Exercise 1:

Assume you have the following data about a country. Use the information and formulas in chapter 9 and the chapter 9 study guide to fill in the table below.

(Note: these are actual data, except the rate of economic growth. Rate of economic growth data are roughly US’s average from the past (3%) and China’s projected growth rate in the near future. Are these good assumptions to use?)

Can you see why standards of living in China are rapidly increasing? Which number shows this the best?

About how long will it be before China’s economy becomes larger than the U.S.’s?

Airnova Inc. has two types of bonds, Bond D and Bond F. Both have 8 percent coupons, make semiannual payments, and are priced at par value. Bond D has 2 years to maturity. Bond F has 15 years to maturity.

Airnova Inc. is considering four different types of stocks. They each have a required return of 20 percent and a dividend of $3.75 for share. Stocks, A, B, and C are expected to maintain constant growth rates in dividends for the near future of 10 percent, 0 percent, and -5 percent, respectively. Stock D is a growth stock and will increase its dividend by 30 percent for the next four years and then maintain a constant 12 percent growth rate after that

Discuss

If interest rates suddenly rise by 2 percent, what is the percentage change in both bonds?

If interest rates suddenly fall by 2 percent, what is the percentage change in both bonds?

What does this tell you about the interest rate risk of longer-term bonds?

What is the dividend yield for each of the four stocks?

What is the expected capital gains yield?

Discuss the relationship among the various returns that you find for each of the stocks.

Problem 9-19
Corporate valuation

Barrett Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its earnings. In other words, Barrett does not pay any dividends, and it has no plans to pay dividends in the near future. A major pension fund is interested in purchasing Barrett's stock. The pension fund manager has estimated Barrett's free cash flows for the next 4 years as follows: $2 million, $6 million, $11 million, and $13 million. After the fourth year, free cash flow is projected to grow at a constant 8%. Barrett's WACC is 16%, the market value of its debt and preferred stock totals $52 million, and it has 16 million shares of common stock outstanding.

a. What is the present value of the free cash flows projected during the next 4 years? Round your answer to the nearest cent.

b. What is the firm's horizon, or continuing, value? Round your answer to the nearest cent.

c. What is the firm's total value today? Round your answer to the nearest cent.

d. What is an estimate of Barrett's price per share? Round your answer to the nearest cent.

Consider

Airnova Inc. has two types of bonds, Bond D and Bond F. Both have 8 percent coupons, make semiannual payments, and are priced at par value. Bond D has 2 years to maturity. Bond F has 15 years to maturity.

Airnova Inc. is considering four different types of stocks. They each have a required return of 20 percent and a dividend of $3.75 for share. Stocks, A, B, and C are expected to maintain constant growth rates in dividends for the near future of 10 percent, 0 percent, and -5 percent, respectively. Stock D is a growth stock and will increase its dividend by 30 percent for the next four years and then maintain a constant 12 percent growth rate after that.

Discuss

• If interest rates suddenly rise by 2 percent, what is the percentage change in both bonds?

• If interest rates suddenly fall by 2 percent, what is the percentage change in both bonds?

• What does this tell you about the interest rate risk of longer-term bonds?

• What is the dividend yield for each of the four stocks?

• What is the expected capital gains yield?

• Discuss the relationship among the various returns that you find for each of the stocks.

The figures show a hypothetical planetary system at two different times. The system has a star S and three planets, labeled A, B, and C. The table provides the mass of each body in the system, as well as their spatial coordinates (?,?) in their initial and final positions. The spatial coordinates of the bodies are given in Astronomical Units (AU). Body Mass (kg) Initital Position Final Position S ?S=2.0197×1030 (0,0) (?S,?S) A ?A=2.0735×1028 (0.3429,0) (0,−0.5335) B ?B=6.6485×1026 (0.5617,1.2553) (−1.5385,0) C ?C=8.4729×1027 (0,1.6711) (−0.8021,−0.6035) The initial velocity of the center of mass of the system is zero. Find the magnitude ?S of the star's displacement from the origin in its final position. An x y coordinate system. The star S is at the origin. Planet A lies on the positive x-axis. Planet B is in the first quadrant of the graph. Planet C lies on the positive y-axis. Initial Position An x y coordinate system. The star S is near the origin in the first quadrant. Planet A lies on the negative y axis. Planet B lies on the negative x axis. Planet C is in the third quadrant of the graph. Final Position ?S= AU

Company ABC has just announced earnings of $2 per share. Based on the last five years, earnings have grown at a rate of 20% per annum and the company expects this to continue for the next five years, after which it expects earnings to remain constant forever. The company has a policy of paying out 30% of its earnings as dividends. ABC stock has a beta of 1.2. The yield to maturity on 10-year government bonds is 2% and market risk premium is 10%.

