1. Mr. S. P. Johnson is creating a college fund for his daughter. He plans to make 9-yearly payments of $12,000 each with the first payment deposited today on his daughter's 6^th birthday (happy birthday!) Assuming his daughter will need three equal withdrawals from this account to pay for her law-school education beginning when she is twenty-two (i.e. 22, 23, 24), how much will she have on a yearly basis for her law school career? Mr. Johnson expects to earn a constant 10% annual return for the time interval of this problem.

2. A 10-year 8% coupon bond has a yield of 9%. Using annual compounding, what would the duration of the bond equal?

• If interest rates were to increase by 30 basis points, what percentage change in price would you expect for the bond?

• Find the new price.

• What does it mean to immunize yourself from interest rate risk using duration? How would you do it with a coupon bond? Zero coupon bond?

3. Given an opportunity cost of 10% find the value of the annuity if the payments illustrated below are made.

70 70 70 70 70

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

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4. A bond is selling for $1050.74. The coupon rate is 8%. It has ten-years until maturity, with semi-annual compounding. What is the yield-to-maturity (YTM)? Explain the reinvestment rate assumption.

5. (2 points) For the bond in problem 4, what are the capital-gains yield and the current-yield?

6. For the bond in problem 4, assume that the re-investment/interest rate has changed to 10%. Calculate the realized compound yield at a re-investment rate of 10%. If an investor wanted to maximize the rate of return, what would you advise the investor to dosell or hold the bond? Why?

7. How would you describe the difference between accounting and finance? Explain Dr. dlT's definition for finance. Note, "Chapter 1, introduction" has the answer to both parts of the question.

8. Given an interest rate of 10% find the value of the missing payment in year-3 if the whole stream of payments, inclusive of the missing payment is equal to $4,294.58.

400 400 400 ? 300 500 400 400

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9. If you believed interest rates were going to increase, what type of bond would you select? Circle the appropriate choice. High or low coupon? Short or long maturity? Premium or discount? High or low duration?

10. Stock X just paid a dividend of $3.0 a share. Growth is expected to be 8% for 6-years and then 3% there on. Given a ks= 10%, find P₁.

The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.

Table 1(millions of $)

Pettijohn Inc. Balance Sheet

Assets: Liabilities:

Cash and marketable securities $1,554 Accounts payable $7,980

Accounts receivable 9,660 Notes payable 5,880

Inventories 13,440 Accrued taxes 4,620

Total current assets 24,654 Total current liabilities $18480

Net fixed assets $17,346 Long-term debt 10,920

Total assets $42,000 Common Stock 3,360

Retained Earnings 9,240

T. Liabilities equity $42,000

Table 2(millions of $)

Pettijohn Inc. Income Statement Other Information

Net sales (all credit) $58,000 The common shares are trading in

Operating Costs except depreciation $54,978 the stock market for $88each.

Depreciation expense $ 1,029

EBIT $2,793 Shares outstanding - 180 million

Interest expense 1,050

Earnings before taxes $1,743

Income taxes $ 601

Net income $ 1,133

Common stock dividends $509.83

Change in retained earnings $1,233.17

1. Based on the information in Table 1, the current ratio is:

2. Based on the information in Table 2, the net profit margin is:

3. What is the P/E ratio? What does a high P/E ratio indicate?

4. What is the return on equity? Assume that current retained earnings have not been added to the equity account.