After completing their degree at UTRGV in 1992, Brian Mark, Finance Major and Steven James, IT major

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Question:

After completing their degree at UTRGV in 1992, Brian Mark, Finance Major and Steven James, IT major pursued their dream of launching computer games design company. Early 1993, the friends started preparing Steven’s house garage to become the first location of their company, Digital Studios partnership. Throughout the years, Digital Studios passed through several successes and failures. Within the period 1993-1996, Digital Studios exploded significantly with regard to sales and reputation. They specialized in producing and designing kids’ games based on animation and cartoon characters. Early 1997, Digital Studios encountered a hard to reject opportunity. Disney Inc. was searching for a small company to partnership with in order to produce a computer game for their new star Hercules. Digital Studios did not have enough resources and capital to undertake this opportunity. However, with the unbelievably growing IT industry towards late 1990s, the friends immediately thought of going public. It is May 1st 1997, the most recent value estimate for Digital Studios is $20 Million. The company is going to be incorporated and part of its equity is going to be sold to the public. The friends decided to keep 60% of the firm’s voting rights. However, to raise the fund required to undertake Disney’s opportunity, the company had to sell 80% of its equity to the public. The underwriter proposed to register two types of shares to accommodate their request, Class A to be issues to the public and Class B to be issued to the founders. The company is going to issue 20 million shares in total.

6- at the beginning of 2002, Digital Studio dividends just paid was $ 1.96. Digital Studios expected to grow at a higher rate and the management wanted to share the good days with shareholders. Digital Studios decided to increase dividends by 5% annually. What is the stock price today if the required rate of return is 7%?

$ 98
$ 29.4
$ 102.9
$ 41.16

7- It is 2003, Digital Studios Inc. is trying to raise additional equity. The company is going to issue 5 million shares. Because of the preemptive rights, existing shareholders get the right to purchase this new issue first. An equity holder named Susan Malik owns 10,000 of Class A shares. How many shares is she going to be offered?

10,000 rights
5,000 rights
2,500 rights
12,500 rights

8- in 2007, Mr. David “an investor and one of Digital Studios bondholders” wanted to sell his bonds that he acquired back in 1997. What would be the current market price for the bond assuming the following term structure of similar risk bonds?

Time to maturity	YTM
5	6%
10	8%
15	10%

$ 742.39
$ 539.16
$ 806.96
$ 957.35

9- if Mr. David owns 1000 bonds, how much money would he receive in total by selling all his bonds?

$ 742,390
$ 539,157
$ 806,956
$ 957,349

10- Mr. David has an outstanding credit card payment of $ 20,000 with APR of 6%. If he is going to keep paying the minimum monthly payment of $ 250. How long will it take Mr. David to pay off the entire credit balance?

161.75 months
102.42 months
30.17 months
67.46 months

11- Mr. David is 35 years old and wants to save for his retirement. He decided to asve half the money that he got from selling his bonds at a portfolio that earns 3.5 %. How much will he have in his retirement account when he turns 60?

$ 1,131,225.11
$ 877,232.99
$ 794,265.93
$ 953,517.36

12- Mr. David wants to give his daoughter a gift when she turns 21. Currently she is 6 years old. He is thinking of saving $ 1250 a month in an investment that pays an annual rate of 4%. How much will he gift her when she turns 21?

$ 19,193.43
$ 307,613.11
$ 25,029.48
$ 363,447.37

13- Now it is 2008, the whole market is struggling to overcome the financial crisis. Digital studios decided to adopt a constant dividends policy. The management announced that it is going to pay $1.5 annual dividends indefinitely. What is the stock price if the required rate of return is 12%?