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3) assume that you just won the megabucks lottery. you are offered the opportunity to take 25 years of payments in the amount of $38,000 at the end of each year or a single amount of $500,000 to be paid immediately. if you expect to be able to earn 5% annually on your investments over the next 25 years, ignoring taxes, which alternative would you take? why?
4) find the value of a bond maturing in 5 years, with a $1,000 par value and a coupon rate of 10% (interest paid annually), if the required rate of return on similarrisk bonds is 16% annual interest (interest paid annually).
5) bread browner’s bonds have 12 years remaining to maturity. interest is paid annually, the bonds have $1,000 par value, and the coupon rate is 10%. the bonds sell at a price of $850. what is their yield to maturity? 12.48%
6) nature’s naturals bonds have 7 years remaining to maturity. the bonds have a face value of $1,000 and a yield to maturity of 8%. they pay interest annually and have a 9% coupon rate. what is their current yield?
7) “shortterm interest rates are more volatile than longterm interest rates, so shortterm bond prices are more sensitive to interest rate changes than are longterm bond prices”. is this statement true or false? explain your answer.
8) ripoff rentals has issued bonds that have a 10% coupon rate, payable semiannually. the bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5%. what is the price of the bonds?
9. assume that 1 year from now you plan to deposit $1,000 in a savings account that pays a nominal rate of 8%.
a) if the bank compounds interest annually, how much will you have in your account 4 years from now?
b) what would be your balance 4 years from now if the bank used quarterly compounding, rather than annual compounding?
c) suppose you deposited the $1,000 in 4 payments of $250 each at the end of years 1,2,3, and 4. how much would you have in your account at the end of year 4, based on 8% annual compounding?
d) what is the present value of a security that will pay $5,000 in 20 years if securities of equal risk pay 7% annually?
e) your parents will retire in 18 years, they currently have $250,000 they think they will need $1,000,000 at retirement. what annual interest rate must they earn to reach their goal, assuming they don’t save any additional funds?
10. please provide your answers to the integrative case 3 on p. 304 and 305 of your textbook, encore international;
a) what is the firm’s current book value per share?
b) what is the firm’s current p/e ratio?
c) 1) what is the current required rate of return for encore stock?
2) what will be the new required rate of return for encore stock assuming that they expand into european and latin american markets as planned?
d. if the securities analysts are correct and there is no growth in future dividends, what will be the value per share of the encore stock? ( use the new required rate of return on the company’s stock here).
e. 1) if jordan ellis’ predictions are correct, what will be the value per share of encore stock if the firm maintains a constant annual growth of 6% in future dividends. (continue to use the new required rate of return here).
2) if jordan ellis’ predictions are correct, what will be the value per share of encore stock is the firm maintains a constant annual growth of 8% in dividends per share over the next 2 years and 6% thereafter?
f. compare the current (2012) price of the stock and the stock values found in parts a, d, and e. discuss why these values may differ. which valuation method do you believe most clearly represents the true value of encore stock?
4) find the value of a bond maturing in 5 years, with a $1,000 par value and a coupon rate of 10% (interest paid annually), if the required rate of return on similarrisk bonds is 16% annual interest (interest paid annually).
5) bread browner’s bonds have 12 years remaining to maturity. interest is paid annually, the bonds have $1,000 par value, and the coupon rate is 10%. the bonds sell at a price of $850. what is their yield to maturity? 12.48%
6) nature’s naturals bonds have 7 years remaining to maturity. the bonds have a face value of $1,000 and a yield to maturity of 8%. they pay interest annually and have a 9% coupon rate. what is their current yield?
7) “shortterm interest rates are more volatile than longterm interest rates, so shortterm bond prices are more sensitive to interest rate changes than are longterm bond prices”. is this statement true or false? explain your answer.
8) ripoff rentals has issued bonds that have a 10% coupon rate, payable semiannually. the bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5%. what is the price of the bonds?
9. assume that 1 year from now you plan to deposit $1,000 in a savings account that pays a nominal rate of 8%.
a) if the bank compounds interest annually, how much will you have in your account 4 years from now?
b) what would be your balance 4 years from now if the bank used quarterly compounding, rather than annual compounding?
c) suppose you deposited the $1,000 in 4 payments of $250 each at the end of years 1,2,3, and 4. how much would you have in your account at the end of year 4, based on 8% annual compounding?
d) what is the present value of a security that will pay $5,000 in 20 years if securities of equal risk pay 7% annually?
e) your parents will retire in 18 years, they currently have $250,000 they think they will need $1,000,000 at retirement. what annual interest rate must they earn to reach their goal, assuming they don’t save any additional funds?
10. please provide your answers to the integrative case 3 on p. 304 and 305 of your textbook, encore international;
a) what is the firm’s current book value per share?
b) what is the firm’s current p/e ratio?
c) 1) what is the current required rate of return for encore stock?
2) what will be the new required rate of return for encore stock assuming that they expand into european and latin american markets as planned?
d. if the securities analysts are correct and there is no growth in future dividends, what will be the value per share of the encore stock? ( use the new required rate of return on the company’s stock here).
e. 1) if jordan ellis’ predictions are correct, what will be the value per share of encore stock if the firm maintains a constant annual growth of 6% in future dividends. (continue to use the new required rate of return here).
2) if jordan ellis’ predictions are correct, what will be the value per share of encore stock is the firm maintains a constant annual growth of 8% in dividends per share over the next 2 years and 6% thereafter?
f. compare the current (2012) price of the stock and the stock values found in parts a, d, and e. discuss why these values may differ. which valuation method do you believe most clearly represents the true value of encore stock?
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