What is the bond's capital gain or loss

timer Asked: May 12th, 2014

Question description

Chapter 5

Time Value of Money Problem:

You wish to retire in 30 years and you wish to accumulate $1,000,000 for your use.  If you're starting today with $25,000, and you plan on putting money away each month, how much must you invest each month when using an 8% rate of compounding to obtain your goal.

Secondly, if you wish to draw funds from this retirement account upon retirement, and the level of interest rate is 7% at that time, how much will you be able to withdraw as an income each month over a 25 year time span?

Chapter 6

You're concerned with the sales level over the next 12 months as the markets and overall economy have swung  up and down over the last two years, and, there is reason to believe (make a case for) both better and worse times over the next 1 year.

Your analysts tell you that sales should grow by 30% if the economy is strong.  If the economy holds steady, you'll see a 5% increase due to the general level of inflation in the market place.  And, if the economy slides into recession, you can expect to see a 30% decline in sales over the next year.

Last year sales were 10,000,000 and your analysts tell you that there's a 60% probability that the market will stay 'as is'; a 15% probability of a strong economy; a 25% probability of a recession.  What is the expected level of sales in the next 12 months?

Chapter 7

Your division is considering two investment projects, each of which requires an up-front expenditure of $15,000,000.  You estimate that the investments will produce the following net cash flows:

Project A

5,000,000  year 1

10,000,000  year 2

20,000,000  year 3

Project B

20,000,000  year 1

10,000,000   year 2

6,000,000  year 3

What are the two projects net present values, assuming the cost of capital is 10%, 5%, 15% (compute for each).

Chapter 8

Renfro Rentals has issued bonds that have a 10% coupon rate, payable semi-annually.  The bonds mature in 8 years, have a face value of $1,000 and a yield to maturity of 8.5%.  What is the price of the bond?

A 10 year, 12% semi-annual coupon bond with a par value of $1,000 may be called in 4 years at a call price of $1060.  The bond sells for $1,100 (assume the bond has just been issued).

a) What is the bond's yield to maturity

b) What is the bond's current yield

c) What is the bond's capital gain or loss

d) What is the bond's yield to call

Chapter 9

Smith Manufacturing's stock currently sells for $22 per share.  The stock just paid a dividend of $1.20 a share (i.e., D1 = $1.20).  The dividend is expected to grow at a constant rate of 10% a year.  What stock price is expected 1 year from now?

What is the required rate of return on the company's stock?

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