bonds is $1,000. The bonds have a 10 percent coupon rate and pay interest on a semi-annual basis. Assuming there are no changes to interest rates during the course of the year, what are the current yield and capital gains yield on the bonds for this year?
In: Finance
In what ways is IRR more useful than NPV? In what ways is NPV more useful than IRR? Or you could view this question as asking for the pros and cons of each calculation.
In: Finance
We decided that we need to specify the type of retirement income we want and make plans to accomplish our goal. Our goal is to plan for 25 years of retirement, at $150,000 per year, but we want to receive the
$150,000 at the beginning of each year of our retirement. So, to reach our objective, for the next 30 years, we need to set aside the right amount of money as an annual constant contribution into a retirement fund at the end of each of those years. So in total, there will be 25 annual payments (withdrawals) of 150,000 each received at the beginning of each month, preceded by 30 annual contributions made at the end of each period. (The last contribution time may correspond with that of the first withdrawal time).
We discussed this in general terms with another pension adviser, and she advised us to assume an average nominal annual rate of return of 8.50%, compounded annually, for the entire 55-year period.
Ques 1) How much money would we need in our pension plan when we retire after 30 years of work to make our pension dream come true? Please use (display + name) the excel function/ formula used for each yellow cell.
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Answer 1. amount needed at beginning of retirement |
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APR |
8.50% |
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period rate |
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annual pension |
-$150,000.00 |
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#periods |
25 |
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Amount needed at BEG of retirement: |
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Ques 2) In order to accumulate this amount of money, how much would we need to deposit in our pension plan at the end of each year, for each of the next 30 years of work, if we contributed a constant amount each year? Please use (display + name) the excel function/ formula used for each yellow cell.
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Answer 2. required annual contribution |
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period rate |
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#periods |
30 |
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Required annual contribution: |
Ques 3) If the inflation rate for the next 30 years were to be 2% per year (assuming country’s Bank manages to meet its target inflation of about 2%), what annual income now would provide the same purchasing power as a $150,000 annual income in 30 years? Please use (display + name) the excel function/ formula used for each yellow cell.
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Answer 3. inflation impact after 30 years |
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inflation rate |
0.02 |
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payment in 30 years |
$150,000.00 |
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equivalent amount in today's dollars: |
In: Finance
You are required to use a financial calculator or spreadsheet (Excel) to solve 10 problems related to the risk and return, stocks and bonds valuation. You are required to show the following 3 steps for each problem:
(i) Describe and interpret the assumptions related to the
problem.
(ii) Apply the appropriate mathematical model to solve the
problem.
(iii) Calculate the correct solution to the problem.
1. A $1,000 par value 8-year bond with a 13 percent coupon rate recently sold for $980. What is the yield to maturity if the bond makes semiannual payments? Submit your answer as a percentage rounded to two decimal places.
2. Consider a 7 year bond with face value $1,000 that pays an 8.4% coupon semi-annually and has a yield-to-maturity of 6.9%. What is the approximate percentage change in the price of bond if interest rates in the economy are expected to increase by 0.40% per year? Submit your answer as a percentage and round to two decimal places. (Hint: What is the expected price of the bond before and after the change in interest rates?)
3. Nippon, Inc. expects its current annual $30 per share common stock dividend to remain the same for the foreseeable future. What is the intrinsic value of the stock to an investor with a required return of 9.2%? Round to two decimal places.
In: Finance
5.31 Calculating Interest Expense
You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of .9 percent per year, compounded monthly for the first six months, increasing thereafter to 18.5 percent compounded monthly. Assuming you transfer the $10,000 balance from your existing credit card and make no subsequent payments, how much interest will you owe at the end of the first year?
In: Finance
ABC paid a dividend of $3.00 this past year. The dividends are expected to grow at a rate of 20% for the next three years, and at a constant 3% rate thereafter. The required rate of return for investors in this stock is 10%. Calculate the value of this stock today.
In: Finance
Evaluate the following pure-yield pickup swap: You currently hold a 15-year, AA-rated, 8.5% coupon bond priced to yield 11.0%. As a swap candidate, you are considering a 15-year, AA-rated, 10.5% coupon bond priced to yield 12.0%. (Assume reinvestment at 11.0%, $1,000 par value, semiannual coupons.) Do not round intermediate calculations. Round your monetary answers to the nearest cent and percentage answers and value of swap to two decimal places. You may use Appendix C to answer the questions.
| Current Bond | Candidate Bond | |
| Dollar investment | $ | $ |
| Annual coupon | $ | $ |
| i on one coupon | $ | $ |
| Principal value at year end | $ | $ |
| Total accrued | $ | $ |
| Realized compound yield | % | % |
Value of swap: basis points in one year
In: Finance