A five-year bond with a yield of 7% (continuously compounded) pays a 5.5% coupon at the end of each year.

1. What is the bond’s price?
2. What is the bond’s duration?
3. Use the duration to calculate the effect on the bond’s price of a 0.3% decrease in its yield.
4. Recalculate the bond’s price on the basis of a 6.7% per annum yield and verify that the result is in agreement with your answer to (c).

You start a corporation. Your idea will produce $100K at the end of each year for 20 years. After 20 years you will sell all assets – this will produce an additional $1.2 million at year 20. To begin production you need $500K immediately which you will raise by issuing bonds and stock. You issue a 20 year bond with 4% annual coupon and face value $1 million. YTM on bonds is 14%, stockholders also require 14% return. No cash is retained within the company. a) What are the cash flows produced by the company? What are these worth (assuming 14% annual rate)? b) What are cash flows to bondholders? What is the bond worth today? c) What are the cash flows to owners? What is ownership worth today? d) What percent of ownership in your company must you sell today?

Harvey Hogan was in his 31^st year as Director of Athletics at Wilson College, a coeducational, private liberal arts college that offered 16 sports and was a member of the Champions Intercollegiate Athletics Conference (CIAC). Mr. Hogan was proud of the fact that, although his budget was the smallest in the conference (which consisted of 10 schools), he had always operated in the black.

    However, the college faced some serious financial issues in the current school year due to a drop in enrollment during the spring semester. As a result, the Chief Financial Officer (CFO) told all department heads that their individual budgets could NOT go over what had been appropriated at the start of the year.

     Mr. Hogan met with the coaching staff and apprised them of the financial crisis that faced the college. He asked for their help but really did not foresee a problem since the Athletics Department had never gone over budget in his previous 30 years.

     On June 30^th, the fiscal year ended and the CFO (Ms. Newman) put an emergency call into Mr. Hogan. She scheduled a meeting with him so he could explain why he was over budget by $12,000.00. She told him that 4 sports had exceeded their budgets—men’s lacrosse, women’s volleyball, men’s tennis, and football.

     When Mr. Hogan returned to his office he immediately called each coach and scheduled meetings with them. According to the women’s volleyball coach, she had failed to check her monthly computer printouts because she was “too busy coaching and recruiting” to spend time on the printout. She said she was sure she stayed within her budget and did not overspend. After some investigating by Mr. Hogan, the coach admitted that she had been asked to serve as a chaperone for the intramural flag football team which travelled to New Orleans for the national tournament. She had transferred some volleyball funds to their account to help them cover their costs. She also paid for their uniforms, but indicated that it was the first time she had ever gone over budget.

     The football coach was also shocked to learn he was over budget by $5000.00. He discovered that the company that washed the team practice and game uniforms failed to send a monthly statement as he had requested. Instead, the owner of the cleaning company waited until the end of the school year to send a bill for $5000.00. Moreover, in previous years several football student athletes who were offered grants-in-aid did not report for practice choosing to enroll at other institutions. The coach assumed this would happen again. However, every scholarship athlete reported for practice which put him over by two grants ($40,000.00). While he was still in compliance with the conference, he was above the institutions limit.

     The men’s tennis coach has always ignored Ms. Newman’s directive to turn in all receipts by June 1^st. Instead, he regularly procrastinated until as late as mid-July when he would turn in receipts for the national tournament held in May. He was $2000.00 over budget.

     Men’s lacrosse exceeded its budget because the coach, who had built a nationally ranked team, had decided to take a trip north to play several games over spring break. He had no other excuse except that he felt the tough competition would help his national ranking and bring good publicity to the college and help his recruiting.

     In addition to these problems, another serious one surfaced. The track and field coach wanted a new computer. When he was told that the request would not be approved until the next year, he worked out a deal with a local computer store. The salesperson agreed to let him get a computer and hold the bill until the next year when he was told he could purchase the computer. Unfortunately, the salesperson was fired and the store owner demanded payment immediately.

     The final frustration came when 12 dozen pairs of athletic socks arrived. The bill had no identifiers on it so Mr. Hogan could not tell who ordered them. No one would admit it and it was a mystery as to how the purchase order got through the business office without the approval of the Athletics Director, Mr. Hogan.

     In the next meeting that Ms. Newman had with Mr. Hogan, she was furious. She asked Mr. Hogan “who is in control of the Athletics Department budget—you or your coaches!” What should Mr. Hogan do?

