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    Finance Questions

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    1. Calculate the current price per share for Cali Corporation given the following projections for the coming year:

    Sales=10,000 units
    Sales price per unit= $10
    Variable cost per unit= $5
    Fixed costs= $10,000
    Bonds outstanding= $15,000
    Interest rate on outstanding bonds= 8%
    Tax rate= 40%
    Dividend payout ratio= 60%
    Expected long term growth rate= 8%
    Shares of common stock outstanding= 10,000 shares
    Beta= 1.4
    Current rate on government T- Bonds= 5%
    Expected return on the stock market= 9%

    2. According to www.bondpage.com, on Feb 22, 2006, dealers were offering the US government's 10.625% 2015 Treasury Bond for "145.958." Answerthe following about the bond:

    a. What is the price in dollars of the bond?

    b. What is the amount of the coupon interest payment you would receive each year if you bought the bond? (assume annual payments)

    c. How many payments would you receive if you bought the bond and held it to maturity? (how many years does the bond have to go before it matures)

    d. What is the bonds yield to maturity, assuming you purchased it for the current offering price?

    3. Assume you are planning how to finance your child's college education. The child is 3 yrs old now so there are 15 years to go before your child enters college at age 18. According to your estimates you will need $80,000 in the bank at that time.

    a. If you believe you can earn 9% a year, on average, between now and the time your child starts college, how much will you have to invest between now and then inorder to reach your target?

    b. It appears the annual payment required to reach your target is more than you can afford. If the most you can afford to invest each year is $12,000, what average annual rate of return must you earn in order to reach your target?

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    Solution Preview

    1. Calculate the current price per share for Cali Corporation given the following projections for the coming year:

    Sales=10,000 units
    Sales price per unit= $10
    Variable cost per unit= $5
    Fixed costs= $10,000
    Bonds outstanding= $15,000
    Interest rate on outstanding bonds= 8%
    Tax rate= 40%
    Dividend payout ratio= 60%
    Expected long term growth rate= 8%
    Shares of common stock outstanding= 10,000 shares
    Beta= 1.4
    Current rate on government T- Bonds= 5%
    Expected return on the stock market= 9%

    We first find the dividend amount. The net income is
    Sales (10,000X10) = 100,000
    Variable Cost (10,000X5)=50,000
    Fixed Cost = 10,000
    EBIT = 40,000
    Interest (15,000X8%)=1,200
    Income before tax = 38,800
    Tax(40%)=15,520
    Net income=23,280
    Dividend amount (60%) = 13,968
    Dividend per Share=13,968/10,000 = 1.40
    Since this is for the coming year, the dividend is the expected Dividend(D1)=1.4
    We now use the CAPM to get the cost of equity
    Cost of equity = Risk free rate + (Market Return-risk free rate) X ...

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