Question

1. The bonds issued by Jensen & Son bear a 6 percent coupon, payable semiannually. The bond matures in 8 years and has a $1,000 face value. Currently, the bond sells at par. What is the yield to maturity?

2. A General Co. bond has an 8 percent coupon and pays interest annually. The face value is $1,000 and the current market price is $1,020.50. The bond matures in 20 years. What is the yield to maturity?

3. You intend to purchase a 10-year, $1,000 face value bond that pays interest of $60 every 6 months ( semiannual). If your nominal annual required rate of return is 10 percent with semiannual payments, how much should you be willing to pay for this bond?

4. The Seattle Corporation has been presented with an investment opportunity which will yield end-of-year cash flows as follows:

Years 1 through 4       $30,000 per year

Years 5 through 9       $35,000 per year

Year 10                         $40,000 per year

This investment will cost the firm $150,000 today, and the firm's cost of capital is 10 percent. What is the NPV for this investment?

5. Your firm wants to save $250,000 to buy some new equipment three years from now. The plan is to set aside an equal amount of money on the first day of each year starting today. The firm can earn a 4.7 percent rate of return. How much does the firm have to save each year to achieve their goal?

6. Your great-aunt left you an inheritance in the form of a trust. The trust agreement states that you are to receive $2,500 on the first day of each year, starting immediately and continuing for fifty years. What is the value of this inheritance today if the applicable discount rate is 6.35 percent?

7. Your car dealer is willing to lease you a new car for $299 a month for 60 months. Payments are due on the first day of each month starting with the day you sign the lease contract. If your cost of money is 4.9 percent, what is the current value of the lease?

8. Toni adds $3,000 to her savings on the first day of each year. Tim adds $3,000 to his savings on the last day of each year. They both earn a 9 percent rate of return. What is the difference in their savings account balances at the end of thirty years?

9. Marko, Inc. is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,000, $9,000, and $15,000 over the next three years, respectively. After that time, they feel the business will be worthless. Marko has determined that a 14 percent rate of return is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.?

10. You have some property for sale and have received two offers. The first offer is for $189,000 today in cash. The second offer is the payment of $100,000 today and an additional $100,000 two years from today. If the applicable discount rate is 8.75 percent, which offer should you accept and why

11. On December 1, you borrow $210,000 to buy a house. The mortgage rate is 8.25 percent. The loan is to be repaid in equal monthly payments over 20 years. The first payment is due on January 1. Which one of the following statements is true assuming that you repay the loan as agreed?

12. What is the net present value of a project that has an initial cash outflow of $12,670 and the following cash inflows? The required return is 11.5 percent.

Year     Cash Inflows

                                                   1          $4,375

                                                   2          $      0

                                                   3          $8,750

                                                   4          $4,100

13. You are considering two mutually exclusive projects with the following cash flows. Will your choice between the two projects differ if the required rate of return is 8 p ercent rather than 11 percent? If so, what should you do?

                                    Year                 Project A          Project B

                                       0                   -$240,000        -$198,000

                                       1                   $           0        $110,800

                                       2                   $         0         $ 82,500

                                       3                   $325,000        $ 45,000

14. It will cost $2,600 to acquire a small ice cream cart. Cart sales are expected to be $1,400 a year for three years. After the three years, the cart is expected to be worthless as that is the expected remaining life of the cooling system. What is the payback period of the ice cream cart?

15. Yancy is considering a project which will produce cash inflows of $900 a year for 4 years. The project has a 9 percent required rate of return and an initial cost of $2,800. What is the payback period?

16. Braun Industries is considering an investment project which has the following cash flows:

                  Year              Cash Flow

                  0                -$1,000

                  1                     400

                  2                     300

                  3                     500

                  4                     400

The company's cost of funds is 10 percent. What is the project's payback, internal rate of return, and net present value?

17. As the director of capital budgeting for Denver Corporation, you are evaluating two mutually exclusive projects with the following net cash flows:

Project X Project Z

            Year        Cash Flow Cash Flow

            0          -$100,000 -$100,000

            1             50,000 10,000

            2             40,000 30,000

            3             30,000 40,000

            4             10,000 60,000

If Denver's cost of capital is 15 percent, which project would you choose?

18. Lucinda Diamanti is 10 years old today (August 15th) and while all she’s interested in is her new bike, her parents Mr. & Mrs. Diamanti are considering how they will pay for her college education beginning in 8 years. They decide to set up a meeting with their financial adviser Cindy Morgan to discuss an education savings plan. During the meeting, the Diamanti’s inform Cindy that they have $8,000 they can use to begin the savings plan, and from what they can determine, Lucinda will require 4 years to complete her undergraduate degree in molecular biology. Cindy consults a reputable college reference to see that tuition costs are currently estimated at $32,000 per year and are expected to grow at 4% each year for the foreseeable future. The Diamanti’s are concerned that they won’t have enough money and ask Cindy how to make sure they have enough to completely pay for Lucinda’s undergraduate education. The Diamanti’s inform Cindy that they want to make deposits into the education savings plan on an annual basis until Lucinda’s first year in college at which point they will stop making contributions. Cindy tells them they can earn 8% annual interest on their savings plan. Your job to answer the following two questions (You may assume there are 8 years between today and the beginning of Lucinda’s first day in college):

Assuming the estimates on tuition costs are correct, how much money needs to be in the account when Lucinda begins college in 8 years to fund 4 years of college? Round your answer to a whole number.

19. How much money do the Diamanti’s need to deposit annually in order to reach their goal to fund Lucinda’s education fully? Remember that the  Diamanti’s have $8,000 to invest today. Round your answer to a whole number.

20. Please use the following facts to analyze this nest two questions:

Assume you just received a bill for services you and have the following two payment options:

Option 1:

Pay the entire bill of $600 now

Or

Option 2:

Pay:

$130 now

    And

$130 for each of the next 4 months

What annual interest rate (APR) are you paying if you choose Option 2? Assume monthly compounding. Round you answer to the nearest two decimal points. Do not use $, commas or %. For example, 25.34% would be entered as 25.34.

21. What Effective Annual Rate are you paying if you choose Option 2? Assume monthly compounding. Round you answer to the nearest two decimal points. Do not use $, commas or %. For example, 25.34% would be entered as 25.34.

22. Please use the following facts to analyze the next two questions:

Facts and Assumptions:
Lease Term in Months	24
Lease Down Payment	$      500.00
Monthly Lease Payments	$      300.00
Sales Tax Rate	8%
Lease Buyout at End	$ 15,000.00
Title Fee	$        25.00
Car Loan Market Rate	7%
Outright Purchase Price Before Tax and Title	$ 19,500.00

What is the NPV of the lease? Round you answer to the nearest whole number. Do not use $, commas, or decimal points and enter as a positive number. For example, -$34,567.50 would be entered as 34568.

23. What would it cost you to buy the car today if you were paying cash? Round you answer to the nearest whole number. Do not use $, commas, or decimal points and enter as a positive number. For example, $34,567.50 would be entered as 34568.

Answer 1