Question 1 1. Two credit cards both state an APR of 10%. First National Bank’s card charges 0.8333% compounded monthly. First United Bank’s card charges 5% compounded semiannually (twice a year). Given these APR’s, what are the effective annual rates charged by these two credit cards? Question 2 1. You are considering the investment project summarized by the cash flows and timeline below. If the discount rate is 7%, what is the net present value of this project? Would you accept or reject the project? Year 0: cash outflow (cost) of $3,000 Year 1: cash inflow of $1,000 Year 2: cash inflow of $1,050 Year 3: cash inflow of $1,100 Year 4: cash inflow of $900 Question 3 1. 3a. You want to buy a new house, but you are not sure what you can afford. What is the monthly payment for a 30 year loan with a 5% APR if the loan is for $175,000? 3b. What is the monthly payment for a 30 year loan with a 5% APR if the loan is for $200,000? Question 4 1. Lycan Inc. has 7.5% coupon bonds on the market that have 18 years left to maturity and a face value of $1,000. The bonds make annual payments. If the yield to maturity on these bonds is 4.25%, what is the current bond price? Question 5 A company is expected to pay a dividend of $1.50 per share next year. The dividends are expected to grow at 2.5% per year indefinitely. If the required return on similar investments is 5%, what is the current price of the stock? Question 6 1. Your company issues 6% coupon bonds with a face value of $1,000. Suppose these bonds have 7 years to maturity, make semiannual payments, and have a yield to maturity of 8%. 6a. What is the current price of the bonds? 6b. If interest rates fall to 5%, what would the price be? Question 7 1. Marcel Co. is growing quickly. The company just paid a dividend of $2.00. Dividends are expected to grow at a 25% rate for the next three years, with the growth rate falling off to a constant 5% thereafter. If the required return is 7%, what is the current stock price? (Please explain all of your work. That is, indicate the future dividends and the future stock price that you need to do this calculation to receive partial credit). Question 8 Whichever project is chosen, if any, you require a 5% return on your investment. What is the payback period for each project? If you base your decision on which project has the shortest payback, which will you choose? Question 9 • Whichever project is chosen, if any, you require a 5% return on your investment. What is the internal rate of return for each project? If you base your decision on the IRR, which will you choose? Question 10 Whichever project is chosen, if any, you require a 5% return on your investment. 10. a. The CEO of your company notes that both projects cost the same, and both last for 5 years. Therefore, she suggests that the company pursue the project with the shortest payback. However, she does not want to be short sighted, and wants to know which project adds the most value to the company. What is the net present value of each project? 10. b. Considering the answers to questions 8, 9, and 10a., which project should you recommend to the CEO? Question 1 1. Two credit cards both state an APR of 10%. First National Bank’s card charges 0.8333% compounded monthly. First United Bank’s card charges 5% compounded semiannually (twice a year). Given these APR’s, what are the effective annual rates charged by these two credit cards? Question 2 1. You are considering the investment project summarized by the cash flows and timeline below. If the discount rate is 7%, what is the net present value of this project? Would you accept or reject the project? Year 0: cash outflow (cost) of $3,000 Year 1: cash inflow of $1,000 Year 2: cash inflow of $1,050 Year 3: cash inflow of $1,100 Year 4: cash inflow of $900 Question 3 1. 3a. You want to buy a new house, but you are not sure what you can afford. What is the monthly payment for a 30 year loan with a 5% APR if the loan is for $175,000? 3b. What is the monthly payment for a 30 year loan with a 5% APR if the loan is for $200,000? Question 4 1. Lycan Inc. has 7.5% coupon bonds on the market that have 18 years left to maturity and a face value of $1,000. The bonds make annual payments. If the yield to maturity on these bonds is 4.25%, what is the current bond price? Question 5 A company is expected to pay a dividend of $1.50 per share next year. The dividends are expected to grow at 2.5% per year indefinitely. If the required return on similar investments is 5%, what is the current price of the stock? Question 6 1. Your company issues 6% coupon bonds with a face value of $1,000. Suppose these bonds have 7 years to maturity, make semiannual payments, and have a yield to maturity of 8%. 6a. What is the current price of the bonds? 6b. If interest rates fall to 5%, what would the price be? Question 7 1. Marcel Co. is growing quickly. The company just paid a dividend of $2.00. Dividends are expected to grow at a 25% rate for the next three years, with the growth rate falling off to a constant 5% thereafter. If the required return is 7%, what is the current stock price? (Please explain all of your work. That is, indicate the future dividends and the future stock price that you need to do this calculation to receive partial credit). Question 8 Whichever project is chosen, if any, you require a 5% return on your investment. What is the payback period for each project? If you base your decision on which project has the shortest payback, which will you choose? Question 9 • Whichever project is chosen, if any, you require a 5% return on your investment. What is the internal rate of return for each project? If you base your decision on the IRR, which will you choose? Question 10 Whichever project is chosen, if any, you require a 5% return on your investment. 10. a. The CEO of your company notes that both projects cost the same, and both last for 5 years. Therefore, she suggests that the company pursue the project with the shortest payback. However, she does not want to be short sighted, and wants to know which project adds the most value to the company. What is the net present value of each project? 10. b. Considering the answers to questions 8, 9, and 10a., which project should you recommend to the CEO?
Purchase answer to see full attachment