1. You’ve just won a settlement that will pay you $10,000 at the end of each of the next 20 years (i.e. a total of $200,000 in all). Assuming you can earn 12%
annually. If they gave you the option of taking a lump sum settlement in lieu of the yearly payments, what dollar amount should you ask for to make you equally as well off as if you’d taken the payments?

2.  What should the price of a share of stock be if it’s expected to pay a dividend of $10.00 per share at the end of the current year? Dividends are expected to grow at a 4% annual rate into the foreseeable future, and you require a 14% annual rate of return on your investments.

3. A company just paid a dividend (this morning) in the amount of $100. Its dividends are expected to grow at 10% per year for the next 3 years, after which dividends are expected to grow at a rate of 4% forever. You require a 14% rate of return on your stock investments. What’s the most you should pay for a share of the stock?

4. You are considering an investment. It requires an intimal cost of $1,000, and will generate cash flows of $300 for each of the next 2 years, and $400 for each of the two years after that (Note: the cash flows come at the end of the year, so the first $300 cash flow will take place 1 year from today). If you require a 10% annual rate of return on your money, what is the NPV of the investment?

5. . What is the IRR of the investment in the previous question?

6.  A stock is expected to pay a $5 dividend in 1 year’s time. You also expect that you could sell the stock in 1 year’s time (immediately after the dividend is paid)
for $90. If you want to receive a 10% return on your investments, what’s the most you should pay for the stock?

7.  Risk-free rates are currently 3%. The expected return on the market index is 7%. What is the required rates of return on an investment in a firm with a beta of 2?

8.  You are considering buying a business. It is projected to generate $1 Million in cash flows for each of the next 2 years, and $3 Million in cash flow for each of the two years after that. In addition, you assume you can sell the business for $15 Million after 4 years. If you require a 15% annual return on your investments, what is the most you should pay for this opportunity?

9. Treasury rates are currently 4%. You expect the market risk premium to be 5%. If a firm’s stock has a beta of 2.5x, what should the required return on the stock be?

10. A firm has debt with a $50Million book value, the debt sells at 95% of par value, and has a yield to maturity of 8%. The firm also has 10 million shares of common stock outstanding, with each share currently selling for $12. The stock is expected to pay a dividend next year in the amount of $0.60 per share, and dividends are expected to grow at 6% into the foreseeable future. The firm has a marginal tax rate of 20%. What are the firm’s cost of equity and weighted average cost of capital?

Answer rating: 100% (QA)

1 To calculate the lump sum settlement amount that would make you equally as well off as if you had taken the yearly payments you can use the present value formula Since you can earn 12 annually the p... View the full answer