Question

1. You have the following information on a project's cash flows. The cost of capital is 16.1%.

Year	Cash Flows
0	-$105,000
1	47,000
2	13,000
3	31,000
4	39,000
5	-24,000

The NPV of the project is $____. Round to two decimal places.

2. Given a face value of $1,000 and 19 years to maturity, what is the price of a zero coupon bond if rates are at 6.7 percent (assume semi-annual compounding)? (Round your answer to 2 decimal places. (e.g., 123,345.16))

3. Suppose you are going to receive $17,000 per year for 10 years at the end of each year; thus you receive the first payment one year from today. Compute the present value of the cash flows if the appropriate interest rate is 6 percent. Round it two decimal places, and do not include the $ sign, e.g., 123456.78.

4. A stock has a beta of 0.9, the expected return on the market is 7 percent, and the risk-free rate is 1.3 percent. The expected return on this stock must be ______ percent. (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))

Answer 1

1.Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$105,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the cost of capital of 16.1%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 16.1% cost of capital is -$24,976.41.

2.Information provided:

Face value= future value= $1,000

Time= 19 years*2= 38 semi-annual periods

Yield to maturity= 6.7%/2= 3.35% per semi-annual period

The price of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

N= 38

I/Y= 3.35

Press the CPT key and PV to compute the present value.

The value obtained is 285.89.

Therefore, the price of the bond is $285.89.

3.The question is solved with the help of net present value.

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= $0. Since there is no initial cash flow for this question.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the interest rate of 6%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 6% interest rate is $125,121.48.

4.The expected return on a stock is calculated using the Capital Asset Pricing Model (CAPM)

The formula is given below:

Ke=Rf+b[E(Rm)-Rf]

where:

Rf=risk-free rate of return

Rm=expected rate of return on the market.

Rm-Rf= Market risk premium

b= Stock’s beta

Ke= 1.3% + 0.9*(7% - 1.3%)

= 1.3% + 5.13%

= 6.43%.

In case of any query, kindly comment on the solution.