(a) Calculate the current value per share.

(b) If the stock is currently trading in the market at $10 per share, comment on whether any profits can be made. What form of market efficiency prevails if this occurs? Examine the other two (2) forms of market efficiency and what the observation on the stock price here implies in terms of market efficiency.

(c) The company plans to issue a 7-year bond in the near future to finance expansion into neighbouring countries. It expects interest rates to fall in 3 years’ time. State and describe two (2) possible types of bonds the company could issue. Analyse how the company can determine the pricing for its bond issue?

Airnova Inc. has two types of bonds, Bond D and Bond F. Both have 8 percent coupons, make semiannual payments, and are priced at par value. Bond D has 2 years to maturity. Bond F has 15 years to maturity.

Airnova Inc. is considering four different types of stocks. They each have a required return of 20 percent and a dividend of $3.75 for share. Stocks, A, B, and C are expected to maintain constant growth rates in dividends for the near future of 10 percent, 0 percent, and -5 percent, respectively. Stock D is a growth stock and will increase its dividend by 30 percent for the next four years and then maintain a constant 12 percent growth rate after that.

Discuss:

If interest rates suddenly rise by 2 percent, what is the percentage change in both bonds?

If interest rates suddenly fall by 2 percent, what is the percentage change in both bonds?

What does this tell you about the interest rate risk of longer-term bonds?

What is the dividend yield for each of the four stocks?

What is the expected capital gains yield?

Discuss the relationship among the various returns that you find for each of the stocks.

You are advising the small town of Blackrock regarding future plans for 1,000 acres of forest located near the town. The owner of the forest has offered to sell the land to the town for $2,000,000. The forest provides many recreational benefits for local residents, as well as being the home of much wildlife including an endangered species. After conducting several studies you estimate that the annual recreational and environmental benefits will be $100,000 per year. (please use 6% as the discount rate )

a) Considering only the next 50 years, is buying the forest a good idea for the town? Why or why not?

b) What is the maximum amount the town would be willing to pay the landowner to lease the land for 50 years? Explain why.

c) How would your answers to parts a) and b) change if the recreational and environmental benefits increase by 3% per year, reflecting the fact that the town is growing, not only in population but also in income of the population? Explain.

d) Which methods of benefit estimation would you use to estimate i) the recreational benefits, and ii) the environmental benefits of the forest? Explain the reasons for your choice and describe how you would undertake each study (maximum 100 words).

You work on a traffic management team for the city. There has been a proposal to add a new lane to a road near a busy intersection. As part of the research into whether or not to build the new lane, the team would like to know how many cars, on average, pass through this intersection at peak hour each day (5 pm to 6 pm). Your colleague has developed the hypothesis that the population mean is 886. You intend to test this hypothesis. For the purposes of this research, the team is assuming that the standard deviation in the number of cars passing through each hour is 38.

You randomly select 49 days on which to monitor the traffic going through this intersection.

a)Complete the following statement by filling in the correct numbers. Give your answers to the nearest whole number of cars.

If the true population mean really is 886, then for 90% of all samples of size n = 49, the sample mean will be somewhere between  and  cars.

b)Over the 49 days, you find that an average of 891 cars pass through the intersection. Therefore with 90% confidence you

can rule out the possibility that your colleague's hypothesis was correct
cannot rule out the possibility that your colleague's hypothesis was correct

The COVID 19 Rapid Response fund was set up to alleviate the suffering of the people. “In March 2020, the Government of Canada announced $1 billion to support a whole-of-government COVID-19 Response Fund, which supports federal public health measures such as enhanced surveillance, increased testing and ongoing support for preparedness in First Nations and Inuit communities” Government of Canada (2020). The policy aims to reduce the suffering of people hit by COVID 19 that led to the loss of jobs and increment of unemployment in the country.

The objective of the response fund is to support researchers that will help develop measures to detect and reduce the transmission of COVID-19. The fund enabled the health care system to test patience suffering from the virus and help contain the spread of COVID 19 Government of Canada (2020). According to a research from the University of Calgary (2020), he objective is to support Alberta-based genomics projects designed to address specific, short-term needs of industry, not-for-profit, and public sector receptors through research conducted by academics in collaboration with these receptors, with near-term outcomes that address the COVID-19 crisis.

Question that needs to be answered

Why was the Response fund focused on one ethnic group and not others?