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1. A company 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 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,120.
What is the bond’s nominal yield to call?
2. A Corporation (AC) just paid a dividend of $1.32 per share. Analysts expect the AC’s dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in year 3 and after that. AC’s beta coefficient is 1.10, the market risk premium is 5%, and the risk-free rate is 3.5%.
What is the current market value of AC stock?
3. A company recently hired you as a consultant to estimate the company’s WACC. You have obtained
the following information:
1) The firm’s noncallable bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000, and a market price of $1,050.00.
2) The company’s tax rate is 40%.
3) The risk-free rate is 4.50%, the market risk premium is 5.50%, and the stock’s beta is 1.20.
4) The target capital structure consists of 35% debt, and the balance is common equity.
The firm uses the CAPM to estimate the cost of equity, and it does not expect to issue any new
common stock. What is its WACC?
4. A Company is evaluating the purchase of new equipment. The price of the equipment, including shipping and installation, is $235,420. The equipment is fully depreciated at the time of purchase(it is eligible for 100% bonus depreciation). The equipment would be sold after three years for $101,400. The equipment requires a $6,221 increase in net operating working capital. The new equipment would not affect the cost, but the pretax revenues would increase by $134,100 per year. The company tax rate is 22 percent, and the WACC is 11.25 percent.
What is the MIRR of the project? What is the NPV of the project?
5. A Company has decided on the following project: The project has the following cash flows.
Year
Cash Flow in $
0
-30,000
1
6,000
2
12,000
3
18,000
4
12,000
The company’s weighted average cost of capital is 10 percent (WACC = 10.31%).
What is the project’s discounted payback, net present value (NPV), internal rate of return, and MIRR?
6. A company recently reported an operating income of $5.95 million, depreciation of $1.20 million, and a tax rate of 40%. The firm’s expenditures on fixed assets and net working capital totaled $0.6 million.
What was its free cash flow in millions?
7. Suppose an investment pays $41,950 per year for the first ten years, $52,790 for the next ten years, and $36,470 for the following ten years (all payments are at the end of each year).
If the appropriate annual discount rate is 7.51 percent, what is the value of this investment today?
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