Investment, Bond Face Value, NPV Calculations and WACC
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1. Janice Smith wishes to accumulate $8,000 by the end of 5 years by making equal annual end-of-year deposits over the next five years. If Janice can earn 7 percent on her investments, how much must she deposit at the end of each year to meet this goal?
2. J& J just issued a bond with a $1,000 face value and a coupon rate of 7%. If the bond has a life of 30 years, pays annual coupons and the yield to maturity (YTM) is 6.8%, what will be the bond sell for?
3. Biogenetics, Inc plans to retain and reinvest all of their earnings for the next 30 years. Beginning in year 31, the firm will begin to pay a $12.00 per share dividend. The dividend will not subsequently change. Given a required return of 15%, what should the stock sell for today?
4. What is the NPV of a project that is expected to pay $10,000 a year for 7 years if the initial investment is $40,000 and the required return is 15%?
5. A firm has 2,000,000 shares of common stock outstanding with a market price of $2.00 per share. It has 2,000 bonds outstanding, each selling for $1,200. The bonds mature in 15 years, have a coupon rate of 10% and pay coupons annually. The firm's beta is 1.2, the risk free rate is 5%, and the market risk premium is 7%. The tax rate is 34%. Calculate the WACC?
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Solution Summary
The solution has various finance problems relating to bond and stock valuation and NPV calculations.
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1. Janice Smith wishes to accumulate $8,000 by the end of 5 years by making equal annual end-of-year deposits over the next five years. If Janice can earn 7 percent on her investments, how much must she deposit at the end of each year to meet this goal?
We are given the future value and we have to find the annuity amount. The time period is 5 years and the rate is 7%. To get the future value o an annuity, we use the FVIFA table. From the table, we get the FV factor for 5 years and 7% as 5.751. The annuity amount is 8,000/5.751=$1,391.06.
2. J& J just issued a bond with a $1,000 face value and a coupon rate of 7%. If the bond has a life of 30 years, pays annual coupons and the yield to maturity (YTM) is 6.8%, what will be the bond sell for?
The price the bond will sell for is the present value of the interest and the principal. The interest amount ...
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