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Tutorial Exercise for Submission to Blackboard:

Essay by   •  March 2, 2019  •  Research Paper  •  841 Words (4 Pages)  •  87 Views

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Tutorial Exercise for submission to Blackboard:

  1. You are looking at a new project that costs $95,000 and you have estimated the following expected cash flows:

Year 1: $22,500

Year 2: $30,260

Year 3: $32,100

Year 4: $48,820

If the discount rate is 18%, would you recommend the project?         Provide your reasoning.

                                                        

  1. A firm needs to choose between two projects:  

Project A: Project involves an initial outlay of $162,000 today and will yield $273,100 in six years’ time.  

Project B: Project involves an initial outlay of $98,300 today and will yield $225,300 in eight years’ time.

Using the Internal Rate of Return (IRR) method, determine which of these projects would be invested in if the annual market rate of interest is 10%.

                                                                                         

  1. Current forecasts for AB Limited is to pay dividends over the next four years, as follows:

Year

1

2

3

4

Dividends

$0.30

$0.45

$0.58

$0.74

At the end of four years you anticipate selling the stock at a market price of $8.25.

  1. Compute the current price of the stock given 18% discount rate?                                                                                                 
  2. Suppose that AB Limited shares is currently trading at $6.25 would you buy the stock? Explain.                                                                 
  1. The share price of CD Ltd is currently $21.00 and the last dividend was $2.30. The analyst is predicting an annual dividend growth rate of 4.50% and the required rate of return is 15.0%. Compute the fair value of CD Ltd using the Gordon Growth model.                                                                
  2. Would you buy CD Ltd’s shares based on the Gordon Growth model? Provide your reasoning.                                                                  


  1. Consider the following three bonds:

Bond J

Bond K

Bond L

Par Value

    1,000

      1,000

      1,000

Coupon

0%

5%

7.5%

Time to Maturity

8

5

3

Required Yield

3%

9%

6%

  1. Calculate the present values of each bond. State whether the bond is above par, at par or below par.                                                                

  1. Calculate the Macaulay Duration for each bond. Which bond has a higher exposure to interest rate risk?                        

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