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# Time value of money, bond and stock value, WACC, NPV, IRR

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2. If you invest \$10,000 today at 3 percent compounded monthly, how much will you have after 10 years?

3. How much would you have to invest today in order to receive \$10,000 in 5 years at an assumed 5% APR and quarterly compounding?

4. What is the present value of \$10,000 to be received for each of the next 5 years at an assumed 4% APR.

5. What are the monthly payments required in order to pay off a \$12,000 auto loan at an assumed 5% APR over a 3 year period?

6. A corporation issued a \$1,000 par value bond paying 3% interest with 15 years to maturity. Assume the current yield to maturity on such bonds is 3 %. What is the price of the bond?

7. A corporation will pay a \$1.00 dividend (D1) in the next 12 months on a share of common stock. The required rate of return is 5 % and the constant growth rate is 4 %.Compute the theoretical stock price Po.

8. The preferred stock of a corporation pays an annual dividend of \$1.00. It has a required rate of return of 4 %. Compute the price of the preferred stock.

9. A \$1,000 par value bond has 10 years to maturity. The bond pays \$40 a year in interest and is selling for \$950. Given a 30% tax bracket, what is the after tax cost of this debt?

10. A share of preferred stock is selling for \$20 with an estimated floatation cost of \$1 per share. It is anticipated that the preferred stock will pay \$1.50 per share in dividends. Compute the cost of the preferred stock to the issuing corporation.

11. A corporation expects to pay dividends (D1) of \$1.75 per share at the end of the current year and the current price of its common stock is \$30 per share. The expected growth rate is 3.5% and floatation costs of \$1.00 per share are anticipated. Making use of the constant growth model, compute the cost of this new common equity.

12. Making use of the Capital Asset Pricing Model, compute the cost of
Common equity assuming a risk free rate of 3.5%, a market rate of 5% and
An assumed beta of 1.3.

13. Assume the following capital structure:
Debt 30%
Preferred stock 10%
Common equity 60 %

The following facts are provided:

Bond yield to maturity 5%
Corporate tax rate 35%
Dividend, Pre. stock \$1.75
Price, Pre. stock \$25.00
Floatation, Pre. stock \$1.00
Dividend (Do), Com. Stock \$1.00
Price, Com. Stock* \$15.00
Growth rate, Com. Stock 2%

* You are to assume this to be issued common stock with a zero floatation cost.

Compute the weighted average cost of capital

14. Please assume the following cash flow data:

Year Cash Flow
a. - \$120,000
b. 48,000
c. 72,000
d. 104,000

Required: Please calculate each of the following:
a. The Payback
b. The Internal Rate of Return
c. The Net Present Value at an assumed capital cost of 12 %.
d. The Modified Internal Rate of Return.

\$2.19

## An increase in interest rates will cause the current resale value of a long term bond to increase more than that of a short term bond.

I need to discuss the answers in class with some explanations.

True or False with an explanation

1. An increase in interest rates will cause the current resale value of a long term bond to increase more than that of a short term bond.

2. In the CAPM, Beta can best be described as the relative volatility of a security as compared to the total stock market with a Beta of 1 indicating that the stock is equally as volatile as the markets are as a whole.

3. Most companies will use the lowest interest rate of their long term debt as the discount rate (hurdle rate) for doing the NPV calculations on capital projects.

4. The Present Value (PV) of \$10,000 received 3 years from now assuming an interest rate of 4.5% would be \$11,411.66.

5. If two capital projects are mutually exclusive you should always select the one with the highest IRR and ignore the NPV of each project.

6. One of the major advantages of funding the company with debt financing is the tax effects realized because the interest charges are a tax deduction.

7. When it comes to paying dividends, a large mature slow-growing company is much more likely to pay out a dividend than is a new fast-growing start up company.

8. If you were to graph the WACC you would find that increasing the amount of debt will lower the WACC to a point and then it will start to rise again as debt increases further. This results in a U shaped curve on the graph.

9. A company that is underleveraged (too little debt) can be considered a more attractive take over target simply because of this fact.

10. The Pay Back Method is preferred by many companies because it is relatively easy to use and incorporates Time Value of Money concepts.

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