Question

1.Home Builder Supply, a retailer in the home improvement industry, currently operates seven retail outlets in Georgia and South Carolina. Management is contemplating building an eighth retail store across town from its most successful retail outlet. The company already owns the land for this store, which currently has an abandoned warehouse located on it. Last month, the marketing department spent $10,000 on market research to determine whether to build and open the new store. Which of the following should be included as part of the incremental free cash flows for evaluating the proposed new retail store?

a.The interest paid on the bridge loan used to finance construction costs construction costs of the new retail store.

b.The expected loss of sales at its existing retail outlet, if customers who previously drove across town to shop at the existing outlet become customers of the new store instead.

c.The $10,000 in market research spent to evaluate customer demand.

d.The dividends be paid out to shareholders from the new store’s profits.

e.cost of managers’ time and effort spent so far evaluating the new store

2.The U.S. Government just issued a zero-coupon bond with a face value of $1,000 and maturity of 30 years. Other similar bonds offer 4.50% per year, compounded semiannually. Compute the value of the bond. what is the formula used?

3.A bond has a maturity of 10 years, face value of $1,000, and coupon rate of 4.00%. Coupon payments are made semiannually. Other similar bonds offer 6.50% per year, compounded semiannually. Compute the value of a bond. what's the formula used?

Answer 1

1.
The expected loss of sales at its existing retail outlet, if customers who previously drove across town to shop at the existing outlet become customers of the new store instead.

2.
Formula of Present Value=Future Value/(1+periodic rate)^number of periods=Par value/(1+yield/2)^(2*n)
=1000/(1+4.5%/2)^(2*30)
=263.14856086

3.
=Par*Coupon rate/yield*(1-1/(1+yield/2)^(2*n))+Par/(1+yield/2)^(2*n)
=1000*4%/6.5%*(1-1/(1+6.5%/2)^(2*10))+1000/(1+6.5%/2)^(2*10)
=818.25817316