QUESTION

1. Your company wants to raise $10 million by issuing 20- year zero- coupon bonds. If yield to maturity on the bonds will be 6% (annually compounded APR), what total principal amount of bonds must you issue?

2. Summit Systems will pay a dividend of $1.50 this year. If you expect Summit’s dividend to grow by 6% per year, what is its price per share if the firm’s equity cost of capital is 11%?

3. The following table contains prices and dividends for a stock. All prices are after the dividend has been paid. If you bought the stock on January 1 and sold it on December 31, what is your realized return?

You are choosing between two projects, but can only take one. The cash flows for the projects are given in the following table:

 

0

1

2

3

4

 

A

-$50

25

20

20

15

 

B

-$100

20

40

50

60

a) What are the IRRs of the two projects?

b) If your discounted rate is 5%, what are the NPVs of the two projects?

c) Why do IRR and NPV rank the two projects differently?

4. You buy 100 shares of Tidepool Co. for $40 each and 200 shares of Madfish, Inc., for $15 each. What are the weights in your portfolio?

5. You are analyzing a stock that has a beta of 1.2. The risk-free rate is 5% and you estimate the market risk premium to be 6%. If you expect the stock to have a return of 11% over the next year, should you buy it? Why or why not?

6. This year, FCF, Inc., has earnings before interest and taxes of $10 million, depreciation expenses of $1 million, capital expenditures of $1.5 million, and has increased its net working capital by $500,000. If its tax rate is 35%, what is its free cash flow? 

7. River Enterprises has $500 million in debt and 20 million shares of equity outstanding. Its excess cash reserves are $15 million. They are expected to generate $200 million in free cash flows next year with a growth rate of 2% per year in perpetuity. River Enterprises’ cost of equity capital is 12% per year in perpetuity. After analyzing the company, you believe that the growth rate should be 3% instead of 2%. How much higher (in dollars) would the price per share of stock be if you are right?

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