Question

1. GM issued a $ 1,000, 30-year bond 5 years ago at 9 % interest. Comparable bonds yield 6 % today. What should GM’ bond sell for now?

2. Define each variable in the equation P = (D1 + P1) / (1 + R)

3. Solve the NPV and solve for the Payback

     YR Cash Flow

       0 -$26,000

1 11,000

2 14,000

3 11,000

   with the required rate equal to 6%

4. Use the following tax brackets for taxable income:

Bracket: Tax Rate

0–$10,000 15%

$10,000–$50,000 25%

$50,000–$250,000 30%

Over $250,000 35%

Compute the average tax rate for the following taxable income amounts

a. $20,000

b. $125,000

c. $350,000

d. $1,000,000

5. Where do analysts get financial information about companies? What are their concerns about the information?

6. Why don’t we calculate the difference in the equity account between the beginning and end of the year and consider that difference as a source or use of cash? Why do we similarly exclude the cash account? Explain.

Answer 1

1]

Price of a bond is the present value of its cash flows. The cash flows are the coupon payments and the face value receivable on maturity

Price of bond is calculated using PV function in Excel :

rate = 6% (YTM of bonds = market interest rate)

nper = 25 (Years remaining until maturity with 1 coupon payment each year)

pmt = 1000 * 9% (annual coupon payment = face value * coupon rate)

fv = 1000 (face value receivable on maturity)

PV is calculated to be $1,383.50

2]

P = value of stock today

D1 = next year dividend

P1 = stock price after 1 year

R = required rate of return

3]

NPV is calculated using NPV function in Excel

NPV is $6,073.12

Payback period is the time taken for the cumulative cash flows to equal zero

Payback period = 3 + (cash flow required in year 4 for cumulative cash flows to equal zero / year 4 cash flow) = 3 + ($1,000 / $11,000) = 3.09 years

NPV is $6,073.12

Payback period = 3.09 years