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Miscellaneous Finance Questions

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1)A state's lottery winner is promised $200,000 a year for twenty years (starting at the end of the first year). How much must the state invest now to guarantee the prize if the state can earn annually 7 percent on its funds? How much must the state invest if the annual payments were made at the beginning of the year?

2)A homeowner has a ten year home-improvement loan for $36,875. What are the annual payments required by the loan if the annual rate of interest is 10 percent?

3.Brian has a capital gain of $3,700 and a capital loss of $5,100 for a net long-term capital loss of $1,400. This reduces his taxable income from other sources and reduces taxes by (.35)($1,400) = $490.

4 Barbara has a short-term capital loss that is used to offset the $2,000 long-term capital gain. The remaining $4,000 is used to offset $3,000 of current income from other sources with $1,000 being carried forward to the next year. The tax savings in the current year is (0.35)($3,000) = $1,050.

5.The risk free rate of return is 8 percent; the expected rate of return on the market is 12 percent. Stock X has a beta coefficient of 1.3, an earnings and dividend growth rate of 7 percent, and a current dividend of $2.40. If the stock is selling for $35, what should you do?
6.Presently, Stock A pays a dividend of $2.00 a share, and you expect the dividend to grow rapidly for the next four years at 20 percent. Thus the dividend payments will be:

Year Dividend
1 $1.20
2 1.44
3 1.73
4 2.07

After this initial period of super growth, the rate of increase in the dividend should decline to 8 percent. If you want to earn 12 percent on investments in common stock, what is the maximum you should pay for this stock?
7.You bought a stock for $20 and sold it for $59.72 after six years. What was the annual rate of return?

8.You bought a stock for $28.29 that paid the following dividends:

Year 1 2 3
Dividend $1.00 $1.50 $1.80

After the third year, you sold the stock for $35. What was the annual rate of return?

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Solution Summary

The solution examines miscellaneous finance questions. The solution examines annual rate of returns and dividends.

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Financial Problem: Net Present Value and Ranking Projects

Please help with following assignment:

See attached file for proper format.

1 The partnership of Lou and Bud is considering three long-term capital investment proposals. Relevant data on each project are as follows.

Project
Brown Red Yellow
$200,000 $225,000 $250,000

Capital investment
Annual net income
Year 1 25,000 20,000 26,000
2 16,000 20,000 24,000
3 13,000 20,000 23,000
4 10,000 20,000 22,000
5 8,000 20,000 20,000
________ ________ _________
Total $ 72,000 $ 100,000 $ 115,000
======= ======= =======

Salvage value is expected to be zero at the end of each project. Depreciation is computed by the straight-line method. The company's required rate of return is the company's cost of capital which is 12%. (Assume that cash flows occur evenly throughout the year.)

Instructions
(a) Compute the cash payback period for each project. (Round to two decimals.)
(b) Compute the net present value for each project. (Round to nearest dollar.)
(c) Compute the annual rate of return for each project. (Round to two decimals.) (Hint: Use average annual net income in your computation.)
(d) Rank the projects on each of the foregoing bases. What project do you recommend?

2 Jo Quick is managing director of the Tot Lot Day Care Center. Tot Lot is currently set up as a full-time child care facility for children between the ages of 12 months and 6 years. Jo Quick is trying to determine whether the center should expand its facilities to incorporate a newborn care room for infants between the ages of 6 weeks and 12 months. The necessary space already exists. An investment of $20,000 would be needed, however, to purchase cribs, high chairs, etc. The equipment purchased for the room would have a 5 year useful life with zero salvage value.

The newborn nursery would be staffed to handle 11 infants on a full-time basis. The parents of each infant would be charged $125 weekly, and the facility would operate 52 weeks of the year. Staffing the nursery would require two full-time specialist and five part-time assistants at an annual cost of $60,000. Food, diapers, and other miscellaneous supplies are expected to total $6,000 annually.

Instructions
(a) Determine the annual net income and the net income cash flows for the nursery.
(b) Compute the cash payback period for the new nursery and the annual rate of return. (Round to two decimals.)
(c) Compute the net present value of incorporating a newborn care room. (Round to the nearest dollar.) Tot Lot's cost of capital is 10%.
(d) What should Jo Quick conclude from these computations?

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