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# Finance questions

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Question 1:
a) You want to quit your job and return to school for an MBA degree 3 years from now. The current tuition fee for the MBA degree is \$20,000. You expect the fees to increase at an annual compounded rate of 3%. (To simplify your calculation, assume that you have to pay the entire fee during enrollment, which is supposed to be made at the beginning of year 4). You plan to start savings today and will make 3 equal deposits in a low risk investment account that pays an annual dividend of 6.00% per annum. Under these assumptions, how much you would need to deposit yearly in order to have sufficient amount to enroll for the programme? [Use 3 decimal places in your calculation and round up your answer to the nearest dollar].
b) Your aunt is about to retire, and she wants to sell some of her stocks and buy an annuity that will provide her with an income of \$40,000 per year for 30 years, beginning a year from today. The going rate on such annuities is 7.00%. How much would it cost her to buy such an annuity today? [Assume annual compounding. Use 3 decimal places in your calculation and round up your answer to the nearest dollar].

Question 2:
a) A 25-year, \$1,000 par value bond has an 8.5% annual payment coupon. The bond currently sells for \$950.88. If the yield to maturity remains at its current rate, what will the price be 5 years from now? [Use 3 decimal places in your calculation and round up your answer to the nearest dollar].
b) Indrapura Industries Limited has a bond outstanding with 15 years to maturity, an 8.25% nominal coupon, semiannual payments, and a \$1,000 par value. The bond has a 6.5612% nominal yield to maturity, but it can be called in 6 years at a price of \$1,150. What is the bond's nominal yield to call?

Question 3:
a) Agarwal Technologies was founded 10 years ago. It has been profitable fthe last 5
years, but it has needed all of its earnings to support growth and thus ha never paid a dividend. Management has indicated that it plans to pay a \$0.25 dividend 3 years from today, then to increase to a rapid pace for the following 2 years:
Year 4 \$0.40
Year 5 \$0.55
Thereafter, earnings and dividends are expected to grow at a long-term constant growth rate of 8.00%. Assume a required rate of return of 11%. [Use 3 decimal places in your calculation and round up your answer to the nearest dollar]
i) What is your estimate of the stock's current value?
ii) If the stock is currently selling for \$12.00 per share, is it a good buy? Why or why not?
iii) If assumptions made holds, what is your estimate of the stock price one year from now?

b) You must estimate the intrinsic value of Noe Technologies' stock. The end-of-year free cash flow (FCF ) is expected to be \$24.00 million, and it is expected to grow at a constant rate of 7.0% a year thereafter. The company's WACC is 10.0%, it has \$125.0 million of long-term debt plus preferred stock outstanding, and there are 15.0 million shares of common stock outstanding. What is the firm's estimated intrinsic value per share of common stock? [Use 3 decimal places in your calculation and round up your answer to the nearest dollar].

Question 4:
a) Doklan Inc.'s management estimates that it has a 25% chance of producing an EBIT of 17m, a 50% chance of producing an EBIT of \$12m, and a 25% chance of producing an EBIT of -\$8m. What is the firm's expected EBIT?
b) Suppose you hold a portfolio consisting of a \$10,000 investment in each of 8 different common stocks. The portfolio's beta is 1.25. Now suppose you decided to sell one of your stocks that have a beta of 1.00 and to use the proceeds to buy a replacement stock with a beta of 0.80. What would the portfolio's new beta be?

Question 5:
Fronterra Engineering Corporation (FEC) has the following capital structure which it considers to be optimal:
Debt 25%
Preferred stock 15%
Common equity 60%

FEC tax rate is 30%; and investors expect future earnings and dividends to grow at a constant rate of 9%. FEC paid a dividend of \$3.60 per share last year and its stock currently sells for \$54.00 per share.

