question archive You are saving for your retirement

You are saving for your retirement

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You are saving for your retirement. You have decided that one year from today you will deposit2% of your annual salary in an account which will earn 8% per year. Your salary last year was$50,000, and it will increase at 4% per year throughout your career. How much money will you havefor your retirement, which will begin in 40 years? HINT: It is easiest to get the PV and then grow thatnumber to FV.2. (10) You have an outstanding student loan with required payments of $500 per month for the nextfour years. The interest rate on the loan is 9% APR (monthly compounding). Looking at your budget,you can afford to pay an extra $250 a month in addition to your required monthly payments of $500,or $750 in total each month. How long will it take you to pay off the loan? What is the effective rateon the account?3. (5) Ajax has been offered a $100,000 advance on a contract with Sys-ed. In exchange, they mustsupply $45,000 in services each year for 3 years. If the IRR of the deal is 16.65%, should they takethe deal? A similar contract proposed by Win-ed has an IRR of 14.3%. Which deal should they take?Explain. Assume the cost of capital is 12%.4. (6) You have the following cash flows. The cost of capital is 14%.ProjectInvestmentCF 1CF 2CF 3CF 4A-400,00075,00090,000180,000210,000a. Calculate the payback period. If the firm has a maximum payback period of 3 years, do youaccept the project?b. Calculate the internal rate of return (IRR). Do you accept the project? Explain.5.(10) You are forecasting the balance sheet and income statement for Star for Y1. Use the followingassumptions: Sales and accounts receivable grow by 25%; cost of goods sold, inventory andaccounts payable grow 20%; and SG&A grows 10%. Interest expense will fall to 9M. The followingaccounts will not change (same dollar amount): depreciation expense, dividends, cash, accruals,notes payable, long-term debt, common stock. The firm will need 100M more in gross PPE.Calculate the additional funds needed.STAR: INCOME STATEMENT (M$)Fiscal Year EndingSalesCost of Goods SoldSG&ADepreciationEarnings Before Interest & Tax (EBIT)Interest ExpenseEarnings Before TaxTaxes (40%)Net IncomeDividendsSTAR: BALANCE SHEET (M$)Y0Y15002403020210102008012040Fiscal Year EndingCashAccounts ReceivableInventoriesCurrent AssetsGross PPEAccumulated DepnNet Fixed AssetsTOTAL ASSETSAccrualsAccounts PayableNotes PayableCurrent LiabilitiesLong Term DebtCommon StockRetained EarningsTotal Liability & EquityY0Y1102030603004026032015525457551953206. (10) Suppose that Starbucks issued a bond at face value on June 15, 2010 that will mature on June15, 2045. The price of the bond on December 15, 2015 was $103.23. The coupon rate is 4.3% withcoupons paid semiannually. The face value is $1000.a. What was the yield to maturity when the bond was issued?b. What is the yield to maturity on December 15, 2015 (Assume you do not get the Dec. 15,2015 coupon payment)?7. (14) Ego Enterprises is considering a new 3-year expansion project that requires a new machine. Themachine costs $2.4 million and can be sold for $600,000 at the end of 3 years. It will be fullydepreciated to a zero book value on a straight line basis over its 3-year tax life. The project willgenerate the following revenues during the 3 years: $2,000,000 for year one; $2,500,000 for year 2and $3,000,000 in year 3. Operating costs are equal to 20% of the same year sales. Operating costsdo not include depreciation or interest. Ego will have $400,000 annually in interest expense as partof the financing. To get the project started and for each year, net operating working capital (NOWC)is 5% of the next year’s sales. The tax rate is 40% and the cost of capital is 12%. Find the net presentvalue. Should they take the project? Explain.8. (9) Colgate-Palmolive Co has just paid an annual dividend of $1.52. Analysts are predicting a 7.5%growth rate in earnings (and dividends) over the next 4 years. After that, assume that Colgate willgrow at only 3% per year. If the required return for Colgate is 9.8%, estimate the price for Colgate.Look up Colgate’s current stock price and compare it to what you calculated.9. (5) Coca-Cola Co. (ticker: KO) just closed at $41.50 per share. Coke is expected to pay an annualdividend of $1.45 per share at the end of the year. Analysts were predicting a growth rate inearnings (and dividends) of 3.5% per year. If this growth rate continues in perpetuity, what is therequired return (cost of capital) for an investment in Coca-Cola stock?10. (8) Suppose your employer offers you a choice between a $5000 bonus, and 100 shares of thecompany stock. Whichever one you choose will be awarded today. The stock is currently trading for$63 per share.a. Suppose that if you receive the stock bonus, you are free to trade it. Which form of thebonus should you choose? What is its value?b. Suppose that if you receive the stock bonus, you are required to hold it for at least one year.What can you say about the value of the stock bonus now? What will your decision dependon?


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