BUSI 530 Week 3 HomeWork 3 (SOLUTIONS) – Liberty University
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Question 1

Compute the present value of a $300 cash flow for the following combinations of discount rates and times: (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Question 2

Compute the future value of a $190 cash flow for the same combinations of rates and times: (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Question 3

In 1880 five aboriginal trackers were each promised the equivalent of 100 Australian dollars for helping to capture the notorious outlaw Ned Kelley. In 1995 the granddaughters of two of the trackers claimed that this reward had not been paid. The prime minister stated that if this was true, the government would be happy to pay the $100. However, the granddaughters also claimed that they were entitled to compound interest.

Question 4

a­1. Calculate the present value of an annual payment of $1,050 you would received for 12 years if the interest rate is 3%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

a­2. Calculate the present value of an annual payment of $850 you would received for 17 years if the interest rate is 3%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

a­3. Which option would you prefer?

b­1. Calculate the present value of an annual payment of $1,050 you would received for 12 years if the interest rate is 12%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b­2. Calculate the present value of an annual payment of $850 you would received for 17 years if the interest rate is 12%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b­3. Which option would you prefer?

Question 5

Find the annual interest rate. (Do not round intermediate calculations. Round your answers to 2

Question 6

If you earn 5.00% per year on your bank account, how long will it take an account with $100 to double to $200? Use the log formula. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Question 7

Investments in the stock market have increased at an average compound rate of about 5% since 1903. It is now 2012.

Question 8

In mid­2010 a pound of apples cost $1.42, while oranges cost $1.26. Ten years earlier the price of apples was only $1.00 a pound and that of oranges was $.78 a pound.

Question 9

a. If you take out an $8,200 car loan that calls for 60 monthly payments starting after 1 month at an APR of 12%, what is your monthly payment? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. What is the effective annual interest rate on the loan? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Question 10

Professor’s Annuity Corp. offers a lifetime annuity to retiring professors. For a payment of $83,000 at age 65, the firm will pay the retiring professor $675 a month until death

Question 11

You can buy property today for $2.5 million and sell it in 4 years for $3.5 million. (You earn no rental income on the property.)

Question 12

A factory costs $450,000. You forecast that it will produce cash inflows of $105,000 in year 1, $165,000 in year 2, and $270,000 in year 3. The discount rate is 11%

Question 13

If the interest rate this year is 8.4% and the interest rate next year will be 10.4%, what is the future value of $1 after 2 years? What is the present value of a payment of $1 to be received in 2 years? (Do not round intermediate calculations. Round your answers to 4 decimal places.)

Question 14

A 10­year Treasury bond is issued with face value of $1,000, paying interest of $72 per year. If market yields increase shortly after the T­bond is issued, what is the bond’s coupon rate? (Round your answer to 1 decimal place.)

Question 15

A 10­year Circular File bond pays interest of $55 annually and sells for $984. What are its coupon rate and yield to maturity? (Do not round intermediate calculations. Round “Coupon rate” to 1 decimal place and “Yield to maturity” to 2 decimal places.)

Question 16

A bond has 16 years until maturity, a coupon rate of 6.8%, and sells for $1,106.

Question 17

General Matter’s outstanding bond issue has a coupon rate of 10.6%, and it sells at a yield to maturity of 8.70%. The firm wishes to issue additional bonds to the public at face value. What coupon rate must the new bonds offer in order to sell at face value? (Round your answer to 2 decimal places.)

Question 18

Refer the table below:

Question 19

One bond has a coupon rate of 5.8%, another a coupon rate of 8.4%. Both bonds have 9­year maturities and sell at a yield to maturity of 7%

Question 20

Sure Tea Co. has issued 4.6% annual coupon bonds that are now selling at a yield to maturity of 6.5% and current yield of 5.8492%. What is the remaining maturity of these bonds? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Question 21

Consider three bonds with 6.4% coupon rates, all selling at face value. The short­term bond has a maturity of 4 years, the intermediate­term bond has maturity 8 years, and the long­term bond has maturity 30 years.

Question 22

A 2­year maturity bond with face value of $1,000 makes annual coupon payments of $96 and is selling at face value. What will be the rate of return on the bond if its yield to maturity at the end of the year is (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Question 23

A bond’s credit rating provides a guide to its risk. Long­term bonds rated Aa currently offer yields to maturity of 4.5%. A­rated bonds sell at yields of 4.8%. Assume a 10­year bond with a coupon rate of 4% is downgraded by Moody’s from Aa to A rating

Question 24

Favored stock will pay a dividend this year of $2.64 per share. Its dividend yield is 8%. At what price is the stock selling? (Do not round intermediate calculations.)

Question 25

Preferred Products has issued preferred stock with an $6.27 annual dividend that will be paid in perpetuity

Question 26

Waterworks has a dividend yield of 10.50%. If its dividend is expected to grow at a constant rate of 7.50%, what must be the expected rate of return on the company’s stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Question 27

Steady As She Goes, Inc., will pay a year­end dividend of $3.10 per share. Investors expect the dividend to grow at a rate of 5% indefinitely

Question 28

Integrated Potato Chips paid a $2.80 per share dividend yesterday. You expect the dividend to grow steadily at a rate of 4% per year.

Question 29

Arts and Crafts, Inc., will pay a dividend of $3 per share in 1 year. It sells at $50 a share and firms in the same industry provide an expected rate of return of 12%. What must be the expected growth rate of the company’s dividends? (Do not round intermediate calculations.)

Question 30

Horse and Buggy Inc. is in a declining industry. Sales, earnings, and dividends are all shrinking at a rate of 10% per year.

Question 31

You expect a share of stock to pay dividends of $1.80, $1.95, and $2.60 in each of the next 3 years. You believe the stock will sell for $30 at the end of the third year.

Question 32

No­Growth Industries pays out all of its earnings as dividends. It will pay its next $3 per share dividend in a year. The discount rate is 12%

Question 33

Assume that market and book values are equal for current assets, current liabilities, and debt and other long­ term liabilities

Question 34

Grandiose Growth has a dividend growth rate of 20%. The discount rate is 10%. The end­of­year dividend will be $2 per share

Question 35

Computer Corp. reinvests 60% of its earnings in the firm. The stock sells for $55, and the next dividend will be $3.30 per share. The discount rate is 10%. What is the rate of return on the company’s reinvested funds? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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