Managerial Finance
Instructions:
- The assignment is due on MONDAY JULY 20, 2020 at 2:00 PM
- You are required to select the best answer and provide DETAILED solutions.
- The assignment may be submitted by a group of up to 3 students.
- The assignment must be TYPED and submitted by e-mail.
- Acceptable formats are word and pdf (printable form A4)
- Late submission of assignments will receive a penalty.
Problem 1
| Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able to retire 30 years from now with retirement income of $27,000 per month for 20 years, th the first payment received 30 years and 1 month from now. Second, he would like to purchase a cabin in Rivendell in 15 years at an estimated cost of $792,000. Third, after he passes on at the end of the 20 years of withdrawals, he would like to leave an inheritance of $800,000 to his nephew Frodo. He can afford to save $2,100 per month for the next 15 years. |
| If he can earn a 12 percent EAR before he retires and a 8 percent EAR after he retires, how much will he have to save each month in Years 16 through 30? |
- $4,954.76
- $5,055.88
- $6,935.25
- $5,157.00
- $6,350.08
Problem 2
| You are planning to save for retirement over the next 30 years. To do this, you will invest $600 a month in a stock account and $300 a month in a bond account. The return of the stock account is expected to be 9 percent, and the bond account will pay 6 percent. When you retire, you will combine your money into an account with a return of 7 percent. |
| How much can you withdraw each month from your account assuming a 25-year withdrawal period ? |
- $118,721.99
- $9,695.63
- $9,893.5
- $10,091.37
- $606,590.82
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Problem 3
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a) $9,303.40 b) $4,377,117.65 c) $941,333.75 d) $950,182.29 e) $969,573.77
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Problems 4-5-6-7
The following given to be used to answer the following 4 questions: Both Bond Sam and Bond Dave have 7 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 3 years to maturity, whereas Bond Dave has 15 years to maturity.
Problem 4
If interest rates suddenly rise by 4 percent, what is the percentage change in the price of Bond Sam?
a) 10.23%
b) -11.10%
c) -9.97%
d) -9.99%
Problem 5
If interest rates suddenly rise by 4 percent, what is the percentage change in the price of Bond Dave?
a) -40.98%
b) 32.45%
c) -29.05%
d) -29.07%
Problem 6
If rates were to suddenly fall by 4 percent instead, what would the percentage change in the price of Bond Sam be then?
a) 11.39%
b) 11.37%
c) -9.94%
d) 10.23%
Problem 7
If rates were to suddenly fall by 4 percent instead, what would the percentage change in the price of Bond Dave be then?
a) 48.01%
b) 48.03%
c) -29.02%
d) 32.45%
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| Problem 8 | ||
| Mobray Corp. is experiencing rapid growth. Dividends are expected to grow at 25 percent per year during the next three years, 15 percent over the following year, and then 7 percent per year indefinitely. The required return on this stock is 12 percent, and the stock currently sells for $88 per share. What is the projected dividend for the coming year?
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| a) $2.46 b) $3.08 c) $4.15 d) $5.35
Problem 9
Storico Co. just paid a dividend of $1.35 per share. The company will increase its dividend by 24 percent next year and then reduce its dividend growth rate by 6 percentage points per year until it reaches the industry average of 6 percent dividend growth, after which the company will keep a constant growth rate forever. If the stock price is $42.35, what required return must investors be demanding on the company’s stock? (Hint: Set up the valuation formula with all the relevant cash flows, and use trial and error to find the unknown rate of return.)
a) 6.21 % b) 8.56 % c) 10.61 % d) 12.85 %
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| Problem 10 |
| Moody Farms just paid a dividend of $3.10 on its stock. The growth rate in dividends is expected to be a constant 6 percent per year indefinitely. Investors require a return of 13 percent for the first three years, a return of 11 percent for the next three years, and a return of 9 percent thereafter. What is the current share price?
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| a) $155.38 b) $123.72 c) $93.94 d) $84.25 |