FEC can obtain new capital in the following ways:
&#61607; Preferred: New preferred stock with a dividend of \$11.00 can be sold to the public at aprice of \$95.00 per share.
&#61607; Debts: Debt can be sold at par with a coupon interest rate of 12%.

i) Determine the cost of each capital component.
ii) Calculate the weighted average cost of capital [WACC].
iii) FEC has the following investment opportunities that are average-risk projects:
Project Cost at t = 0
(\$) IRR (%)

A 10,000 17.4
B 20,000 16.0
C 10,000 14.2
D 20,000 13.7
E 10,000 12.0

Which projects should FFB accept? Why?

iv) Suppose FEC is evaluating a new venture in the consumer product industry. The IRR on the new venture is 15.5%. WACCs of firms in the consumer product industry tend to average around 16%. Should this new project be pursued? Will FEC make the correct decision if its discounts cash flows on this proposed venture at its WACC found in part
(b) above? Explain.

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#### Solution Summary

The solution explains some questions in finance relating to time value of money; annuitites, FV, yield to call, stock value, beta

\$2.19

## Answers to Various Financial Questions

Jenny just married Tim. Jenny remains to work as a cashier for a restaurant, and her monthly income has averaged \$2,840 a month over the past year. Tim is working as a computer programmer and earns \$3,000 a month. Their shared monthly income let them to live comfortably. Yet they have been unable to save any money for urgent situation.
According to Tim, "It's hard to believe, but we don't even have a savings account because we spend almost everything we make." Every month, they deposit each of their paychecks in separate checking accounts. Tim pays the rent and makes the car payment. Pam buys the groceries and pays the utilities. They use the money left over to purchase new clothes and the other "necessities" for enjoying life.
In an effort to make wise use of credit, the Turner have examined various sources that could serve their current and future financial needs. In the assessment process, they compared the APR along with various fees and potential charges.
Tim and Jenny are also learning about various actions that might be useful if they encounter credit troubles. Their discussions with friends and money management advisers provided expanded knowledge of credit counseling and bankruptcy alternatives.
Life Situation Financial Data
Recently Married
Pam, 26
Josh, 28
Renting an Apartment Monthly income \$5,840
Living expenses \$3,900
Assets \$13,500
Liabilities \$4,800
Emergency fund \$1,000

Q1. What is the minimum amount that the Turner should have in an emergency fund? What actions might be taken to increase the amount in this fund?

1. Lucy lacks cash to pay for a \$720 dishwasher. She could buy it from the store on credit by making 12 monthly payments of \$65. The total cost would then be \$780. Instead, Lucy decides to deposit \$60 a month in the bank until she has saved enough money to pay cash for the dishwasher. One year later, she has saved \$770.40—\$720 in deposits plus interest. When she goes back to the store, she finds the dishwasher now costs \$849.60. Its price has gone up 18 percent, the current rate of inflation.
From the financial standpoint, was postponing her purchase a good trade-off for Lucy?

Yes ___
No ___

2. Malou is trying to decide whether she can afford a loan she needs in order to go to chiropractic school. Right now Malou is living at home and works in a shoe store, earning a gross income of \$3250 per month. Her employer deducts a total of \$150 for taxes from her monthly pay. Malou also pays \$100 on credit card debt each month. The loan she needs for chiropractic school will cost an additional \$140 per month.
Calculate her debt payments-to-income ratio without college loan. Remember to convert your answer to a percentage!
Make sure to include zeros and the period in your answer.
Round your answer to 2 decimal places. i.e. 16.55, 12.32

3. Sally is trying to decide whether she can afford a loan she needs in order to go to chiropractic school. Right now Sally is living at home and works in a shoe store, earning a gross income of \$2990 per month. Her employer deducts a total of \$200 for taxes from her monthly pay. Sally also pays \$100 on credit card debt each month. The loan she needs for chiropractic school will cost an additional \$100 per month.
Calculate her debt payments-to-income ratio with college loan. Don't forget to convert your answer to a percentage.
Make sure to include zeros and the period in your answer.
Round your answer to 2 decimal places. i.e. 20.12, 31.89