However, interest is paid semi-annually. If your required rate of return is 10%, what is the value of the bond? How would your answer change if the interest were paid annually? 7) Sharp Co. Bonds are selling in the market for \$1,045. These 15 year bonds pay 7% interest annually on a \$1,000 par value. If they are purchased at the market price, what is the expected rate of return? 8) You own a bond that pays \$100 In annual Interest, with a \$1,000 par value. It matures in 15 years.

Your required rate of return is 10 percent. 1 . Calculate the value of the bond. 2. Calculate YET Topic: Stocks 9) BBC Ltd paid a dividend of RSI 4 per share at the end of the year. It Is expected to grow by 8 percent each year for the next 4 years. The market price of the shares Is expected to be RSI 60 at the end of 4 years. Assuming 1 2 percent required rate of return of investors, at what price should the shares of BBC Ltd sell? 10)Blackburn and Smith common stock currently sells for \$23 per share. The company’s executives anticipate a constant growth rate of 10. Percent and an end-of-year dividend of 2. 50. What Is your expected rate of return? If you require a 17% return, should you purchase the stock 11) IBM Industries pays a dividend of \$ 2 per quarter, the dividend yield on its stock Is reported at What price Is the stock selling at? 12) Inconstant Growth. Tattletale News Corp.. Has been growing at a rate of 20 percent per year, and you expect this growth rate in earnings and dividends to continue for another 3 years. A. If the last dividend paid was \$2, what will the next dividend be? B.

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If the discount rate Is 15 percent and the steady growth rate after 3 years Is 4 percent, what would the stock price be today? Topic: Capital Budgeting 13) Mutually Exclusive Investments. Here are the cash flow forecasts for two mutually exclusive projects: a. Which project would you choose on NAP and AIR basis the opportunity cost of capital Is 2 percent? B. Which would you choose if the opportunity cost of capital Is 12 14) Lana Industries, Inc. , needs a new lathe. It can buy a new high-speed lathe for \$1 million. The lathe will cost \$35,000 to run, will save the firm \$125,000 in labor costs, and will be useful for 10 years.

Suppose that for tax purposes, the lathe will be appreciated on a straight-line basis over its 10-year life to a salvage value of \$100,000. The actual market value of the lathe at that time also will be \$100,000. The discount rate is 10 percent and the corporate tax rate is 35 percent. What is the NAP of buying the new lathe? 15) Blooper Industries must replace its magnesium purification system. Quick & Dirty Systems sells a relatively cheap purification system for \$10 million. The system will last 5 years. Do-let-Right sells a sturdier but more expensive system for \$12 million; it will last for 8 years.

Both systems entail \$1 million n operating costs; both will be depreciated straight line to a final value of zero over their useful lives; neither will have any salvage value at the end of its life. The firm’s tax rate is 35 percent, and the discount rate is 12 percent. Which system should Blooper install? 16) PC shopping network may upgrade its modem pool. It last upgraded two years ago, when it spent \$1 man on equipment with an assumed life of 5 years and an assumed salvage value of \$man for tax purpose. The firm uses straight line depreciation. The old equipment can be sold today for \$man.

A new odder pool can be installed today for \$Mann. They will have a 3 year life and will be depreciated to zero using straight line depreciation. The new equipment will enable the firm to increase sales by \$man per year and decrease operating cost by \$1 Mom per year. At the end of the three years, the new equipment will be worthless. Assume the firm’s tax rate is 35% and the discount rate for the project of this sort is 10%. What is the NAP of the replacement project? Topic : Cost of Capital 17) The market value of your firm’s equity is \$500 million, which is also the value of your total debt.

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