1) Elizabeth has $35,000 in an investment account, but she wants the account to grow to $100,000 in 10 years without making any additional contributions to the account. What effective annual rate of interest does she need to earn on the account to meet her goal?
2) McGwire Company's pension fund projects that most of its employees will take advantage of an early retirement program the company plans to offer in five years. Anticipating the need to fund these pensions, the firm bought zero coupon U.S. Treasury Trust Certificates maturing in five years. When these instruments were originally issued, they were 12% coupon, 30-year U.S. Treasury bonds. The stripped Treasuries are currently priced to yield 10%. Their total maturity value is $6,000,000. What is their total cost (price) to McGwire today?
3) A stock that currently trades for $40 per share is expected to pay a year-end dividend of $2 per share. The dividend is expected to grow at a constant rate over time. The stock has a beta of 1.2, the risk-free rate is 5%, and the market risk premium is 5%. What is the stock's expected price seven years from today?
1. The present value is $35,000 and the future value is $100,000 and the time period is 10 years. Using the compound interest formula
FV = PV X (1+rate)^n
100,000 = 35,000 X (1+rate)^10
(100,000/35,000)^(1/10) = 1+rate
1+rate = 1.110691
Rate = 11.0691%
2. The price of a ...
The solution explains some finance questions relating to interest rate to reach goal, cost of zero coupon bond and expected price of a stock