The following questions are extracted from our course textbook
Fundamentals of Corporate Finance (2nd Asia Global Edition) by Ross,
Westerfield, Jordan, Lim and Tan.
Q1. Chapter 5 Question 11 (P.154)
You have just received notification that you have won the $1 million first
prize in the Centennial Lottery. However, the prize will be awarded on your
100th birthday (assuming you’re around to collect), 80 years from now.
What is the present value of your windfall if the appropriate discount rate is
10 percent?
Q2. Chapter 5 Question 20 (p.155)
You expect to receive $10,000 at graduation in two years. You plan on
investing it at 11 percent until you have $75,000. How long will you wait
from now?
Q3. Chapter 6 Question 29 (p.209)
First Simple Bank pays 7 percent simple interest on its investment accounts.
If First Complex Bank pays interest on its account compounded annually,
what rate should the bank set if it wants to match First Simple Bank over an
investment horizon of 10 years?
Q4. Chapter 6 Question 45 (p.211)
You have just purchased a new warehouse. To finance the purchase, you’ve
arranged for a 30-year mortgage loan for 80 percent of the $2,900,000
purchase price. The monthly payment on this loan will be $15,000. What is
the APR on this loan? The EAR?
Q5. Chapter 6 Question 71(P.215)
Your financial planner offers you two different investment plans. Plan X is a
$20,000 annual perpetuity. Plan Y is a 20-year, $28,000 annual annuity.
Both plans will make their first payment one year from today. At what
discount rate would you be indifferent between these two plans?
Q6. Chapter 7 Question 16 (p.255)
Both Bond Sam and Bond Dave have 9 percent coupons, make semiannual
payments, and are priced at par value. Bond Sam has 3 years maturity,
whereas Bond Dave has 20 years to maturity. If interest rates suddenly rise
by 2 percent, what is the percentage change in the price of Bond Sam? Of
Bond Dave? If rates were to suddenly fall by 2 percent instead, what would
the percentage change in the price of Bond Sam be then? Of Bond Dave?
Illustrate your answers by graphing bond prices versus YTM. What does this
problem tell you about the interest rate risk of longer-term bonds?
Q7.
You’ve just found a 10 percent coupon bond on the market that sells for
par value. What is the discount rate of this bond?
Q8. Chapter 7 Question 28 (p.257)
You want to have $1.5 million in real dollars in an account when you retire
in 40 years. The nominal return on your investment is 11 percent and the
inflation rate is 3.8 percent. What real amount must you deposit each year
to achieve your goal?
Note: To find out the real amount that you need to deposit each year, you
just need to calculate the real interest rate and use it as the discount rate.
Q9. Chapter 8 Question 10 (p.289)
Great Pumpkin Farms just paid a dividend of $3.5 on its stock. The growth
rate in dividends is expected to be a constant 5 percent per year
indefinitely. Investors require a 14 percent return on the stock for the first
three years, a 12 percent return for the next three years, and a 10 percent
return thereafter. What is the current share price?
Q10. Chapter 8 Question 21 (p.290)
Chartreuse Country Choppers Inc. is experiencing rapid growth. The
company expects dividends to grow at 25 percent per year for the next 11
years before leveling off a 6 percent into perpetuity. The required return on
the company’s stock is 12 percent. If the dividend per share just paid was
$1.74, what is the stock price?
Q11. Chapter 8 Question 24 (p.290)
Storico Co. just paid a dividend of $2.45 per share. The company will
increase its dividend by 20 percent next year and will then reduce its
dividend growth rate by 5 percentage points per year until it reaches the
industry average of 5 percent dividend growth, after which the company
will keep a constant growth rate forever. If the required return on Storico
stock is 11 percent, what will a share of stock sell for today?