Questions for Discussion

1. It’s now the middle of July. What can Mr. Hogan do, if anything, about what happened in the last fiscal year? (5 pts.)

2. Make a list of all of the problems you see in the situation above. (10 pts.)

3. Describe how Mr. Hogan can remedy those problems to prevent them from happening in the future. (20 pts.)

You have an opportunity to invest $51000 now in return for $601000 in one year. If your cost of capital is 7.6%​, what is the NPV of this​ investment?

What is the present value of a constant perpetuity of 25 per year where the required rate of return is 5%?

The current cost of graduate school tuition is $18,313 per year.
The cost of tuition is rising at 8% per year.
You plan to attend graduate school for 3 years starting 3 years from now.

How much do you have to invest today if your savings account earns 4.88% APR compounded annually to just fund your tuition?

Harvey Hogan was in his 31^st year as Director of Athletics at Wilson College, a coeducational, private liberal arts college that offered 16 sports and was a member of the Champions Intercollegiate Athletics Conference (CIAC). Mr. Hogan was proud of the fact that, although his budget was the smallest in the conference (which consisted of 10 schools), he had always operated in the black.

    However, the college faced some serious financial issues in the current school year due to a drop in enrollment during the spring semester. As a result, the Chief Financial Officer (CFO) told all department heads that their individual budgets could NOT go over what had been appropriated at the start of the year.

     Mr. Hogan met with the coaching staff and apprised them of the financial crisis that faced the college. He asked for their help but really did not foresee a problem since the Athletics Department had never gone over budget in his previous 30 years.

     On June 30^th, the fiscal year ended and the CFO (Ms. Newman) put an emergency call into Mr. Hogan. She scheduled a meeting with him so he could explain why he was over budget by $12,000.00. She told him that 4 sports had exceeded their budgets—men’s lacrosse, women’s volleyball, men’s tennis, and football.

     When Mr. Hogan returned to his office he immediately called each coach and scheduled meetings with them. According to the women’s volleyball coach, she had failed to check her monthly computer printouts because she was “too busy coaching and recruiting” to spend time on the printout. She said she was sure she stayed within her budget and did not overspend. After some investigating by Mr. Hogan, the coach admitted that she had been asked to serve as a chaperone for the intramural flag football team which travelled to New Orleans for the national tournament. She had transferred some volleyball funds to their account to help them cover their costs. She also paid for their uniforms, but indicated that it was the first time she had ever gone over budget.

     The football coach was also shocked to learn he was over budget by $5000.00. He discovered that the company that washed the team practice and game uniforms failed to send a monthly statement as he had requested. Instead, the owner of the cleaning company waited until the end of the school year to send a bill for $5000.00. Moreover, in previous years several football student athletes who were offered grants-in-aid did not report for practice choosing to enroll at other institutions. The coach assumed this would happen again. However, every scholarship athlete reported for practice which put him over by two grants ($40,000.00). While he was still in compliance with the conference, he was above the institutions limit.

     The men’s tennis coach has always ignored Ms. Newman’s directive to turn in all receipts by June 1^st. Instead, he regularly procrastinated until as late as mid-July when he would turn in receipts for the national tournament held in May. He was $2000.00 over budget.

     Men’s lacrosse exceeded its budget because the coach, who had built a nationally ranked team, had decided to take a trip north to play several games over spring break. He had no other excuse except that he felt the tough competition would help his national ranking and bring good publicity to the college and help his recruiting.

     In addition to these problems, another serious one surfaced. The track and field coach wanted a new computer. When he was told that the request would not be approved until the next year, he worked out a deal with a local computer store. The salesperson agreed to let him get a computer and hold the bill until the next year when he was told he could purchase the computer. Unfortunately, the salesperson was fired and the store owner demanded payment immediately.

     The final frustration came when 12 dozen pairs of athletic socks arrived. The bill had no identifiers on it so Mr. Hogan could not tell who ordered them. No one would admit it and it was a mystery as to how the purchase order got through the business office without the approval of the Athletics Director, Mr. Hogan.

     In the next meeting that Ms. Newman had with Mr. Hogan, she was furious. She asked Mr. Hogan “who is in control of the Athletics Department budget—you or your coaches!” What should Mr. Hogan do?

Questions for Discussion

1. It’s now the middle of July. What can Mr. Hogan do, if anything, about what happened in the last fiscal year? (5 pts.)

2. Make a list of all of the problems you see in the situation above. (10 pts.)

3. Describe how Mr. Hogan can remedy those problems to prevent them from happening in the future. (20 pts.)