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Calculating NPV, WACC and Price of bond/stock

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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 Preview

Please refer attached Excel file for better clarity of formulas.

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?
Solution
Future value of annuity=F=R*future value factor
Where R is periodic payment
Now we can calculate FV factor using FV function in MS Excel for $1 periodic payments
FV Factor= (5.7507)
ve value indicates that it is a cash outflow, we will consider positive value

Now FV of annuity is $8000, So annual payment will be given by
R=FV/FV Factor=$1,391.13

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?
Solution
Here we have to find PV of all cash inflows
First there are coupon payments received annually for 30 years. Coupon payment per annum is given by
R=$70.00
Now find present value of all inflows of ...

Solution Summary

There are five Problems. Solutions describes the steps in finding net present value, price of bond, price of stock and WACC for a firm.

$2.19