Assignment Questions
(Marks: 15)
A company issued 10-year bonds three years ago with a coupon of 7 percent. If the current market rate is 8 percent and the bonds make annual coupon payments, what is the current market value of one of these bonds? what is the current market value of one of these bonds if it was a zero-coupon rate? (2.5 Marks)
ABC company is growing at a constant rate of 7 percent every year. Last week the company paid a dividend of $1.8. If dividends are expected to grow at the same rate as the firm and the required rate of return is 12 percent, what should be the stock’s price four years from now? (2.5 Marks)
XYZ company is considering developing new computer software. Th e cost of development will be $775,000 and management expects the net cash flow from sale of the software to be $200,000 for each of the next six years. If the discount rate is 13 percent, what is the net present value and payback period of this project? (2.5 Marks)
A chemical company is considering buying a magic fan for its plant. Th e magic fan is expected to work forever and help cool the machines in the plant and, hence, reduce their maintenance costs by $6,000 per year. Th e cost of the fan is $50,000. Th e appropriate discount rate is 10 percent, and the marginal tax rate is 35 percent. Should the company buy the magic fan? (2.5 Marks)
Define bond yield to maturity. Why is it important? (2.5 Marks)
Explain why preferred stock is considered to be a hybrid of equity and debt securities? (2.5 Marks)
