Valuation and Rates of Return
Please answer these questions. Does not need any reference.
1. What is the present value of:
a. $7,900 in 10 years at 11 percent?
b. $16,600 in 5 years at 9 percent?
c. $26,000 in 14 years at 6 percent?
2. If you invest $9,000 today, how much will you have:
a. In 2 years at 9 percent?
b. In 7 years at 12 percent?
c. In 25 years at 14 percent?
d. In 25 years at 14 percent (compounded semiannually)?
3. How much would you have to invest today to receive:
a. $15,000 in 8 years at 10 percent?
b. $20,000 in 12 years at 13 percent?
c. $6,000 each year for 10 years at 9 percent?
d. $50,000 each year for 50 years at 7 percent?
4. You need $28,974 in the end of 10 years, and your only investment outlet is an 8 percent long-term certificate of deposit (compounded annually). With the
certificate of deposit, you make an initial investment at the beginning of the first year.
a. What single payment could be made at the beginning of the first year to achieve this objective?
b. What amount could you pay at the end of the year annually for 10 years to achieve the same objective?
5. Midland Oil has $1,000 par value bonds, outstanding at 8 percent interest. The bonds will mature in 25 years. Compute the current price of the bonds if the present
yield to maturity is:
a. 7 percent
b. 10 percent
c. 13 percent
6. Jim Busby calls his broker to inquire about purchasing a bond of the Disk Storage Systems. His broker quotes a price of $1,180. Jim is concerned that the bond might
be overpriced based on the facts involved. The $1,000 par value bond pays 14 percent interest, and it has 25 years remaining until maturity. The current yield to
maturity on similar bonds is 12 percent. Compute the new price of the bond and comment on whether you think it is overpriced in the marketplace.
7. Ecology Labs Inc. will pay a dividend of $6.40 per share in the next 12 months ?(D?_(1).) The required rate of return (K_(e) )is 14 percent and the constant growth
rate is 5 percent.
a. Compute P_0
(For parts b. c. and d in this problem, all variables remain the same except the one specifically changed. Each question is independent of the others.)
b. Assume K_e the required rate of return, goes up to 18 percent. What will be the new value of P_0?
c. Assume the growth rate (g) goes up to 9 percent. What will be the new value of P_0? K_e goes back to its original value of 14 percent.
d. Assume D_(1 )is $7.00. What will be the new value of P_0? Assume K_e is at its original value of 14 percent and go goes back to its original value of 5 percent.
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